San Fran M-F Hits Market

Marcus & Millichap has announced the listing of a 74-unit multi-family complex in San Francisco.

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How can you make money in a deal like this?
(I ask out of my ignorance of how "upscale" markets work)

The Clay Park Towers, located at 1890 Clay St., is currently listed at $39.95 million, a price of about $540,000 per unit. The 10-story building is located on approximately one-fifth of an acre in the city. Around half of the units in complex are one bedrooms, and 40 of the 74 units are fully furnished. The building operates as a short-term corporate rental property, with minimum stays of 30 days.

PS: I know nothing about SanFran so I assume, based on the article's comments, this is a great location and the land is probably worth A LOT

Rent in SF is excessive. I thought a nice 1 bedroom in SF would be $2,500K+. For this deal to work, they need $4K+/mo for rent. Great question.

I'll add a couple of comments:

1) 1890 Clay St is in Pacific Heights, the most sought after (and expensive) neighborhood in San Francisco. There is NO competition from new developments and I would say this is one of the hardest 2-3 neighborhoods in the US to build a new project. Could be #1. So the owners do not have to worry about new competition entering their neighborhood.

This point cannot be stressed enough. Anything you own in Pacific Heights will be worth considerably more in 10 years. Guaranteed. Investors overpay for assets in Pac Heights all the time. VERY seldomly does a deal like this come to market. Most single family homes in this area are $5M+.

2) While $540,000 per unit seems like a lot, it is still lower than replacement cost.

3) MJ is pretty close on his rent guess. In addition, the article mentioned they property was used as corporate rentals...as a furnished corporate rental in this area, $4k is easily attainable.

Back a few years ago (peak of the RE market), condo conversions were very popular in SF. At a price of $540K per unit, an investment group could purchase this property, convert it, and sell the units for $750K ea (more if the area is really, really good).

But as the owner of a short-term lodging property, I somehow think that executive short term rentals may be quite lucrative. Say, $3-4K a month per unit (74 units).

But I have NO idea about corporate rental rates, so this is pure speculation.

Another idea: Get the facility re-zoned as an executive boutique hotel. At only $200/nt and 50% occupancy, (REALLY cheap for the executive short-stay market, where $500/nt and 65% occupancy is more common), this property would gross $2.7M a year (before expenses).

I'd guess that if it were converted, once it got up to speed, a $300 average daily rate and 55% occupancy would be pretty easy to do.

That's $4.4M gross, per year.

-Russ H.

Using them as executive corp rentals:

$3K/mo, 74 units, 50% vacancy rate* = $1.6M per year.

So you'd need to do better than this, or come in w/a lot of equity.

-Russ H.

*Short term corp rentals typically have quite high vacancy rates, unless they're in markets like Manhattan or Honk Kong (or other micro-areas where demand far outpaces supply).

Russ, you have more experience than I do, but wouldn't you think something like this is SF would take many, many years and cost millions?

Thanks a lot guys for this interesting discussion. I just learned a lot about that market. I suspected the condo conversion route was the way to go, but the other points are very valid as well.
Rep++ to all

This is a play for people with deep pockets. Even if I had the money, I would not work a deal like this.

The SF market appears to be changing:

SF Bay area home prices plunge 27 percent in June: Financial News - Yahoo! Finance

This is actually extremely deceiving. The "9 county Bay Area" prices dropped considerably. This is definitely true. This includes Costra Contra County (MANY foreclosures), Oakland, Sonoma (big drop), etc.

SF alone went up something like 4% in the past year.

Edge, thanks a lot for that info. I wonder how the market has been impacted in the nice locations, like the one mentioned in the article.
Here in the DC area, the nice locations are not losing value. They may not be appreciating like before, but there is no real value lost, maybe a couple points, if any.

PS: Posted at the same time as Sid23. Thanks for answering the question.

Too much time / effort? Or risk? Just curious...

This is a litte off topic, but i'm going to throw it out there anyway.

When you mention nice locations holding their value, i'd be very interested to see the volume of transactions for these areas. If they are holding their value but transactions were down 30%, i'd be cautious with the way I interpret that statistic. It is telling me that the vehicle looks OK from the outside, but when I look under the hood we might not be running on all cylinders.

I kind of raise an eyebrow when I hear claims of sales data being skewed because the stuff that is going down is the only stuff that is selling, therefore it's not as bad as it seems.

On the other hand, if they are holding their value with the same number or increasing number of transactions, then i'd feel like they truly are holding their value.

I see this primarily as a land play. Any conversion at this price probably does not make a lot of sense. Being that it is an exceptional area that has seen a lot of value improvements probably means that the price would be based on cost/sq. ft. for the land. Anything that is currently there is just a place holder that may assist in the holding process.

I like land plays as well. It is always nice to own an income producing property that is backed up by the land value. That said, once the land value goes past my ability to work from a basic cap rate, I am no longer interested.

One Trick Pony.

There are plenty of other people that can and will play this game. I have my own process that I rarely deviate from.

Well, if the SF Chronicle is correct, I stand corrected. SF down 11.3%.

http://www.sfgate.com/cgi-bin/articl...QRVS.DTL&tsp=1

Please keep in mind that what you are looking at are aggregate figures.

There are a LOT of REOs and foreclosures being offloaded by the banks right now.

So for every RE prop that's sold by an owner (250 days on market), there might be another 10 or 12 dumped by a bank (20-25 days on market) sold during that same 250 day time frame . . .

This is an EXCELLENT market for REIs looking to pick up bargains for long term holds (4+ years).

You can even buy a nice house in Napa right now for $250K (in 2005/6, the cheapest, crappiest house in Napa was selling for almost $400K). That's a 37.5% price reduction.

So again, this is a great market for those who are in it-- they're literally going around snapping up as many deals as they can afford.

Those who do not have to sell have their homes on the market, and are NOT dropping the prices on them very much. A home may sell for 15% less than its original listing price, whereas in 2004/5, it sold for 5-7% less than its listing price (so, 15 minus 5 or 7 means houses are selling for 8 to 10% less than the highs of 2004/5).

This is NOT a market to sell a house quickly, unless you are giving it away (which is what the banks are doing). You need to plan on your house being on the market for up to a year before it finds the right buyer (compared to 4-6 weeks in 2003/4).

To sum up:

This is a market for:

-Long term plays (buying a house that you won't sell for 4+ years, or selling a house that you can keep on the market for 250-400 days)
-Rehabs (buying a fixer that will take a few years to fix)
-Conversions (buying a prop that is zoned for one thing, and getting approval for converting it to something else).

This is NOT a market for:

-Buying for appreciation
-Quick fix 'n flips
-Good cashflowing props from a "richdad" perspective (as has been pointed out before, CA RE cap rates do not really pencil out unless you have a very unique angle)

Still, the main point of my post is *some* people are getting pretty good prices for their homes (say, 8% off the highs). It's just taking them a LOT longer to sell their homes.

And, my other main point is that so many foreclosures/repossessions are being dumped (and sold) on the market right now that the sheer number of these is skewing the stats.

Hope this all makes sense.

-Russ H.