Pacific Heights Apartments Sell At 3.5 Percent Yield and Below

2140 Pacific Avenue in San Francisco

By Jon Peterson

Two San Francisco apartment complexes in the city’s north central Pacific Heights neighborhood have sold for a total of $34 million: 2140 Pacific Ave. with 27 apartments and 1845 Franklin St. with 30.

2140 Pacific Avenue in San Francisco
2140 Pacific Avenue in San Francisco

Buyers of both properties achieved capitalization rates, or initial yields, in the mid-3 percent range, a return threshold that matches the current San Francisco market rate, brokers said.

“There was a great deal of interest in both properties, and I think these transactions show how many capital sources would like to own apartments in this part of San Francisco,” said James Devincenti, an executive vice president with Colliers International in its San Francisco office. “Pacific Heights is an area where properties don’t come to market for sale very often.”

The San Francisco office of Colliers represented the sellers and one buyer. Besides Devincenti, Colliers Senior Vice President Brad Lagomarsino also oversaw the transactions.

Taylor Street Apartments L.P., a San Francisco Bay Area-based entity, acquired 2140 Pacific, paying $20 million or roughly $741,000 a unit. The complex is two blocks north of Lafayette Park and within easy biking distance of The Presidio. The seller was Ralston Bridge Pacific LLC.

The property traded at a 3.5 percent cap rate, based on current net operating income and the property taxes that will be paid once the property is reassessed, Devincenti said. “In October of last year, we sold 2290 Pacific Ave. at a 3.4 percent cap rate. I think that this is the range of where these properties are trading,” he said.

The sales price included $11.7 million in equity and an $8.3 million assumed loan. The 1929 complex has 16 two-bedroom, two-bath units, eight one-bedroom and one-bath units, and three studios.

1845 Franklin sold for $14 million, or not quite $466,000 a unit, in an all-cash deal to a high-net-worth individual from Hong Kong. Colliers represented the buyer, who achieved a 3.3 percent capitalization rate. The yield is based on the existing net operating income and factors in the taxes to be paid on the reassessment, Devincenti said. The seller was The Prado Group, a San Francisco-based real estate investment and management company.

The Franklin Street property was originally built in 1926 and has a mix of larger and smaller one-bedroom and studio units.

In the case of both properties, a small number of units were vacant at sale and left empty on purpose: “In situations like this, the feeling is that the new owner wouldn’t mind having the units vacant, so it can work on them and get them ready for the next tenant,” Devincenti said.

The current vacancy rate in the Pacific Heights neighborhood is 1.5 percent, according to Colliers’ research. “In 2011 rents were up 15 percent to 20 percent. The same increases were experienced in 2012. For this year, we are expecting rental rates to move up 5 [percent] to 10 percent,” he said.

West Coast Commercial Real Estate News