“Colorado-based apartment real estate investment trust paid $115 million for a recently completed Mission Bay apartment complex, a deal that shattered price-per-unit records for a major multi-family property in San Francisco.
UDR, formerly known as United Dominion Realty Trust, shelled out $595,855 per apartment, or $730 a square foot, for the recently completed 193-unit Edgewater Luxury Apartments at 355 Berry St., north of the channel in Mission Bay.
The seller was the apartment developer Urban Housing Group, which spent five years entitling and constructing the property before opening it in August 2007. Urban Housing fully leased the building in four months, beating projections by five months.”
Edgewater’s $115M price shatters records [Business Times]
Edgewater Apartments (355 Berry): An Overview And Pricing [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by curmudgeon

    I’m missing something…could someone more financially astute explain what?
    condos are typically going for 700-800 per square foot. Everyone says there’s not enough rent potential for a condo owner to buy at that price and then rent out.
    Why does it make sense for an institutional investor to purchase at that high a per square foot rate?
    (with the on-going Beacon thread…it almost seems like an institutional investor could buy out all the underwater owners and take it back to rental where it belongs…lol)

  2. Posted by Dude

    I agree, curmudgeon. If you look at UDR’s website, their asking rents on the property don’t seem high enough to justify the valuation and get a decent cap rate. They’re either betting on strong appreciation or rents going up sharply during their hold period. Then again, their hold period is likely much longer than that of your average flipper.

  3. Posted by anon

    “I’m missing something…could someone more financially astute explain what?”
    Hey, the market is on fire again!

  4. Posted by John

    Because they are not planning to sell in 2 years, or even 10 years. They can make 20 year or 30 year plans.
    The tax consequence is also a completely different game for the kind of business. It is quite possible that they are making a load of money from other properties they purchased 30 years ago, and don’t mind to have a loss on new properties for a while.
    We don’t know how the buyer pay … do they need to get any kind of financing? Let’s think about it….if they have 100M in the bank, they are probably making 2%/year on the idle cash (1% after tax) right now. Buying some properties with the cash doesn’t sound a bad idea.
    Individual buyers also have to pay HOA, which can be a big chunk of the expensive, especially since it is not tax deductable. Institution buyer has their own property management department and handle their own repairment, the per-unit cost is probably at least 50% lower. In addition, that is cost of doing business, so it is tax-deductable (for business income tax).

  5. Posted by chuckie

    All very good points John. But why would they pay so much? Why the valuation so high?

  6. Posted by JJ

    UDR is a REIT which by definition means 95% of there revenue (profit) must be given back to shareholders in the form of a dividend. That means they do not have $100M in the bank and they must finance these types of transactions.
    To John’s point, they will hold this property for the longterm and not flip it. If you take that and add it to expected rent growth in SF of 5-7% for the next 3-5 years = willingness to buy at $730/ft.
    In 10 years $730/ft could seem like a bargain

  7. Posted by zzzzzzz

    As new construction this development is exempt from rent control – no doubt a big factor in the final price tag.

  8. Posted by FSBO

    $596K per unit for an 800sf unit does seem high when you’re buying in bulk. These units are advertised on Craigslist at $2,800+ per month. With management expenses, repairs, taxes, insurance, etc – even for a big efficient company – I would estimate their initial cap rate at no more than 4%. Do they have access to funds at 4%? I guess they must be counting on appreciation and future rent hikes – and can service the debt until then. (Lembi was buying at 2 & 3% cap rates last year – how’d that work out for him?) Maybe anon @ 10:25 is right – the market is on fire again.

  9. Posted by John

    I think it is obvious that they can afford the price.
    However, I think chuckie’s question is why they would. If the developer can only sell those units individually for $600/sqft, why would they offer $730/sqft?

  10. Posted by silly

    They understand that rents are going to rise around here for the foreseeable future.
    Note that the sellers had planned for a 9-month lease-up but they were able to get all 193 units into contract in just 4 months.

  11. Posted by silly

    Here’s some rising rents for you…
    Per Socketsite, the rents in 8/07 were:
    ∙ Studios (520 to 600 square feet) from $1,975/month
    ∙ 1 bedroom/1 baths (535 to 1,055 square feet) from $2,165/month
    ∙ 1 bedroom/1.5 bath lofts (710 to 1,330 square feet) from $2,600/month
    ∙ 2 bedroom/2 baths (940 to 1,330 square feet) from $3,100/month
    From the Edgewater website, they’re now…
    ∙ Studios (556 square feet) from $2,250/month
    ∙ 1 bedroom/1 baths (546 to 850 square feet) from $2,440/month
    ∙ 1 bedroom/1.5 bath lofts (735 to 1,021 square feet) from $2,600/month
    ∙ 2 bedroom/2 baths (1,085 to 1,240 square feet) from $3,325/month

  12. Posted by livethere

    Any idea on what Urban Housing Group netted here after all is said and done?

  13. Posted by FSBO

    355 Berry carries a $31M assessed value (but it does show a supplemental tax bill too). An ’06 press release refers to the project as $38M. Looks like they have done quite well.

  14. Posted by putdownthepipe

    a. Rents won’t appreciate 5-7% for the next 3-5 years without corresponding wage growth. That ain’t going to happen RE wishers.
    b. 2400-2600/mo for a 1 bedroom is horribly overpriced. Anyone actually hunting for a rental will figure that out quickly.
    Maybe they’re hoping to tap into the market for people who have been recently foreclosed.
    I’ve heard that will be a booming growth market for some years to come.

  15. Posted by Lance

    Hmmm….. this seems to suggest that Spencer’s $1900 2BR in Pac Heights is NOT the norm. It also says that if you believe rents are going to keep rising at 5-7% annually, then buying a place at $700 psf might not be as catastrophic as many would have you believe.

  16. Posted by Lance

    @ putdownthepipe – I personally wouldn’t pay $2600 to lease a 1BR apartment either, but market rent is what people are willing to pay for it. According to the article, they sold out at these prices, so it must not be as “horribly overpriced” as you think.

  17. Posted by Observer

    On rent prices is this simply the Market speaking
    Perhaps the price points for rent are both correct… the difference is perhaps building age? If you live in a victorian or other building (e.g. infill) in a older more mature neighborhood you pay ‘x’ and if you want to live in a newer (yet to be completed neighborhood) whose benefits are yet to be full realized you pay ‘x+1’?

  18. Posted by Dude

    What many of you seem to overlook is that UDR is a publicly-traded, investment grade REIT. Check their public filings – they recently borrowed $200MM at LIBOR+85. That’s 3.6%. If that’s the cost of capital on this project, it may well pencil out of the box.
    Which brings me to repeat something I’ve said before: those who feel compelled to invest in real estate are often better off buying good REIT stocks rather than Soma condos or stucco in the central valley. Institutional players can exploit opportunities/economies of scale that are closed to the average person. Plus stock is liquid and can be bought/sold in $25 bites vs. $700K slabs.
    I’m not saying that REITs don’t make bad decisions, lose money, or mis-time the market (or overpay). They can and do. But most have the ability to absorb a bad investment or two. Long-winded point: just because this works for a REIT at $730 psf doesn’t make it a wise investment for Joe Cultcab, amateur SF landlord.

  19. Posted by putdownthepipept2

    Either you RE guys are bad at logic or math or both.
    If the place is fully leased then how would they have places list for rent on their website?
    And even If they are fully leased – does the article mention the rates? No. That inference comes from their website listing prices.
    So.. perhaps the rent prices aren’t the market speaking. Perhaps thats the corporate finance department speaking to help justify the valuation to the buyer.

  20. Posted by JJ

    @ putdownthepipe – Look at RE research market forecasts for the bay area. All are predicting somewhere between 4-7% annual rent growth for the entire bay area. SF will be on the high end of that growth rate compared to the east bay and other suburban areas

  21. Posted by silly

    @ putdownthepipe – When was the last time you moved into a rental?

  22. Posted by FSBO

    Dude – thanks for the information and insight into UDR. Question though – why would banks lend relatively huge sums at LIBOR +85 for projects of this nature? This debt wouldn’t even be securitized, would it? I don’t care how bullish you are on San Francisco, this isn’t exactly a slam dunk project. What happened to the global credit crisis? I wish I could borrow at 3.6% – I could go buy a bunch of 5% cap rate properties.

  23. Posted by Dude

    I’m not sure the loan was specifically for this project, but it does appear to be unsecured (most investment grade debt is).
    Regarding why the loan would be made, keep in mind this is not a huge event for a company like UDR. They have $3.3 billion in market cap and generate $270 million in annual cash flow. So this is a modest sum for them. Additionally, we’re talking about a company with $4.8 BILLION in assets spending $115 million on one property. Like I said above, this entire project could crater and UDR would be just fine. Not so for the average investor who loses one condo to foreclosure and is busted for years.
    Finally, as JJ pointed out, UDR is a REIT and highly regulated. In this case, they’re forbidden from having debt exceed 60% of gross asset value. Think of that as roughly max 60% LTV. It’s a lot easier to get financing with 40% down instead of 5% or 10%.

  24. Posted by anon

    The rest of the article goes on to explain their rationale: they sold a portfolio of properties in Texas and other states for 1.7 billion. They believe that low-affordabilty, supply-restricted areas (San Francisco) will outperform areas that are more affordable, and where there are fewer restrictions on land use

  25. Posted by il_guru

    “Which brings me to repeat something I’ve said before: those who feel compelled to invest in real estate are often better off buying good REIT stocks”
    Let me quote you Dude and let me add one of my favorite lines “REIT don’t call you at 3AM with a clogged toilet”

  26. Posted by Porky

    The thing is, properties with more than 4 units are priced differently than smaller properties. In the Oakland area, properties with more than 10 units are going for $100k-$200k per unit on average. Yes, they might rent for less, but not that much less.
    Also, LIBOR is variable. The odds of LIBOR + .85 going above 5% is almost a certainty within the next 30 years. This is not a 30 year play.
    Maybe what they are looking at is renting for a few years then selling each unit? I am not sure of the legality of that though.

  27. Posted by jimmythekid

    This is a 4.5% annual return on their money (not including depreciation etc). High barrier to entry market. Great yield with plenty of upside; they got it cheap. They can roll out as condos when they sell.

  28. Posted by FSBO

    Thanks for the article link jimmythekid. My estimate of a 4% cap rate was pretty close to what they are stating. I still don’t understand how you can claim that UDR got a “great yield” and got the property “cheap”. 4.5% must be below anyone’s cost of capital. And they are paying the highest price ever paid for a multi-unit building. They are paying $115M for something that was just built for what, $38M, $50M? Is this the last opportunity to own something in Mission Bay? I thought the whole area down to Candlestick Point was under development.

  29. Posted by mac

    I dont get the math for the 4.5 % mentioned above.
    The average price was $596000. The avg rent is 3076*12 = $36912. Thats a 6.19% return. Not including depreciation etc. It seems like a great deal.
    If I bot a condo at the Beacon for > 650k (the recent short sale mentioned here on SS) I wouldnt get 3k for it in rental. More like 2500 according to recent posts.

  30. Posted by jimmythekid

    FSBO that was just built for what, $38M, $50M?
    The real number $95 million all in. They took a lot of risk for a lousy 10 mill. I do not know why they sold.
    Last updated: Wednesday, April 25, 2007
    $95M Apartment Complex Under Way in Mission Bay
    By Brian K. Miller
    (Read more on the multifamily market.)
    SAN FRANCISCO-A $95-million mixed-use development got started last week on 1.5 acres near the University of California in the Mission Bay neighborhood. The project, 555 Mission Rock, is a 192-unit apartment development with 10,000 sf of street-level retail located south of the channel, an untested area for market-rate apartments.
    The developer is a joint venture of AIG Global Real Estate and Urban Housing Group, a multifamily development subsidiary of Marcus & Millichap Co. A source with Urban Housing Group tells GlobeSt.com that the $95-million figure represents to project’s total development cost.
    [Editor’s Note: 555 Mission Rock (555 Mission Rock Apartments: Additional Details And Timing) and Edgewater (355 Berry) are two different developments.]

  31. Posted by jimmythekid

    MY BAD the 95 mill is for another nearby project by the same developer. But still you can see this is a similar project and it is 95 mill. For these midrise deal you can easily be into it 400k+ per unit with land cost, entitlement cost. cof, consultants and construction.

  32. Posted by Porky

    I dont get the math for the 4.5 % mentioned above.
    The average price was $596000. The avg rent is 3076*12 = $36912. Thats a 6.19% return. Not including depreciation etc. It seems like a great deal.
    If I bot a condo at the Beacon for > 650k (the recent short sale mentioned here on SS) I wouldnt get 3k for it in rental. More like 2500 according to recent posts.
    Posted by: mac at May 5, 2008 6:12 PM
    Mac, CAP is calculated 3076*12=36912, MINUS 35% for taxes, insurance, maintenance, etc.= 23923 divided by the price = 4.0% CAP. Assuming 100% occupancy, which is a big assumption.
    4% is really low – we don’t even look at properties listed with less than a 5 cap.

  33. Posted by FSBO

    jimmythekid – yeah, the $38-$50M is probably light. I think the $38M was the construction contract for 355 Berry – but I saw somewhere that the construction contract on 555 Mission Rock was $63M. If that ratio holds, the all-in for 355 Berry might be $60M+ – that’s about $400 per sf (which is plausible). Whatever the true numbers, I think that UHG is enjoying a big gain.
    mac – your 6% ROI excludes mgt expenses, vacant time, maintenance, leasing fees, other operating expenses and property taxes ($7K). I think they will be lucky to get 4% in the early years.

  34. Posted by jimmythekid

    First of it is a 4.5 cap rate right now. This is what UDR filed in docs with the SEC. This purchase was one leg in a $1.7 billion exchange. Porky are your 5 cap deals new construction with a condo map already approved?
    Maybe you should head up acquisitions since you are way smarter than these idiots? Oh by the way these guys seen to be doing all right without you.
    Check out these stats. –
    Achieved 15th consecutive quarter of revenue growth -Delivered 7.7 percent same community net operating income (NOI) growth — Closed $1.7 billion portfolio sale of 25,684 homes– Completed $580 million of acquisitions
    I am sure your numbers are better but take a look http://biz.yahoo.com/bw/080505/20080505006497.html?.v=1

  35. Posted by hhatmm

    UDR already owns one very very profitable apt. in lower pacific heights in San Francisco and they know the market very well before they bought. Several years ago UDR tried to add onto their portfolio by developing more apts, but I suspect found building in San Francisco excrutiatingly expensive and painfully ARDUOUS (because it is SF reality). I would not be surprise me if UDR is buying 355 Berry as a less painful route to expand the SF market. Henceforth, Urban Housing quoting UDR is paying the premium for not having to go through the “brain damage”.

  36. Posted by FSBO

    Good stuff on UDR jimmythekid. They are a good company with a great track record. It still seems to me like they may have paid too much. Who else was bidding? Was someone else out there for $100M or more? The headline didn’t say that the broke the alltime record for highest price paid – it said they shattered it. It seems like a lot of commercial players that bought for record prices over the past year or so have ended up in big trouble.

  37. Posted by jimmythekid

    The $95 million number came from UHG (before they broke ground at 555 Mission Rock). for the total development cost of the project. If you think it’s less; argue with them not me.
    The way I see it for bulk purchases (100 units plus) It’s $100k per unit for dirt. 300k per unit(midrise) all other costs. Total cost to build $400k per door all in. Avalon just bought (mid 07 bought) dirt in mission Bay at 100k per door (entitled)

  38. Posted by jimmythekid

    2000 post also has a condo map. I think that is the building you are referring to.

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