One of the clear winners so far in the post Great Recession market are commercial real estateauctioneers. The dollar volume of CRE properties sold via auction jumped 33% from 2010 through 2011.
Auction sales, excluding non-arms length foreclosures, jumped from $2.52 billion in 2010 to $3.35 billion, according to data from CoStar COMPs.
It should be noted that these numbers may under-report the amount and volume of auction-based sales activity as there is no efficient process for tracking what process was used in all property transactions. Nor, for example, do the numbers reflect note sales — even when the property was to become REO at the time of sale or shortly thereafter.
Still, it is clear that auction sales are increasing and all signs point to this type of property marketing has gotten off to a great start this year. Last week, Auction.com in Irvine, CA, successfully sold 64 multifamily assets in an online auction event. The auction included 46 properties and 18 notes comprised of 9,300 units and totaling $424 million, according to Jeff Frieden, its CEO and founding principal.
The assets in the auction were viewed 230,884 times, 5,926 confidentiality agreements were signed and there were 2,366 registered bidders who had submitted cash deposits in advance to participate in this online auction event. These registered bidders submitted 1,821 bids on the 64 assets. In addition, each asset received, on average, 22 bids. The highest-priced individual asset of the auction sold for $55.1 million with the click of a mouse.
In 2011, Auction.com auctioned 1,169 notes totaling $4.6 billion and 1,087 properties for $1.2 billion, Frieden said.
Interestingly, too, Tranzon LLC officials noted a significant increase in online auctions from 19% in 2010 to 27% in 2011. Tranzon is a group of independent, regional national auction and accelerated marketing firms.
“I think there are many factors that go into deciding whether an auction should be online or live onsite/ballroom,” said David Warren, president of Tranzon LLC. “Certainly the technology is becoming better over time. Also, buyers are becoming more accustomed to buying real estate in online auctions, similar to the way they have for a much longer time purchased personal property items through various online auction companies.”
“Perhaps the most important factor, though, is the nature of the real estate itself, and whether the particular property can, in our auctioneer’s judgment, be sold effectively online. For example, a high volume sale of very similar properties seems to be quite appropriate for an online auction, and we have sold portfolios of that type online with very good results for our clients,” Warren said.
Regarding overall auction volume, Shawn Miller, director of sales for LFC Group of Cos., which runs the Freedeom Realty Exchange, said, “The trend seems to be large fourth quarter / first quarter pushes of property from the banks throughout the marketplace in order to meet internal goals and reporting.”
“2009 and 2011 we saw a significant increase in the office, hospitality and multifamily sectors due to the large volume of loans maturing and the aggressive push of financing opportunities / liquidity for acquiring these asset classifications,” Miller said. “In 2010 to present, we have seen increasing volumes of land / lots coming to market from the banks as they have held on their balance sheet for several years and have write-down these assets to today’s market value bridging the bid/ask spread within the marketplace.”
More Financing, More Properties Driving More Buyers
“Our volume doubled year over year in both properties sold and dollar volume,” said Stephen Karbelk, CEO & founder of National Commercial Auctioneers in Tulsa.
“More sellers are seeing auctions as an excellent way to sell a lot of real estate at one time,” Karbelk said. “We are seeing more, larger auctions. Instead of a lender just selling one or two properties at auction, they are choosing to sell 30, 50, 100 or more properties at an auction. One of the reasons for this is that the auction method is the best way to sell so much real estate at one time.”
“We are seeing more buyers at our auctions as well,” he said. “We are averaging 11 registered bidders per property and a 93% acceptance rate of the high bid by our clients.”
Kelly T. Frank, executive vice president of Auction Services Group Inc. in Chicago, agreed that auction volume was increasing.
“In 2008 and 2009 sellers, mostly financial institutions, were reluctant to even try to sell real estate because of the lack of financing available. That had a significant impact on pricing because we were working with cash-only buyers who wanted large discounts,” Frank said. “As the market for available financing improved, so did the volume of sales and pricing.”
And as financing improved, so did the number of potential buyers, particularly individual investors and developers.
“About 80% of our offerings are ultimately sold to a regional owner-user / end-user demographic for the property,” Miller of LFC said. “By selling to this demographic, we are yielding much better returns for our clients, as opposed to liquidating assets to investor demographics.”
As more bidders and more properties come to market, the average prices per property are also on the rise. Average per square foot prices on completed auction sales held steady for nearly a year between mid-2009 and mid-2010 at about $54/square foot. In the next year, average per square foot prices sold at auction doubled to $110/square foot.
Spreads between asking price and purchase price are also narrowing.
“Auction sales price to ask continues to get closer,” said Thomas W. Saturley, president of Tranzon Auction Properties in Portland, ME. “Part of this is attributable to discounted ask and conversely, the increase participation at the auctions.”
Saturley, like other auctioneers, said that auction sale buyers continue to be lead by individual investors, with end users continuing to grow in numbers and therefore percentage.
Auction Volume Expected To Remain Strong
“Our sales volume is very strong and would expect it to remain so for at least the next eight quarters… remembering that our clientele are primarily financial institutions, governmental sellers (SBA, FDIC and Rural Development) and corporate surplus,” Saturley said.
Hospitality property offerings are expected to be strong; as are retail and failed subdivisions, Saturley said.
Karbelk of National Commercial Auctioneers said that “REO properties are starting to have “birthdays” with the banks and they need to get sold. The nicer properties are still trading pretty quickly but the less desirable properties are starting to pile up with the banks. We are seeing more land coming up for auction than before, and buyers are interested in buying it. Back in 2009, selling land was nearly impossible because there was no clear picture as to when it could be developed. But now, with greater market predictability, new development projects are on the horizon.”
Miller of LFC said, “As we begin to bridge the gap between bid/ask you will continue to see bank’s become more aggressive and realistic in selling their property so they can focus on their core business — lending. There will continue to be significant volume of REO property being released by the banks through 2012 and beyond, tremendous opportunities will be had.”
By Mark Heschmeyer, Costar Group