A portfolio of five “trophy” buildings which have been remodeled and reconfigured by Starcity to yield 72 individually rentable rooms, with shared kitchens and living spaces for the residents, are on the market in San Francisco.

According to the offering memorandum, which was prepared prior to the impact of COVID-19 having really taken hold in San Francisco, the five buildings at 414-416 Bryant Street, 1813-1817 15th Street, 1854 McAllister Street, 1150 Fell Street and 6-8 Nottingham Place were on track to generate $2,095,631 in annual rent with an estimated $299,593 in annual operating expense, excluding property taxes, and the un-priced offering presents a “rare opportunity for [an] investor or operator to gain [an] immediate presence in [the] San Francisco co-living market.”

The five buildings were individually acquired by Starcity between 2017 and 2018 for $11.165 million in total, and then refurbished, repurposed and repositioned, based on our review of the deeds.

Comments from Plugged-In Readers

  1. Posted by SomeCallMeE

    Exhibit “A” of what will go into foreclosure first when the courts re-open…

    • Posted by haighter

      I don’t think so. This is “co-living”, not AirBnB. I’d guess the average tenancy is 3-6 months. Likely the owner will just have to reduce rents a bit as the market softens but not to a level that would destroy the economics of this business.

      • Posted by AY

        I can’t imagine being in a ‘co-living’ situation right now, depending on the good hygiene and habits of 15-20 non-family members. Might as well be stuck on a cruise ship. Only thing worse would be one of those pod/bunk bed buildings.

      • Posted by SomeCallMeE

        These properties were purchased at astronomical prices in the last few years based on a business model that required top of the market rent per foot to pencil. Co-living will be hit hardest by post pandemic economy, right there with retail and hospitality.

        • Posted by Brahma (incensed renter)

          Any potential buyer is going to have to be deep-pocketed, have long investment time horizons and well-capitalized pre-new coronavirus or be in a position to take advantage of cheap financing that becomes available in the next several months. And the seller’s probably going to have to take a haircut.

    • Posted by Jake T

      The numbers reported suggest that even with property taxes and financing costs, these buildings are solvent at $2m/yr in income.

  2. Posted by Jeffrey W. Baker

    I don’t see how they could have arrived at $300k annual expenses, unless they are simply ignoring financing and taxes.

    • Posted by Jeffrey W. Baker

      OK, reading for comprehension this time, I see they are indeed excluding taxes, but I still don’t see how you could purchase something they were undoubtedly intending to market for $20-25 million and have only $300k annual expenses.

      • Posted by SocketSite

        The cost of capital (i.e., financing) is excluded from the expense line as well (but it does include a 5 percent management fee).

  3. Posted by Notcom

    I’m really partial toward the Nottingham property…seems to have a definite Art Nouveau influence.

    That inspiration, tho, comes from being a (what looks like a classic) URM; anyone have much experience in how sophisticated investors are in dealing with this ?? I’m sure there are disclosure requirements – NOTICE: You’re taking your chances – but as SF becomes a ‘world city’, with investors from NYC, London, Moscow, et al. who probably think “Seismic” is a new club, I’m not sure the concept really sinks in.

    • Posted by Jeffrey W. Baker

      Funny that there is a big, formal program for wood-framed soft story buildings, complete with a list and a map, but not a corresponding list or map of unreinforced masonry buildings. I wonder if this place escaped the UMB program because it was fewer than 5 apartments, and how converting it to an 11-room frat house affects that exemption.

      • Posted by Notcom

        It may be that they were covered under earlier mitigation efforts – you see a lot of anchor bolts on buildings – whereas the soft-story concerns are just the past few years Northridge was a quarter century ago, but that’s last week in code-change terms)

  4. Posted by sf

    Co-Vid living?

  5. Posted by mary_jane_jacobs

    Anyone looking to gain exposure to real estate at present would do well to sit down with an advisor and try to understand the cap rates implied by current securities market pricing.

    The salad days are back, but not in the MLS world.

    • Posted by Jake T

      Shiller PE is around 19, so cap rates of ~5.2%? I don’t get why commenters are so mysterious about their claims.

      • Posted by jimbo

        No Mystery here. The real estate cycle was all ready exiting the boom phase, with plenty of bad apples-to-apples sales and Case-Shiller already down prior to this COVID19 hit. Companies with high debt loads, of which there are many, were all ready seeing trouble in the markets. Auto financing data shows that many consumers were all ready under mounting financial stress.

        Pin meet bubble. Mystery solved.

    • Posted by mary_jane_jacobs

      I think Jake T is referring to Robert Shiller’s CAPE (Cyclically adjusted Price Earnings) ratio, a backward-looking measure that attempts to remove inflation’s effects from the earnings a company has experienced, applied to the S&P 500.

      I think jimbo is talking about the Case Shiller index, a measure (also named for the busy Robert Shiller) that attempts to normalize price returns for real estate transactions as a means of creating a market gauge.

      What I am talking about is the cap rate (capitalization rate, calculated as the ratio between the Net Operating Income (NOI) of a real estate investment, over the value of the investment itself. This calculation ignores the cost of financing and is the primary tool used by financial analysts to evaluate the return (reward) component of the risk/return trade-off for an income-producing investment.

      REITS and real estate stocks have sold off so much that one industry report quoted an implied 14% cap rates for hotel stocks and an 8% cap rate if one assumes NOI for hotels drops by 40% in the coming year. To make any reasonable guess as to the NOI, one would have to make some assumptions about decreases in business and asset values. A lot of decreases are already priced in.

      As an example, AvalonBay (ticker AVB) can be bought for 2/3rds the value at which the company was trading in late [February]. Do these broker/sellers expect to take a 33% cut on their equity as of February? Probably not. It might take a year to convince them. So don’t even waste your time with these guys. Go buy a painless stock with a $15 brokerage fee instead of a 5% fee.

      You’re much better off in the financial markets.

      • Posted by Jake T

        Your point about the different Shiller indices is correct. I’m not sure why any of what you have described is any more true today than at this time last year. AVB and Essex are trading at 2014 values, but cap rates haven’t moved much since then. Residential rents have been flat since 2015.

        Real estate is not an easy asset class but none are. Furthermore, holding and operating a property is a very different experience from holding a security, and the person who treats them as interchangeable is mistaken regardless of how markets are moving.

        • Posted by mary_jane_jacobs

          I’m comparing what the guys marketing this portfolio of co-living spaces “un-priced” are doing vs. the securities market. If you call up the seller of the subject offer and tell him you want to pay a 2014 price for these buildings, he’ll probably say, ‘Good For You’ or another phrase whose acronym is GFY.

          The point is that this listing is a waste of time if you can do better in the financial markets, and of the two, holding stocks is much much easier than holding physical real estate. The person who treats them as interchangeable is indeed mistaken if he thinks he has to put up with as much baloney for a REIT or stock as he has to with actual co-living twenty-something millennials as customers. Stocks are easy. Property management is hard.

          • Posted by Jake T

            How big do you think the intersection is between interested, serious buyers of this $12m listing and people who are looking to park their money into VTI?

          • Posted by mary_jane_jacobs

            You keep talking about stocks broadly. I keep talking about real estate investments in the stock market instead of in the physical market. If you want to put money into real estate, the stock market offers a better way to get exposure to the asset class. I make no comparison between VTI and this listing.

          • Posted by Jake T

            Sure. I generally agree with you, but I’m sure so do most readers of this website.

  6. Posted by Jake T

    For context this 22 unit building with $350k of gross income just sold for $7m.

    • Posted by mary_jane_jacobs

      Price negotiated pre-covid, so not a comp.

      • Posted by Jake T

        It went out of contingency when the outbreak was well along its way in Asia and China had been shut down for 2 weeks. Furthermore, the buyer could still have walked away losing just a deposit which certainly would be less than the 25% drawdown in the overall market.

        • Posted by civ-e

          the u.s. markets and economic outlook has changed a lot since the time that china was shut down for 2 weeks, at which time it was business as usual over here, except for talk possible about manufacturing disruptions, which is much more benign than the barrel we’re staring down now.

  7. Posted by Brahma (incensed renter)

    For the sake of commenters who haven’t heard of starcity, the media’s “co-living” darling…from Mar 2018, Dorm Living for Professionals Comes to San Francisco:

    Starcity has already opened three properties with 36 units. It has nine more in development and a wait list of 8,000 people. The company is buying a dozen more buildings…has raised $18.9 million in venture capital and hired a team of 26 people…

    Go read the whole thing with the realization that it almost reads like the CEO and founder’s publicist wrote it. The only thing in it that comes anywhere near critical is when the author points out that starcity is contributing to gentrifying The Tenderloin.

    If the business is so great and revolutionary and delivering the lifestyle people want, why are they selling five buildings? Are they low-performing?

  8. Posted by mary_jane_jacobs

    Are you saying that apartment buildings in nice neighborhoods will still be trading for 3%(?) cap rates in the near term? I think that’s about what your Scott Street listing represents.

    • Posted by Jake T

      Scott St. was closer to 2%. I’m just providing data — SocketSite can be hysterical. I don’t think the drawdown in real estate will be nearly as extreme as the one in securities. On the other hand, cap rates on multi family in SF must be evaluated carefully since so much of a building’s rental potential is captured by long term rent controlled tenants.

      • Posted by SocketSite

        Keep in mind that the data point you provided is for a multi-unit building, with predominantly two-bedroom, individual units, which are currently yielding below market rents, on average, and went into contract back in January with a listed CAP Rate that was closer to three percent than two.

        And of course, there were the eight ground floor garages, begging to be converted into value-added ADUs.

        • Posted by Jake T

          It closed for higher than list. One should be able to back out closing cap rate by doing some arithmetic based on listed cap rate and price.

          • Posted by SocketSite

            That’s correct. Which we did. It was effectively a 3 percent CAP based on the estimated expenses, income and $6.95 million contract price.

            But again, it’s a 12-unit building, with 11 two-bedrooms which are currently generating below-market rents of between “$1,152 and $4,104” a month with the potential for value-added ADUs (and yes, we’re well aware of how rent control applies but we’d be willing to put odds on the plans).

            All of which brings us back to the market for co-living buildings and the impacts of COVID-19.

  9. Posted by mary_jane_jacobs

    “I don’t think the drawdown in real estate will be nearly as extreme as the one in securities.” I don’t either (I have elsewhere suggested 20% lower) but 20% on an asset that’s conservative at 4:1 leverage, well, hurts.

    @SS – garages are encompassed by rent control regulation. Assuming the ones in question are used by tenants, as an ADU-seeking landlord, your choices to take those back from your tenants are:

    1. Ask pretty please.
    2. Pay a negotiated buyout.
    3. Ellis the whole building.

    1 is unlikely, 2 and 3 are for nearly everyone, prohibitive. As to #2, even if you get 5-6 people to play ball the other couple can delay your project indefinitely. There was no free money in that Scott street trade.

    • Posted by Jake T

      Rent control lets buyers be unrealistically optimistic about potential upside.

      • Posted by mary_jane_jacobs

        That’s true, and what brings us back to my original point which is that investors should be buying real estate stocks instead of physical real estate at this point. The markets will re-converge at some point. Will the stocks go up, or they physical asset prices go down?

        Probably some of both, and I think anyone who believes this co-living space is worth a 3 or a 4 (or even a 5-6) cap in the next 12 months is excessively optimistic.

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