Market View
by Jay Greenberg
Who is your favorite Superhero? Is it Batman, Superman or San Francisco Apartments? On this Halloween weekend, I am writing this third quarter San Francisco Apartment Magazine update. What a great town for Halloween and real estate. As I walked around my neighborhood tonight, I saw many creative costumes, superheros and beautiful properties. I was thinking to myself: who is more impressive, Superman—more powerful than a locomotive, able to leap tall buildings in a single bound—or San Francisco apartment buildings?
San Francisco apartments have shown superhero strength since 1999 when the stock market plummeted, the dot-coms busted, rents dropped as much as 40% and the entire tech sector was TKO’d. Unemployment rose dramatically then. Moreover, events like the attacks of September 11th and the Iraq war, as well as factors, like rising vacancies and a dreadful office market, were negative conditions that affected our market. More recently, investors have ferociously competed to acquire the strength and stability of our Superhero. To conquer others in this competition, as an investor you need to be strong and brave and, of course, have deep pockets. Today investors are making down payments of 40 to 50%, with variable rate loans at 4% in return for a 2% cash flow. However, this cash flow would be nonexistent if you suddenly discovered that you needed to remodel one turnover. For example, if you first have to remodel a unit and then three months later you finally find a tenant, you certainly would need to be strong, brave and have some deep pockets.
Many mere mortals wonder why someone would want to pay so dearly to be this Superhero when they analyze these numbers. If you look at the bigger picture, you will surely conclude that it currently pays to be strong, brave and have deep pockets. A typical 5 - 9 unit apartment building sold for an average cost of $208 per square foot through September 30, 2003; but the average cost per square foot jumped to $265 through September 30, 2004. Based on these two figures, if you purchased a typical 5,000-square-foot apartment building in 2003, you paid $1,040,000 with a 45% down payment of $468,000. Your average building today is worth $1,325,000, with a capital gain of $285,000 on your $468,000 investment. Wow, that is a phenomenal investment with interest write off, depreciation and the ability to refinance cash out and or trade up tax-free. Currently it does pay to be strong, brave and have deep pockets.
The following is year-to-date information through September 30, 2004, versus the same time period for 2003. Dollar volume in the 5 - 9 unit sector was $118 million in 2003 versus $226 million in 2004. Dollar volume in the 10 - plus unit sector was $105 million in 2003 versus $304 million in 2004. The number of transactions in the 5 - 9 unit sector was 114 in 2003 versus 179 in 2004. The number of transactions in the 10- plus unit sector was 46 in 2003 versus 109 in 2004. Gross rent multipliers and cost-per-square-foot indicators continue to rise, pushing values to all time highs.
Since 1999 and even prior to that year, reports began to circulate that astronomers had discovered a large chunk of kryptonite in outer space and it was headed toward planet earth. Even more disturbing are those astronomers who report that this kryptonite chunk is on a direct path to San Francisco. Many had predicted the kryptonite should have hit our town sometime in the past five years, others predict it is getting closer and gaining velocity and should hit sometime in the near future. Yet others predict a strong offshore breeze may be blowing this potential and damaging kryptonite out to sea.
It is Halloween, and I need to put on my costume and head out again into this crazy night with all the crazy people. Tonight, I am dressed as a superhero, a 12- unit marina-style building with parking for eight cars.
The opinions expressed in this article are those of the author
and do not necessarily reflect the viewpoint of SFAA or the
San Francisco Apartment Magazine.
Jay Greenberg is a real estate broker with Marcus & Millichap. He can be
reached at 415-391-9220 ext. 300. Copyright © 2004 by the San Francisco
Apartment Magazine. All rights reserved.