The new sales price at 67% premium is more than double what we should expect based on market fundamentals.
San Francisco, CA (PRWEB) June 14, 2014
In San Francisco, large office buildings have been trading hands recently due to more foreign money coming into the market. According to a San Francisco Business Times article from May 22 2014, one such building, 225 Bush Street, was last sold in 2012 to Flynn Properties for $212 million, or $360 PSF. According to the article, Flynn recently sold the building to Kylli Inc., a Chinese firm backed by Genzon Group, for $350 million, or $600 PSF. If you are keeping score at home, the transaction represents a 67% ROI in under two years.
Is the $350M sale price of 225 Bush Street justified, considering the building’s income? The question was of interest to Blake Toline, a Research Analyst at CompStak, a New York based firm focused on collecting commercial lease data. Toline analyzed CompStak’s 2012 leasing data for the market and compared it to recent rental data around 225 Bush. Toline determined that through the first six months of 2012, full service office leases signed in the North Financial District of San Francisco had average starting rents of $41 PSF, compared with the current average starting rents in the submarket at around $54 PSF. Given the data, the starting rents over the last two years have increased approximately 32%. In other words, the new sales price at 67% premium is more than double what we should expect based on market fundamentals.
Did Kylli Overpay?
To determine whether Kylli overpaid for the property, Toline investigated additional factors that drive up a building’s price other than investor demand. One important factor is rental rates in the building. While the property’s rent roll is traditionally reserved only to the eyes of owners and potential buyers, CompStak was able to get a glimpse into the building’s income. Back in 2012, rents in the building were being signed for below market value, whereas recently, the new leases are signed around the market average starting rent, according to CompStak data.
In other words, while the market increased by 32%, 225 Bush leases appreciated by much more.
A second factor is vacancy rates. According to Greg Flynn, Founder and President of Flynn Properties, the building went from 68% leased when it was purchased in 2012 to 99% leased today. Toline than was able to conclude that “with leasing rates up 31% and occupancy up 45%, a clearer picture and a justified valuation emerges presenting a potential win-win”. Great return for the previous owners and solid cash flows in a stable property for the new investors.