• Parkmerced also in trouble

• Lembi Group, one of the city's largest landlords

Private-equity firm Tribeca Cos. took ownership of a block of apartment buildings in the San Francisco Bay area by buying up defaulted mortgage debt on the cheap, in the latest sign of how investors are maneuvering to pick up distressed commercial real estate.

Tribeca used a "loan-to-own" strategy that is becoming increasingly popular among vulture investors. The San Francisco firm first bought $62 million of nonperforming mortgages for 50 cents on the dollar from the buildings' lender, UBS AG. Tribeca moved Wednesday to foreclose on the properties, including nine buildings in San Francisco and one in Burlingame.

The buildings were previously owned by closely held Lembi Group, which had been San Francisco's largest landlord. The company defaulted on about $300 million of loans in 2008 and handed over 50 buildings securing those loans to UBS, its largest lender, including the 10 apartment properties Tribeca took over Wednesday. Over the past year, the Swiss bank has sold down to about $150 million the portfolio of Lembi properties it took back, a person familiar with the matter said. A UBS spokesman declined to comment. That portfolio doesn't include the 10 apartment properties Tribeca took over Wednesday.

Lembi's woes are another example of how debt-fueled real-estate acquisitions are now coming back to haunt landlords and other property investors. Between 2003 and 2007, Lembi became San Francisco's dominant residential landlord by spending more than $1 billion and borrowing up to 95% of a building's purchase price. The company accumulated a portfolio of 307 buildings and more than 8,000 apartments across the city.

By buying the nonperforming mortgages on the Lembi properties, Tribeca used the debt positions to angle for ownership. Such strategies have been around for years and are expected to pick up further as more landlords are struggling with rising vacancies, falling rents and heavy debt loads.   - 2009 December 31   WALL ST. JOURNAL

TRANSACTION

Rutherford Investments has sold three small 1960s-era developments in the region totaling 167 units to Landmark Realty, according to the broker, Atlanta-based Apartment Realty Advisors. The combined purchase price was $26.2 million. The individual cap rates, based on in-place income, range from 5.4% to 6.2%, according to ARA.

Both Rutherford and Landmark are based in San Francisco. Rutherford is a syndicator with a $1-billion portfolio that has been slowly selling smaller properties and trading up. Landmark owns a few hundred units in San Francisco proper and was looking to reinvest proceeds from a refinancing of his San Francisco properties.

The properties are Marine View Apartments and Shoreline Apartments, both located in Alameda, CA, and Romar Apartments located in Novato, CA. Alameda is located directly across the bay from San Francisco. Novato is located 25 miles north of San Francisco.

Shoreline Apartments, 38 units, sold for $7.4 million or $194,736 per unit. Built in 1961, the property is situated across the street from the San Francisco Bay. The property sold for a 5.4% cap rate on in-place income, the lowest of the group due primarily to its bay views and proximity to the beach.

Marine View Apartments, 65 units, sold for $9.65 million or $148,462 per unit. Built in 1967, it includes studios, one, two and three bedroom floor plans with an average unit size of 778 square feet. The property sold for a 6.1% cap rate on in-place income, according to ARA.

Romar Apartments, located just west of Highway 101, sold for $9,175,000 or $158,190 per unit. Romar was built in two phases, with 42 units completed in 1962 and the additional 12 units added in 1980. All units in this asset have two-bed, two-bath floor plans offering 750 square feet of living space. This property sold for a 6.2% cap rate on in-place income.

The transactions are the first apartment sales in the region since last year. Landmark is expected to close one more small property from Rutherford in the coming weeks when the loan assumption is approved. The brokers involved were John Downing and Craig Chiappone. Chiappone tells GlobeSt.com that the buyer put the properties under contract late last year and that cap rates have since moved up slightly.

“We had eight or nine offers from institutions when the properties first came to market in July but those all fizzled out,” he says. “We remarketed the properties in November and found this buyer in December. I don’t know if we could replicate [the cap rates] if they came to market today but we could get pretty close to it.”  - 2009 March 2009    BUSINESS JOURNAL

Rents show signs of rising

In San Francisco, rents are up slightly. Below, changes in average rents 
for all types of apartments in the nine counties:

Don't panic yet. Rents are still dropping in many parts of the Bay Area -- but the decline has slowed. Meanwhile, San Francisco landlords have been charging more, and almost 95 percent of the apartments in San Jose are booked, according to the latest rental survey.

"Last year, I was giving rent rebates to even existing tenants," said Gregg Witkoski, who owns three different San Francisco buildings. "But that's long gone now."

The average rent for a one-bedroom apartment in San Francisco rose 2.9 percent year-over-year, to $1,652 per month, said Novato rental research firm RealFacts. For all apartment types in the city, the average rose 1.4 percent from 2003, to $1,786 - the largest increase in four years. The last time the city's average rent ticked up was in the third quarter of 2003, when it edged up $7, or less than one half of 1 percent, to $1,769.

Although the overall average monthly rent in San Jose dipped 2.8 percent to $1,271 for the three months ended June 30, the city's occupancy level - which plummeted after the dot-com bust -- jumped 1.4 percent to 94.5 percent, the first year-to-year increase in four years. The slightly more competitive Bay Area market reflects a trend across many of the 25 metropolitan areas RealFacts surveyed in its quarterly report.

A 95 percent occupancy rate is considered key in the residential rental market. At that level or above landlords can raise rents; below 95 percent usually means rent decreases in an effort to fill vacant units.

At the same time, however, Ktsanes stopped short of describing the second quarter data as a clear shift to a landlords' market in the Bay Area, partly because in some areas, additional housing is still becoming available. That increased housing stock, paired with low interest rates -- which are pushing a flood of renters to become buyers -- could keep a lid on rent prices for the next few quarters.

"Because of the low interest rates, there's been lots of construction occurring," said Ktsanes, noting that several large developments are under way in Silicon Valley.

RealFacts' Bay Area reports are based on surveys of about 1,200 so-called Class A apartment complexes containing 50 or more units. In Sacramento, the minimum is 75 units; in all other cities, the cutoff is 100 units.

Although the firm's surveys do not include smaller apartment buildings -- which are common in much of the Bay Area -- local landlords say vacancies are down, and prices are firmer.

Of the 15 units he owns, Witkoski has only one vacancy, compared with last year when each of the five units in his Haight Street building turned over.

"I spent more time renovating those apartments than" working at his SoMa art framing business, Witkoski said.

In addition, popular Web sites where many local owners advertise their units show fewer rent discounts.

For example, only about two dozen current postings pop up on Craigslist.com with the word "reduction" in the ad, compared with hundreds of such ads last year and in the months immediately following the crash of the high-tech bubble in 2000.

On the other hand, some experts say supply still outstrips demand.

Market research at MetroRent, a San Francisco firm that pairs landlords with tenants, shows stagnating rents. And the two factors that would boost rents -- job creation and higher interest rates -- aren't materializing, said John McWeeny, the company's chief operating officer.

"We're at an equilibrium, and I think we will be for the next year," McWeeny said.

Indeed, in several Bay Area counties, occupancy rates remained below 94 percent, and average rents were down year-over-year, though in some cases, by only a few dollars per month. As recently last summer, the average rent fell year-over-year by 6.2 percent for the Bay Area and by about 9 percent in Santa Clara County. The steepest declines in the region were from 2001 to 2002.

For some prospective tenants shopping in San Francisco, there seems to be wide selection and little competitive pressure.

Theodore Ordon-Yaussi, a San Francisco State student who currently lives in the Sunset District, has toured more than a dozen units throughout the city in recent days. On Thursday, the 19-year-old and his mother, Irene Ordon, looked at a one-bedroom loft in the Richmond area listed for $1,300 per month.

"There's definitely a lot of choice. ... And it feels like (rents) are negotiable," said Irene Ordon.

Nevertheless, others in the market say there are few, if any, breaks on rent. In the last two years, many landlords advertised free rent for a month or two, reduced security deposits and made allowances for pets -- perks unheard of during the high-tech frenzy when occupancy neared 100 percent.

"There may be some people offering maybe a smaller security deposit, but there's no free rent for a month or anything," said Academy of Art student Brett Magnuson, 25, who viewed a two-bedroom, $1,600 unit owned by Witkoski in the SoMa section of San Francisco.

What's more, Magnuson, a native Nebraskan, noted that even at their post-peak levels, rents in the Bay Area are among the highest in the country and three times the average in downtown Omaha.

"The pay here is higher -- I guess most people know (higher rents are) part of moving out here," Magnuson said. - by Kelly Zito    The San Francisco Chronicle   26 July 2004 

Vacant Dot-Com Sites in San Francisco Turn Into New Apartments

In a concrete tower on San Francisco's Market Street, where employees of Internet companies such as Pets.com once toiled, developers are building the city's latest hot product: apartments.

Tishman Speyer Properties is converting the top half of the 40-story building at 575 Market to housing from offices left vacant in the dot-com bust. "Housing in San Francisco so far has been a very, very strong performer," said Tishman Managing Director Ezra Mersey. "We're confident it makes sense."

Developers that bought or built offices to capitalize on the 1990s Internet boom, when rents more than doubled in less than four years, are seeking refuge in housing. San Francisco office rents have fallen 60% from a peak of $ 80.16 a square foot two years ago, more than in any other U.S. city, broker Cushman & Wakefield said. About 15 million square feet of space is vacant, equal to all office space in Portland, Ore.

Equity Office Properties Trust, the largest U.S. office building owner, recently said that it ended a two-year venture to build San Francisco offices after investing $ 253 million only to see vacancies soar. Though costs to retrofit office buildings can limit the payoff on conversions, developers and brokers say the strategy is preferable to losing money on an empty building.

"These people are sitting with an asset saying, 'What should I do about this?' " said Paul Zeger, president of Pacific Marketing Associates in San Francisco.

The transformation of offices into homes will help ease what the Federal Reserve Bank of San Francisco ranks as the nation's tightest housing market, analysts said. Only 14% of residents can afford the median home price, $ 568,000 in the city.

Nationwide, 58% of residents can pay their local median rate, the California Realtors Assn. said.

Residential rents in San Francisco are higher than in any city except New York, rising 0.5% to an average $ 1,832 a month in the fourth quarter from the third quarter, apartment research company RealFacts said.

The average U.S. apartment rent fell 0.4% to $ 905 in the fourth quarter from the previous quarter, according to Reis Inc.

The increase in city apartment rents signals the end of a 6.9% decline in those rents from the year-earlier fourth quarter as companies fired workers, analysts said. No other city is positioned like San Francisco for conversion to housing from offices, analysts and developers say.

"We experienced a more pronounced cycle than anyplace else," said Tom Sullivan, former president of the dissolved Equity Office venture. "There was so much venture capital funding jobs. When the jobs went away, it left us with a high vacancy rate."

San Francisco's office demand is weakest in the 91-block former industrial area known as South of Market, where refurbished brick warehouses hold loft apartments, restaurants and offices. The area lies in the shadow of Tishman Speyer's tower that once served as the headquarters of ChevronTexaco Corp.

The end of the Internet boom left 49% of the area's offices empty. The citywide office vacancy rate climbed to 23% in the fourth quarter of last year from 1.8% in the third quarter of 2000, brokers say.

"It's a ghost town," Robert Larscheid, senior vice president at broker Axiant Group, said of the neighborhood that once was home to Internet retailer Pets.com and data network provider Northpoint Communications Group Inc. "There's no migration at all from the financial district and no new business enterprises."

A.F. Evans Development Co. plans to build 165 apartments in the traditionally industrial area after developer Ron Kaufman scrapped plans for a 300,000-square-foot headquarters for Internet software maker Macromedia Inc.

Evans Development also wants to create 250 apartments at the site of a warehouse once intended for offices, President Charmaine Curtis said.

"Heavy industrial is never going to relocate there and people don't necessarily want it," Curtis said. "A more logical transition is housing and mixed use."

Developer Douglas Rosenberg plans a 110-unit condominium project South of Market, where he once intended to build 110,000 square feet of offices.

"Just about every office developer in San Francisco has considered the residential option," Rosenberg said.

Tishman Speyer, based in New York, plans 130 apartments for the former ChevronTexaco building, where cutbacks by tenants such as Proxicom Inc. left the 40-story tower and a neighboring 20-story office building 87% vacant, property broker Grubb & Ellis said.

Housing costs have been driven up by a lack of supply in a city with 760,000 residents, said John Crapo, a director at the San Francisco Center for Economic Development. "The minimum we should be producing is 3,000 units a year, and we haven't done that in 12 to 14 years," he said. -   Elizabeth Hayes,   Bloomberg News      Los Angeles Times   27 Jan 2003

Silicon Valley High-Tech Rents Tumble
Rent in Silicon Valley for high-tech commercial real estate fell almost 30 percent in 2002, extending a slide that began a year earlier, according to a study released on Thursday.

Annual rent for high-tech work space in Silicon Valley averaged $15.24 per square foot in the fourth quarter, down 29 percent from $21.48 per square foot in the first quarter, according to commercial real estate services company Cushman and Wakefield.

Average annual rents in the region had been as high as $50.88 per square foot in the first quarter of 2001.

Silicon Valley, home to scores of big and small technology companies, has been hammered by the high-tech industry's downturn, sending local commercial rents tumbling as companies consolidated facilities while slashing payrolls.

Silicon Valley had about 30.15 million square feet of commercial space suited for high-tech companies available for rent in the fourth quarter of 2002, up 37 percent from 21.96 million square feet of such vacant space in the first quarter of last year.

The region's vacant high-tech real estate was a low 3.1 million square feet in the third quarter of 2000 when Silicon Valley's local economy was booming.

The unemployment rate in Santa Clara County, the region's heart, was 7.8 percent in November, down from 8.1 percent in the prior month but up substantially from 1.3 percent in December 2000 amid the dot-com boom and torrid business investment in tech goods and services of all kinds.    - Reuters   2 January 2003

• San Francisco overview

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