COVER STORY, NOVEMBER 2011

DO I HEAR A BID?
The commercial real estate auction business is drawing a big crowd.
Matt Valley

When Ken Rivkin thinks of commercial real estate auctions, particularly for high-end properties, the words Picasso and Van Gogh come to mind. “If you have expensive art to sell, you don’t go to a broker, you go to Christie’s.”

But the executive vice president and managing director of the commercial division of Auction.com is the first to admit that some real estate observers aren’t sold on that idea. “When they think of auctions, they think of dust bowls, foreclosures and distress,” points out Rivkin.

Perception aside, the auction industry is gaining traction. During the past 12 months, Irvine, California-based Auction.com has sold more than 950 commercial real estate properties.

The company also has auctioned more than 1,300 loan notes in excess of $4.5 billion in unpaid principal balance over the past year. (Auction.com conducts all commercial real estate sales via the Internet.)

Speed and certainty of execution are the big selling points of auctions, whether they are conducted online, through a sealed-bid process or in a ballroom-type setting. Once a buyer opts to sell a property at auction, the asset is heavily marketed and typically sells in 60 days or less. Auction.com spends $35 million annually in U.S. advertising.

Properties sold at auction are mostly all-cash deals. What’s more, the auction process doesn’t allow buyers to wiggle out of deals. “We have a non-negotiable sales contract,” emphasizes Rivkin of Auction.com. “We sell everything as is. There is no uncertainty after the auction whether something is going to get renegotiated.”

Auction.com has more than 80 institutional sellers as clients. The list includes special servicers and a number of insurance companies. Plenty of small and medium-sized banks use the platform. “What our customers tell us is that we get more money for their properties,” says Rivkin.

A new era

In a sign that commercial real estate auctions are in the mainstream, Walgreens has retained the services of Oak Brook, Illinois-based Inland Real Estate Brokerage & Auctions Inc. to sell a four-state portfolio of retail assets. This is the first time the drugstore chain has used the auction vehicle to dispose of surplus real estate.

The sale includes seven development sites owned by Walgreens. The sites are  located on prime corner lots in California, Florida and Georgia. Inland Real Estate & Auctions also will handle the sale of the Drakeshire Shopping Center, a 38,400-square-foot retail center that Walgreens owns in metro Detroit.

When all is said and done, three Walgreens development sites will be sold via the sealed-bid auction process and the balance will be sold at open out-cry auctions. The latter are conducted as live events in a ballroom setting and are the most traditional and recognized type of auction. In the sealed-bid process, the offers are reviewed by the seller in a closed-door environment. This format is best suited for hard-to-value assets.

Rogers

The Walgreens auction events are scheduled for Nov. 11-17. Paul Rogers, president of Inland Real Estate Brokerage & Auctions, says the decision by Walgreens speaks volumes about property sellers’ growing acceptance of the auction model.

“Maybe 10 years ago, [Walgreens] would have never considered auctions because of the impression that they were only for distressed and difficult-to-sell real estate,” points out Rogers. But that’s no longer the case.

“It’s more of a sales vehicle, an alternative platform to gain activity for a property where it might otherwise sit idle for a period of time,” Rogers adds.

Louis Fisher, CEO and national director of sales for the Sperry Van Ness Accelerated Marketing Co., has overseen and conducted more than 2,600 real estate auctions during his career. The auctions have  resulted in $1.5 billion in closed sales.

Sperry Van Ness Accelerated Marketing Co. has been more active in the Midwest than anywhere else in the country during the past 16 months,  says Louis Fisher, CEO and national director of sales. The auction company sold more than 1,000 assets across the region during that period.

The properties ranged from a 144,000-square-foot vacant office building to a subdivision with 56 lots to a fractured condominium development, and “some eclectic stuff in between,” says Fisher.

Auction.com also is active in the Midwest. The company will conduct a Midwest Commercial Property Auction from November 14-17. The online event features more than $1 billion in multifamily, office, industrial and mixed-use assets from throughout the region.

Here’s a sample of the properties to be auctioned off followed by the starting bid: 127 acres of raw land in Huntley, Illinois, $425,000; 35,923 square feet of warehouse space in
South Elgin, Illinois, $350,000; and 10 acres of commercial land in Bartlett, Illinois, $500,000.

What’s driving the trend?

While the auction business has been around for more than 40 years as an alternative way to market real estate and liquidate distressed properties, the collapse in real estate values during the recession of the late 2000s created a new wave of business for this niche industry. The growth of the Internet also has played a big factor.

Auctions are particularly helpful in markets where pricing is opaque, points out Rivkin. They are an efficient way to determine the true market pricing. Utilizing the Internet also allows sellers to access a much broader universe of buyers.

Smaller investors, for example, can compete with large opportunity funds to buy assets a la carte. “It’s a very democratic process. With an auction it’s all determined by who wants to pay the highest price,” says Rivkin.

About 90 percent of the auction sales Sperry Van Ness conducts involve some distress of some type. Buyers are drawn to the auctions process for a few reasons, says Fisher.

“There is the lure that an auction brings a bargain. The other aspect is that buyers have done their due diligence. They feel reasonably comfortable that they have paid a fair price when they leave an auction because they know that someone was able to bid just a fraction below them,” says Fisher.

The sellers that Sperry Van Ness represents at auction include major financial institutions, government agencies, as well as REITs. They seek to recover the maximum amount possible on their soured investments.

Institutional sellers also have a lot of reporting and tracking requirements, which the accelerated marketing program at Sperry Van Ness is able to provide, says Fisher. “We have an enormous amount of data and
analytics available to us today.”

Statistically speaking, one out of three properties sold in a traditional manner outside the auction process goes in and out of contract 3.5 times before the deal successfully closes, according to Fisher. “Most of the reason institutional investors will choose the auction route is the finality it provides,” he emphasizes. “You can’t retrade the price after you sign the contract.”

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