May 29, 2009

Lembis Look To Cut Another Twelve Loose As Rental Market Drops

"The troubled Lembi real estate empire has put 12 San Francisco apartment buildings up for sale at prices well below what it paid for the properties in 2006 and 2007."

"The buildings the family is attempting to sell include 2185 Bay St., a 24-unit complex the Lembis bought in late 2007 for $7.9 million. The asking price on the building is $5.9 million. Another building, 1305 Lombard St. sold for $2.6 million in 2007 and is priced at $1.9 million. A third property, the 14-unit 2050 Powell St., sold for $3.4 million in 2006 and is priced at $2.9 million."

"David Gruber, who owns 13 multifamily buildings in San Francisco, said rents have dropped 10 percent to 15 percent, and he is seeing an increase in requests for rent adjustments."

Lembis expect to sell apartment buildings for loss [Business Times]
San Francisco Rental Market Weakness: SocketSite Readers Report [SocketSite]
RealFacts Reports (Not So Real) Asking Rents Flat In San Francisco [SocketSite]

First Published: May 29, 2009 11:15 AM

Comments from "Plugged In" Readers

They were losing what? 2K per unit on average? How low will prices have to go for an grounded investor to start breaking even? 50%?

A ~25% haircut looks a bit timid knowing their purchase price was way out of whack compounded to the fact that rents are falling pretty fast. But it's a good start towards price discovery.

Posted by: San FronziScheme at May 29, 2009 11:38 AM

I've been told that losing 2K a month on a unit is a wise investment that builds up a land-lording business. One wonders why the lembis are bailing?

Could it be that an asset is something that puts money into your pocket every month and a liability is something that takes money out of your pocket every month?

Is it possible that instead of purchasing assets they've been purchasing liabilities?

That doesn't seem like a way to make money. But what do I know, I'm not a "Real estate professional".

Posted by: diemos at May 29, 2009 11:45 AM

How low will prices have to go for an grounded investor to start breaking even?
Ha. That's the problem with you naysayers. You are valuing these units as rentals, instead of highly desirable "I can't believe its not a condo" units (aka Forever TICs).
Let's try some math on on the desirable 2185 Bay St. Using 1257 Francisco as a reference point (~$640/sq.ft.), we arrive at a value of $7.96 million (640 * 12438sq.ft), which is, coincidentally, what the Lembis paid for it. I guess they didn't anticipate the market, uhhhh, flattening.

Posted by: EBGuy at May 29, 2009 11:56 AM

LOL. SF real estate is starting to resemble the butt of so many jokes:

Q: "How do you make a million dollars in SF real estate?"

A: "Start with two million."

(I heard that one first in relation to auto racing, but I'm sure I've heard it about other pursuits since.)

Posted by: LMRiM at May 29, 2009 12:03 PM

These places will probably sell above asking if - and only if - they're staged with rhinos and zebras in the lobbies. Investors go crazy over that kind of stuff.

Posted by: Brutus at May 29, 2009 12:16 PM

EBGuy, very true.

When you're buying a rental building, you're not buying square footage, but rents, recurring costs, and legal liability. Add to this the ever more stringent constraints on landlords.

What good does it do to you to have bought a building at 20% less a foot than the TIC next door if your rent sucks, the repairs eat your capital and you cannot convert into TICs or condos. Rent control makes sure rents will get stuck while your costs follow real life inflation.

It'd better be a good pricepoint to have something that can stand on its 2 feet in SF. We're not there yet and by very far.

Posted by: San FronziScheme at May 29, 2009 12:17 PM

I sold a building to the Lembis in 2007. Maybe I should buy it back.

Also, the links to the SFBT article are broken because SS left the lowercase L off the end of the URL.

[Editor's Note: Stupid SocketSite (and since fixed).]

Posted by: SFBear at May 29, 2009 12:30 PM

You wouldn't sell now if you think rent will go back up. The fact that they are selling says that they don't think rent will rebound any time soon. 2007-2008 rents were anomaly and it'll be a long time before we see that kind of level again.

The prolonged depression of rental market will have implication on the RE market too. The owners who went rental route to wait out the market will have to cry uncle like Lembis sooner or later, and sell at the market price eventually.

Posted by: Fishtarian at May 29, 2009 1:09 PM

You wouldn't sell now if you think rent will go back up. The fact that they are selling says that they don't think rent will rebound any time soon. 2007-2008 rents were anomaly and it'll be a long time before we see that kind of level again.

I highly doubt a drop in rents is causing them to sell. Maybe the fact that rent didn't increase 100% from when they bought the places, but the prices they paid were out of whack for 2007-2008 rents, which were not that much higher than rents today.

Posted by: Brutus at May 29, 2009 2:35 PM

I m not sure the Lembis know much of anything about the future direction of rental rates.

All they know, is that they have received a margin call, which, can only be met via liquadation.

Quite a few are in that same situation, imho.

Posted by: jon at May 29, 2009 2:41 PM

90% leverage and poor liquidity caused them to disintegrate, not a 10% reduction in rents.

Posted by: gh at May 29, 2009 2:55 PM

Sounds like the Lembis were just "bull market babies". Unable to anticipate or understand the real forces at work in SF real estate valuation (which had little to do with SF itself), they just plowed ahead doing what worked in the past. Most investors/businessmen operate that way - presumably the Lembis siphoned off enough cash from the whole endeavor that they can maintain good spirits and laugh about it. It's only money anyway - no big deal.

Posted by: LMRiM at May 29, 2009 3:01 PM

Someone in that family had a bit of sense when they first started out....or else, they just got lucky. What passed for genius was in reality just dumb luck and a bull market.

It doesn t appear there is much money left to prop up the empire. I don t think they are smart enough to pare their losses. Instead, this liquidation is at the behest of their lenders.

Once again, luck might enter into it. Those who hold out for a rise in either rental rates or in the value of the property will not find the market very friendly in the future. This downturn still has some legs.

Posted by: jon at May 29, 2009 3:13 PM

Lembis are basically gambling with house money in the hundreds of millions. No big deal. If the market goes up 50%, they will have looked like geniuses. If it tanks the way it has, the banks take the hit and they will walk away no worse for wear. It's no different from a standard conforming loan multiplied a thousand times over.

Except, it's not a big deal when your family is already worth hundreds of millions and has connections to capital regardless of credit score. It's a game to them and in the end, they still win because they still own hundreds of properties.

Posted by: Triple Net at May 29, 2009 4:08 PM

Yeah, I dont think any of the lembis are breaking out the top ramen soup yet.

BTW, can someone with a subscription to the SF biz times cut/paste the entire article? WTF is wrong with SFBT- didn't they get the memo that most newspaper content is free on the web?

Posted by: 45yo hipster at May 29, 2009 4:46 PM

doubt the ramen too but but I did hear a ferrari was repossessed.

Posted by: bankerboy at May 29, 2009 5:06 PM

I lived in one of the aforementioned buildings until recently. The price the Lembis paid was WAY beyond the rent they got, very cash flow negative - it was a total bet on appreciation and/or being able to quickly replace rent-controlled residents with MUCH higher rent paying tenants. I paid the highest rent in the building (everyone else had been there for years if not decades), and even if everyone paid what we paid, the numbers didn't nearly work out. Not even close.

Posted by: insider at May 29, 2009 5:17 PM

a boston transplant visited my open house this weekend thinking it was a rental... he complained that he couldn't believe how competitive renting is here.... from others i've heard the 10-15% drop in prices is doing the trick. so i don't see a free-fall in rental prices from where we are now... although i'd like to hear comments from a rental agent, or an owner with vancancies

Posted by: hangemhi at June 1, 2009 9:40 AM

What happened was, Socketsite convinced every single able bodied adult that buying in San Francisco is a terrible idea right now. As a consequence, the rental market has become competitive. This in turn has rendered what would normally be a rental shopper's market anything but.

Posted by: The Tipster's Legacy at June 1, 2009 10:06 AM

Renting competitive? It was a year ago, but not now. Not by any stretch of imagination.

You may be used to it, but $3000/mo for 2br is still a lot of money. A Manhattan price in mission bay, for example. I won't be surprised if the rent drops by another 15% by the end of this year, on top of 20% since the peak.

Posted by: Fishtarian at June 1, 2009 11:13 AM

For those of you who can stand the 'suburbs', I noticed sign spinners advertising a rental open house at the Library Gardens in downtown Berkeley. Twenty-three minutes to downtown SF, if you can put with the cultural wasteland of suburbia (tongue planted firmly in cheek for the sarcasm impaired).

Posted by: EBGuy at June 1, 2009 1:18 PM

Ha ha, TTL, I think you'll find that there are MORE places on the rental market, not less. People can't sell their SOMA condos for what they owe on their zero down loan, so they rent them out. There are more residences than last year, and practically the only buyers are former renters. They free up a rental spot when they buy.

Posted by: tipster at June 4, 2009 1:50 PM

People can't sell their SOMA condos for what they owe on their zero down loan, so they rent them out.

And they're almost always in the red which means they're subsidizing renters with their savings or their sweat. That's what I call sweat-negative-equity!

Posted by: San FronziScheme at June 4, 2009 2:10 PM

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