New York City-based AREA Property Partners, the former Apollo Real Estate Advisors, has paid $59.6 million in cash for a 422-unit apartment portfolio in San Francisco. It is the international real estate fund manager’s first-ever Bay Area apartment acquisition.
The rent-regulated units, priced at a bit more than $141,000 apiece, are predominantly located in the Tenderloin district and downtown San Francisco with a sprinkling in the upscale neighborhoods of Pacific Heights, Russian Hill and Potrero Hill.
AREA projected a 5.5 percent yield, or capitalization rate, from the portfolio based on current rents and the purchase price.
“We think that the San Francisco market is a very attractive place to own apartments from a supply-demand perspective. The price that we paid for the property was also very attractive,” said AREA Partner James Simmons.
The properties were acquired from an unidentified lender but were previously owned by San Francisco’s Lembi family and have been battered by the recession, Simmons said. Many tenants lost their jobs, and the previous owner was operating under a pile of debt. As a group, the units are considered workforce housing.
AREA was one of three finalists in the recently completed competition to buy more than 1,800 rent-controlled apartments in the Peninsula city of East Palo Alto. That portfolio is owned by Wells Fargo & Co., which has selected real estate investment trust Equity Residential as the buyer, though neither the bank nor the real estate company has announced the deal’s close.
The San Francisco complexes acquired by AREA were built from 1911 to 1965, though most were developed in the early 1900s. There are a total of 20 buildings in the portfolio. The overall occupancy at the time the deal was completed was 95 percent. In aggregate, the apartments have 278,000 square feet.
AREA plans to invest an additional $3.2 million to improve the apartments. This work has started and should be completed over the next 18 months.
AREA made the investment in the San Francisco assets for its AREA Domestic Emerging Market Fund, a commingled fund formed in 2008 with a total capital raise of $485 million. Institutional investors are its main capital source. The investor anticipated as much as 70 percent leverage would be placed on the assets in the fund. The real estate investor hopes to complete all of the investments for the fund by the end of the year.
The San Francisco rent-control ordinance limits annual increases in rental rates to 60 percent of the consumer price index, said Dean Preston, executive director of Tenants Together, a San Francisco nonprofit that works to advance California tenants’ rights. Under state law, landlords of rent-controlled units are allowed to reset rents at market rates when a tenant leaves, either voluntarily or through eviction. As long as a tenant remains in a San Francisco unit, however, rent increases are limited to the annual bumps.
Tenant-rights organizations like Preston’s are on the lookout for landlords that pursue aggressive measures to push existing tenants out of units so that they can increase rents.
The confluence of rapid job creation, high housing prices and limited new multifamily construction is pushing San Francisco rents up rapidly. Vacancies in A-class apartments in the Russian Hill neighborhood fell to 1.8 percent in the first half of the year, according to Marcus & Millichap Real Estate Investment Services. Effective rents in the Russian Hill-Embarcadero submarket climbed above $2,200 a month, up 3.4 percent year over year. Effective rents—generally, rents after incentives are taken into account—in the Civic Center-downtown submarket were $1,421 a month at midyear, up 4.8 percent.
AREA has regional offices in San Francisco and Los Angeles. Overall the company owns and operates a mixture of apartments and commercial real estate assets on a domestic and international basis. The company has established multiple investment funds and joint ventures involving 570 transactions with an aggregated value in excess of $65 billion.