Great Article

Here is a terrific article from COSTAR.
Thinking of selling your commerical/multifamily/retail/land. Read and heed.

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Auction Gavels (Again) Mark the Return of Distressed Real Estate

 Call it an 'Auction' or an 'Accelerated Marketing Model," The Seller's Objective is the Same -- To Fast-Track Deals Via the Auctioneer's Mallet       By Randy Drummer July 15, 2009

With the recession taking a toll on traditional channels for selling commercial real estate, auction houses are once again stepping up to the podium to call "going, going, gone" on a new set of distressed assets just beginning to hit the market.

Auctioneers, brokers and agents who weathered the real estate slump of the 1990s and early 2000s say a well-recognized pattern in the market cycle is starting to emerge, with commercial properties now joining the residential foreclosure auctions that have been mainstays for more than two years during the current economic downturn.

An estimated $58.6 billion in real estate was sold in private live-auction bidding in the U.S. in 2008, up 38.5% from five years ago, according to figures from the Overland Park, KS-based National Association of Auctioneers. Residential real estate, raw land (including agriculture) and commercial real estate were the fastest-growing sectors during that period in terms of gross sales, increasing at a clip of 47.7%, 36.8% and 31.3%, respectively, according to the trade group.

The $15.5 billion in gross auction sales of commercial real estate in 2008 was down slightly from 2007. With banks gearing up to shed significant volumes of troubled assets and distressed owners moving in the direction of foreclosure, however, bankers, brokers and auctioneers tell CoStar Advisor that more commercial property is heading for the auction block in 2009. Activity is especially picking up in the third quarter with dozens of live auctions scheduled around the nation, including major online events by at least two major brokerages, NAI Global and Sperry Van Ness/Guardian.


In one of the largest event, NAI Global is offering 75 investment properties in 21 states valued at more than $250 million between July 16-30. A timed online auction will include 58 properties -- including the historic State Theatre in South Bend, IN, which still bears bullet holes from the nearby shootout following John Dillinger's final bank robbery on June 30, 1934 -- and 14 properties in a sealed-bid auction. Meanwhile, a July 30 live auction by Sperry Van Ness/Guardian at the Hyatt Regency in Los Angeles includes more than $100 million in real-estate owned (REO), bank-ordered and developer close-out assets in six Western states. The auction listing has already produced four closings by buyers.

"We're probably seeing a 30 to 40% increase this year" in office, retail, industrial, multifamily and land auction inquiries, Paul Rogers, senior vice president with Oak Brook, IL-based Inland Real Estate Auctions, Inc., tells Advisor.

"With bank activity in particular, we're going to be busy for the rest of this year -- and probably well into next year."

Rogers said banks warehoused and buried troubled properties last year, but particularly during the second quarter of 2009, banks started more workout programs -- and are starting to use auctions to move properties.

"Our membership is seeing more energy and movement this year on the commercial real estate side," adds National Auctioneer Association spokesman Chris Longley. "Sellers, especially, are coming to the realization that the price point they had in mind is not a reality. That's where auctions are so useful in determining value -- bringing people together through competitive bidding."

Liquidation auctions are just one of the signs of the times for private real estate developers like Opus West Corp., which announced plans to enter bankruptcy protection earlier this month, citing debts of nearly $1.5 billion. In Dallas on Aug. 26, Opus West is scheduled to hold an "absolute" auction -- a call with no minimum bid -- of office, industrial, retail, multifamily and land in California, Texas and Arizona.

Meanwhile, developers such as Manhattan-based Metrovest Equities cite a different reason for going to auction on unsold inventory. Metrovest announced last month months they're taking a "proactive approach" by holding a closeout auction of 25 remaining one-and two-bedroom luxury condos at their 315-unit Beacon development in Jersey City, NJ. Since the units were 80% sold and occupied, Metrovest said the auction was aimed at accelerating development of live/work lofts in the project's second phase currently under construction.

The suggested list price of the remaining units up for auction was $150,000 to $250,000 -- sharply lower than the original price of $380,000 to $700,000. However, the auction was "not a distress sale," but rather an attempt to cut the marketing time and reinforce competitive bidding for the new phase, said Metrovest President George Filopoulos.

Metrovest has already completed the first two buildings and 45,000 square feet of amenity space of the second phase and is well under way on a third building. The Beacon will ultimately comprise 10 buildings containing 1,200 luxury residences and 80,000 square feet of retail space.

NAI Global President and CEO Jeffrey Finn said auctions are helping the Princeton, NJ-based firm build momentum "as we continue to try new strategies and techniques to bridge the gap between motivated buyers and sellers in this challenging sales environment."

An auction deal's accelerated pace cuts marketing costs by aggregating properties from multiple sellers, and gives clients the opportunity to sell their asset quickly, reducing holding costs and securing true market value, Finn said. NAI Global's auction list includes development sites in the metro Washington, DC area, retail sites in Highland Park, IL, and Spokane, WA, the historic theater redevelopment in South Bend, IN, and an infill site in Flint, MI; an upscale hotel/golf resort in Beecher, WI, and a fully entitled multifamily development tract in Navarre Beach, FL.

Sperry Van Ness/Guardian's auction list includes only properties from sellers judged to be "motivated," at prices up to 90% off the original loan balance. Each listing on SVN's Internet-based auction platform is represented by a SVN advisor to help with due diligence. Buyers are encouraged to enlist their own brokers as well.

"Our team spent the last several months filtering through hundreds of properties to identify the most sellable assets for this auction," said Karlin Conklin, SVN/Guardian chief operating officer. "But ultimately, investors decide the value and the final price of this inventory."

SVN has hired a 15-year auction veteran to call the bidding. And although the auction motto 'caveat emptor' (buyer beware) still applies, SVN is trying to do as much due diligence as possible "while at the same time, trying to do really good brokerage. The day of the event just happens to be an auction," Conklin said.

"We're gearing it toward strong, core real estate sales techniques -- more than just throwing a property out there and seeing how low we can go."

"The goal is to get enough buyers and energy and information to the table that we can get a better-than-bottom line price. The goal is not a fire sale. No one really knows what 'market price' is today."

For Conklin, the decision to go the auction route paid immediate dividends. In the case of one broken REO condo deal, the property was under contract four times at huge marketing efforts and expense. Each time, the deal was re-traded as buyers backed away from the bank's bottom line price.

"After wasting months of time, we finally decided this was pointless, and we put it into the pool of properties to be sold on July 30," Conklin tells CoStar. "As soon as we posted it and our advisor let people know it was going to auction, a buyer who had been hanging around stepped up, made an offer at more than the reserve and ended up closing in less than 10 days. He didn't want to bid against others at an auction, and we've now closed three other deals for exactly the same reason."

"Buyers said ‘oops, the fun and games and re-trades are over, I better step up or I'm going to lose this property I've been circling for months,'" Conklin said. "The market has changed profoundly. The challenge we have now and probably in 2010 is there are no buyers, or so few that there's no energy being created for the upward bidding that we had from 2005-07."

At an auction, the price is bid upward instead of the usual process where a seller starts at the top price and gradually re-trades down, a "far less painful process" for distressed assets, she said. Plus, the seller knows the deal is nonrefundable, will close faster and has better surety.

"We're approaching it as an accelerated marketing model, in that every one of our properties has a listing agent who knows the seller well, knows the property intimately. There's as much due diligence as possible, well before the day of the event.

In some cases, the seller is simply caught between the rock of a harsh economy and the hard space of having insufficient capital to service debt and properly market the property. On Aug. 5, one of the nation's leading real estate auctioneers, Tranzon Integrated Property Group, will auction a 72-unit, 90,000-square-foot assisted-living center in Middlesex County, CT.

The property was delivered in early 2008 at a construction cost of $14.5 million. Tranzon will sell the center at a deep discount reserve price of $3.5 million. Tranzon Vice President and auctioneer Oren Klein said that a better-capitalized owner could have launched a proper marketing campaign to fill the facility, which suffers from low occupancy.

"The owner has unfortunately been unable to devote the appropriate resources towards attracting tenants," Klein said.

"I don't know if as much an increase in buyer interest as owners becoming more realistic about the market," said Joshua Olshin, president of Tranzon, which has also completed a bankruptcy auction sale of nine assisted-living and skilled nursing facilities owned by Continuum Care Corp. "In '08, nobody was willing to mark to market. Now, across the country, there's been a lot more activity and realism."

On the buy side, "there are a lot of people out there with cash or captive financing available, just waiting for opportunities like this to hit the market," Olshin said.