COVER STORY, JUNE/JULY 2010

NEW EXPECTATIONS
Auctions experience greater success as sellers become more realistic about prices and new technology creates better processes.
By Jaime Lackey

Commercial real estate auctions have become increasingly popular in the current economy. In most cases, auctions are a relatively quick method for completing a sale. In addition, the auction mechanism invites competition, which helps to establish the value of a property.

But the economy isn’t the only factor driving growth in the auction industry. Technology has improved the means of marketing properties and attracting buyers — as well as the bidding process. Northeast Real Estate Business spoke with John Johnson, president of Sperry Van Ness Accelerated Marketing Company Inc., to find out more about changes in the auction industry.

NREB: How are auctions affecting the commercial real estate market?

Johnson: With the exception of specific need-driven transactions, auctions have been the most successful means at closing transactions in this market. More and more commercial properties are being offered for auction, with sellers seemingly more willing to offer their properties at “absolute” auction (no minimum bid required) or relatively low published minimum bid amounts. However, we are still seeing many “reserve” auctions with non-published minimums, and those are generally not as successful in today's market as are absolute and low minimum bid auctions.

NREB: What does this mean for market recovery?

Johnson: Two things seem to be happening: From an auction perspective, sellers are being more realistic in their pricing expectations, and are now more willing than in the recent past to accept the reality that commercial prices will not reach the levels of the recent peak in the foreseeable future. Generally, more types and numbers of buyers are actively in the market. While most buyers are still looking for bargains, the very best triple-net leased commercial real estate is experiencing an increase in pricing.

NREB: How is technology affecting commercial real estate auctions?

Johnson: Due diligence information is critical to a successful commercial real estate auction, and a complete due diligence package must be available at the first phase of the auction advertising. So many technological advances have made the gathering, packaging, and dissemination of due diligence better and easier. Now, instead of sending out 20- and 30-pound due diligence packages, or burning and sending CDs, we are able to immediately put complete packages in the hands of qualified buyers at the click of a mouse.

Web-based due diligence also gives us the advantage of tracking the effectiveness of our promotional and advertising efforts almost instantaneously. We can also follow up with prospective buyers and interested brokers much more effectively. On-line auction platforms have continued to improve, and many brokers are more fully embracing auctions as a result.

NREB: What are the newest trends in commercial real estate auctions?

Johnson: The commercial real estate industry is trying many different methods to spotlight and sell properties. Examples include exclusive online bidding, online bidding with live bidding, and specific weekly price reductions until a property is sold, which is effectively a “Dutch auction.”

In addition, some of the commercial real estate industry’s larger firms have partnered with auction companies or formed their own auction divisions during this down market. We have seen this occur in past down markets over the last 25 years, but as the market improved, almost all brokerages have abandoned direct auction involvement. Sperry Van Ness, on the other hand, has been consistently and directly in the auction business almost since inception of the company in 1987 with the auction team an integral part of the company.

NREB: How do you think these trends will change the auction & commercial real estate industries?

Johnson: We feel that commercial real estate auctions are here to stay. Just look at eBay, for example. Initially it was somewhat of a novelty, but now online auctions and “accelerated selling” are a part of ordinary buying and selling. With some early successes involving online bidding, many brokers and owners are jumping onto the auction bandwagon, but unfortunately, numerous auctions are not succeeding. There are two basic reasons for failed auctions: price expectations (by sellers and brokers) and insufficient advertising. So some sellers and brokers will get burned with unsuccessful auctions, suffering both financially and with their reputations. However, as other successful auctions continue to flourish, the method of selling will adapt to market realities.

NREB: Auctions have been on the rise in the last couple of years. Can you give a measure that describes just how much the industry has grown?

Johnson: According to the National Auctioneers Association research survey compiled by Morpace, Inc., $58.6 billion in real estate was sold at auction in 2008, the latest year for which data has been compiled. Of that amount, $15.5 billion was in commercial and industrial real estate. This CRE dollar amount represents a 31.3 percent increase from 2003 when the survey was started. We are confident that the numbers have increased substantially since that time, and will continue to do so for at least the next 2 or 3 years.

NREB: Anything else you’d like to say about auctions and the impact on the commercial real estate market — especially in today’s economy?

Johnson: While triple-net-leased prices have increased recently, the volume of such transactions has not really taken off. The bulk of sales continue to be in more heavily discounted properties. We are seeing many investors from other countries looking at commercial real estate in the United States as a safe place to invest, and with long-term expectations of increasing value. Auctions will continue to play a major role in commercial sales, because they provide such an efficient and open way to transact business.

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