TIC’s Are Still Attractive for Developers

Developers have been buying San Francisco apartment buildings and converting them to tenancy-in-common (TIC) buildings for years. That’s because owner-occupiers are willing to pay more for homes than investors are willing to pay for rent-controlled apartments. Take a look at the chart, below, which shows historical sale prices for TIC’s and multi-unit (apartment) buildings.

TIC prices leveled out at around $500,000 in 2005, and have remained fairly stable since then. Over the same five-year period, multi-unit building prices have hovered in the neighborhood of $250,000 per unit. In other words, TIC’s have been selling for roughly twice as much as apartments. The price premium is easier to see in the chart, below, which shows the per-unit price difference between TIC’s and apartments.

What I find surprising about this chart is that the TIC price premium does not seem to have diminished over time. It dipped modestly in 2008, but has since bounced back to around $250,000 – the same level that it achieved during the peak years of the housing boom.

If I had several hundred thousand dollars in cash and were looking to invest in San Francisco real estate, I’d think about buying an apartment building and converting it to TIC’s. It’s not cheap to remove tenants and renovate a building, but it doesn't cost $250,000 per unit.