The Real Deal
by Mirella Webb
The first quarter of 2007 is over and the end of the second quarter is quickly approaching. I guess time flies when you’re having fun. The market is as hot as ever in the 10-plus property sector, with little sign of slowing. There is just an insatiable appetite from buyers and not enough properties for sale.
Just in the first quarter alone, the total sales volume has reached over $100 million. The abundant number of deals included buildings from the top of Russian Hill to the Excelsior district and from a 10-unit building to a 114-unit building. But before we get to the numbers, let’s take a look at some notable deals for the first part of 2007.
Early February marked the close of a hefty package of buildings by the largest apartment owner in San Francisco. My office had the pleasure of working with them on a sizable amount of transactions, including: 825 Post St., 808 Leavenworth St., 837 Geary St., 830 Sutter St., 72 Gough St. and 4130 Cesar Chavez St. These buildings represent 278 units and were all sold by a long-time San Francisco investor group that unloaded part of its portfolio to reinvest its gains in other parts of the country. The GRMs for these buildings ranged between 13 and 14 and price per square foot fluctuated greatly. Some of the downtown buildings commanded just south of $200 per sq. ft. while others were as high as $313.
The property that should get a special mention is 825 Post St. This was the largest building sold in the first quarter. This huge, corner 114-unit property was seismically updated in 1994 and over 10% of the units were delivered vacant at the close of escrow. Another prominent building in this package was 4130-4140 Cesar Chavez St. Although it is the least attractive of the bunch, you cannot miss this 40-unit, 1960s-style building perched on top of the hill at the corner of Castro and Cesar Chavez streets. Don’t let the exterior of this one fool you; over half of the units were two-bedrooms and the building included 40-car parking, a swimming pool and world-class views of downtown from almost every apartment.
In early February, we also represented a local family in the sale of its 12-unit apartment building at 1267 Filbert St. This property was in a prime Russian Hill location and it attracted a number of high-profile investors, even at the high 19 GRM and under 4% CAP rate. Five of the 12 units were upgraded in 2006 and this was definitely a “pride of ownership” rental building that was in great condition throughout. The common areas were well maintained and also had recent upgrades, including new paint, carpet and lighting. The units were separately metered for gas and electric service, and the boiler was installed just a few weeks before we put the property on the market. There were about seven units that were paying way-below market rents and four tenants claimed to be protected. If these units could be brought up to market right now, the building would add another $100,000 of income at the current rental rates.
One of the quickest sales that listed in February (it closed in just 40 days) was a 10-unit building at 675 Cole St. at the corner of Waller St. The property had one unit that was occupied by two protected tenants paying rent way below market. There was only one other tenant paying below market rent, but he did not claim protected status. The building included nine interior parking spaces and two independent outside spaces and, luckily for the new owner, only one of the spaces was rented. The listing agent, Deborah Lopez from the Paragon Real-Estate Group, called this building “an ugly duckling” on the MLS and she was pretty accurate about the description. Amongst all the Haight-Ashbury Victorian beauties, this building looked more like it was plucked from Florida in the 1960s. It was a two-floor contemporary building with five units on each floor surrounding a center courtyard. The courtyard even had a plastic roof that could be opened and shut. The units were in good condition with lots of light, but they needed some updating. There was a $50,000 pest report that recommended removing and replacing all of the exterior siding. I believe that doing the work suggested, with some paint and upgrades, could make this a dramatically more attractive property. On the bid date, there were 18 offers, including two all cash offers that the seller countered at the highest price. The winning buyers came in with all cash, no contingencies and a 21-day close. The buyers are in the business of acquiring properties with investors. The building appealed to them because of the low expenses and the strong cash flow. The building sold for $2,311,000, which was approximately $400,000 over the original listing price. The GRM almost reached 15 and the price per sq. ft. was $380, both high numbers for this neighborhood.
The end of March marked the close of 1060 Pine St. This was also a speedy transaction, listed by David Nelson of Marcus & Millichap toward the middle of February. The units in this building were in excellent condition with 9 of the 12 units renovated by Craig Lipton of Maven Investments. The upgrades included about $50,000 per unit on kitchens, baths, new fixtures and appliances, and new copper plumbing. The only thing this building needed was a new roof. At the sales price of $3,225,000, the GRM was just under 14 with a CAP rate of 4.77%. There is not a great amount of upside in rents at this building, but since it’s such a clean property it was well worth the investment. The buyer is an out-of-state investor who traded up from another building.
To summarize the first quarter, the averages for 10-plus-unit buildings are as follows: GRM was 14.9, CAP rate was 4.4%, price per unit was just below $200,000 and price per sq. ft. was about $287. These numbers are a tiny bit under the values compared to the same time last year, but we feel that values will hold and it will be another stellar summer.
A Real-Estate Brainteaser
Now it’s time for our brainteaser! A major, local investment firm disposed of its 55-unit building in the middle of February. This large corner building was located in the Van Ness/Civic Center corridor and sold just over $7 million. Send your answer to the email address below for the chance to win a prize.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Mirella Webb specializes in the marketing and sale of investment-grade properties, particularly apartments throughout the San Francisco Bay Area. She can be reached at 415-477-9233, or via email at mirella.webb@grubb-ellis.com. Copyright © 2007 by SF Apartment Magazine. All rights reserved.