Opportunities appear as SF apartment values sink to 2014 levels 

San Francisco apartment buildings now trade at 2014 prices, according to data from a  Compass report on the market for buildings with five or more units. With cap rates up to 2011 levels, agents say buyers are taking advantage of the low prices to make some not-seen-in-over-a-decade deals.

“With the more attractive cap rates, people are definitely seeing opportunities,” said Compass multifamily agent Mirella Webb. “We’re seeing newer buyers, even people we haven’t seen before, and mom-and pop-buyers.” 

Many of these buyers pay all cash.

What agents are not seeing are the big institutional investors buyers who had bought nearly every building over 12 units in the city that came to the market in at least the last 10 years. They are largely absent from the marketplace as they contend with the impact of the rising cost of the debt on their existing portfolios. 

Veritas, for example, was once one of the city’s biggest apartment owners and a very active buyer. It has now defaulted on about a third of its San Francisco portfolio, after a failed attempt to buy its own debt back from noteholders. Ballast and Brookfield came together to buy most of that nearly $1 billion in debt, backed by 95 San Francisco apartment buildings. Prado Group took the rest, meaning they are also not likely to be in the market for more new buildings anytime soon.  

Since about 2009, smaller privately funded family investors had sat on the sidelines, pushed thre by the bigger buyers. The family offices didn’t buy until the pandemic-caused downturn in rents compounded by last year’s rapid interest rate increases took out the institutionally backed competition, said Compass apartment agent Mark Webb.

“They’ve literally been waiting 11 years for this kind of market,” he said. “Now it’s here.” 

Looking at Compass data through the third quarter of this year, seems like a glimpse back in time. Average gross rent multipliers are at 12, the lowest since 2011, which is also the last time cap rates were higher than today’s 5.7 percent. The average price per unit is $359,000, the lowest since 2014, which is also the last time you could pay an average of $434 per square foot.

The price points would be even lower if not for some higher-end sales in the city’s prime District 7 neighborhoods of the Marina, Cow Hollow and Pacific Heights, which pull up the citywide average. The median price per square foot is $570 in District 7, according to Compass, about $100 more per square foot than in second-most-expensive District 1, which includes the Richmond, Jordan Park and Lake Street.

“People always say, ‘I want to buy north of California Street,’ which is those neighborhoods,” Webb said. 

The obstacle for many buyers is interest rates, currently hovering around 7 percent, Webb and Bonn agreed. Also, still future of rents in San Francisco remains uncertain as remote work and negative perceptions of the city continue. But for those with enough cash, the opportunity is worth making a long bet on both the future of the city and where mortgage rates may go from here, Bonn said. 

“Many of these buildings from $1 million to $3 million or $4 million, there are lots of buyers with that kind of cash,” he said, adding that buyers are also taking advantage of seller financing when it’s offered. “They’re excited to get into the market at a going-in cap rate of 5.5 to 6 percent and hold the building until rates come down and refinance and put debt on it at that point.”

Many buyers come from the broader Bay Area, where they may have invested in the East Bay or the Peninsula in the past because they were priced out of the city, Bonn explained. 

“They’ve got a lot of cash that they’ve harvested over the time that they’ve been working in those markets and they’re bringing it to the city to get the kinds of returns they haven’t seen since 2008,” he said. 

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