the real deal
Sellers Reinvest Their Profits Out of State
By Mark Bonn and Mirella Webb
During the first half of 2007, multifamily investment sales totaled about $400 million for 10-plus-unit buildings in San Francisco, representing a slightly moderated pace from the prior year, which is likely the result of the dearth of investment stock. However, activity was still strong by historical measures and much of the recent buying activity was driven by 10- to 20-unit building sales, which accounted for 59% of the total sales volume.
With the third quarter closing, we have seen a good number of large properties trading hands again, although the number of transactions has dropped significantly compared to the previous two quarters. The total sales volume was under $100 million for the third quarter, which was about one-third of the second quarter’s total sales.
July was the busiest month this quarter with several notable deals. A nice midblock building that consists of 47 apartment units and four sleeping rooms, at 947 Bush St., sold downtown. The purchase price was $7.5 million and the escrow took about five months, mainly because of the underground storage tank that was found at the site. This was a more difficult task than usual because the tank was deeper than 12 feet and it was filled with concrete. The tank issue first came up when the owner refinanced the building in 1994, at which point he hired a company to remove the tank and paid them $10,000. The company ended up going out of business and the tank was left behind; at that time, if tanks were filled with concrete and had no contamination, the city did not require them to be removed. A clearance letter was never filed so this issue came up again during escrow. Golden Gate Tank Removal had to make sure there was no contamination and the seller had to shell out money again to clear up the issue so that the lender would fund the deal. In the end, it all worked out and the site was free and clear of contaminants. The local seller happily traded his proceeds into two separate apartment complexes in New Mexico with almost 1,000 units. We represented both the buyer and the seller in this transaction.
The Sutter Taylor Apartments, at 701 Taylor St., sold in July for $13,500,000. This is a beautiful 58-unit corner building in the heart of downtown, only a couple of blocks from Union Square. The property has three commercial units: the successful Zagat-rated sushi restaurant Sanraku, a nail shop and a longtime San Francisco establishment, the Australia Fair. The building was very well managed and there were quite a few units updated with refinished hardwood floors, and tiled kitchens and baths. Five of the units were delivered vacant at the close of escrow, which was a benefit for the buyer. The building has a very elegant lobby with magnificent period details. During the escrow period, an underground storage tank was again discovered at the building, which the owners thought had already been removed when they purchased the building in the nineties. Unfortunately, it was still in place and the sellers had to spend the money to remove the tank. The job was completed just in time to close escrow. Some of the sellers ended up trading their proceeds into triple-net properties outside of San Francisco.
Near the Civic Center, 477 Turk St. also sold in July, commanding $1,850,000. We should mention here that the deal was for three buildings: nine units at 477 Turk St., a two-flat building at 10-12 Dodge Pl. and a commercial garage at 16 Dodge Pl. The flats at 10-12 Dodge St. had protected tenants paying below-market rents. The commercial garage tenant was also paying below-market rent. The building at 477 Turk St. consists of one commercial store, a mix of one-bedroom units and studios, and two five-room flats. As expected, most of these rents were also below-market rates and every tenant was on a month-to-month lease. All three buildings had deferred maintenance, hence the low price. Levy & Co. brokered this deal.
In one other noteworthy deal in July, Phillip Boersma of Arroyo & Coates closed a transaction at 600 Oak St. in Hayes Valley. This 18-unit modern building sold for $3,925,000. The interiors in the building were standard ‘60s décor, but some of the units had granite countertops and the original painted cabinets. Approximately two-thirds of the units had small balconies off of the living room. The seller had just removed and replaced the façade of the building on the Webster and Oak streets side. In doing so, he replaced all the dry-rotted wood, the patios and the stucco, plus overhauled the windows with double-paned vinyl. The sellers were a syndication group who sold the bulk of their San Francisco properties and exchanged into a shopping center out of state. They were looking for more cash flow, and they also felt it was a great time to sell because the San Francisco market had reached a peak.
In May 2007, James Devincenti of Marcus & Millichap listed 1345 Clement St., and ended up closing at the end of August for $3,525,000 — almost a quarter-million above the asking price. This attractive 15-unit Edwardian was a very clean building with an elegant lobby entrance. There were only two long-term tenants in the building. Some of the units were upgraded and the building had nine parking spaces.
The largest deal in the city, based on price, was 2235 Laguna St. in Pacific Heights. This gorgeous 29-unit property received five offers, of which four were over the asking price. We’re not surprised that a large apartment owner went over the asking price by $2.1 million. The property sold for $19 million. This is noteworthy because the $655,172 price per unit is a new San Francisco record. Never before has an apartment building with 10-plus units sold this high on a price per unit basis. The property is directly across the street from Lafayette Park and has fantastic Bay and Golden Gate views from many of the units. The building is in excellent condition with a newer roof, new paint, new electrical system, new elevator systems, new windows and much more. There were also six renovated units, but overall every unit was in good shape. Steve Pugh of Pacific Union brokered this deal (representing both sides of the transaction), which closed in late August.
To summarize the third quarter, the averages for 10-plus-unit buildings were as follows: the GRM was 15.6, the cap rate was 4.6% (which is a 30 basis-point jump from the previous quarter), price per unit was just above $225,000 and price per foot averaged about $325. We did not include the 2235 Laguna St. deal when calculating averages because it would tip the scale and skew the true average. The rest of the year is shaping up to be a busy one as buyers and sellers are scrambling to close deals before the year’s end.
The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. Mark Bonn and Mirella Webb specialize in the marketing and sale of investment-grade properties, particularly apartments throughout the San Francisco Bay Area. They can be reached at 415-477-9207 or 415-477-9233. Copyright © 2007 by SF Apartment Magazine. All rights reserved.