To the Highest Bidder: Commercial property auctions thrive in economic downturns

Auctioneers have a saying that when times are good, the auction business is good too, but when times are bad, the auction business is great. And, as more commercial property owners are struggling to deal with under-performing assets or upcoming debt maturities in a frozen debt market, auction experts expect the auction business, also known as accelerated marketing, to be quite busy in the coming months.  

“Delinquencies are on the rise, and with an estimated $400 billion dollars of commercial real estate loans coming due in 2009, we believe there is an urgent need for nontraditional marketing approaches,” says Jeffrey Finn, president & CEO of NAI Global. The firm, which has an active auction business with its partner Higgenbotham Auctioneers International, has completed more than $2.3 billion in sales through accelerated marketing programs, according to Finn. It recently launched a new auction platform called Commercial Property PowerSale™ to help property owners and financial institutions dispose of troubled real estate assets.

Today, more than 5,200 commercial properties in the United States are distressed, according to New York City-based research firm Real Capital Analytics. The firm says these assets, valued at $124 billion, are either underperforming because of the economy or because they have debt maturities that owners have been unable to refinance due to the credit freeze.

In Boston, for example, the I.M. Pei-designed John Hancock Tower will be sold to the highest bidder later this month through a sealed-bid auction. The owner, New York City-based Broadway Partners, lost the 60-story building in January after it defaulted on several loans.

Increasingly popular

Regardless of the reason why properties today are troubled, experts say auctions are an ideal way for owners and lenders to dispose of them. Auctions give owners and lenders the opportunity to sell assets quickly and to obtain true market value for their properties – something that is difficult to do in today's market.

The popularity of accelerated marketing programs for commercial property has been growing since the late 1980s when the Resolution Trust Corp. used auctions to liquidate a significant portion of the $400 billion worth of assets it took over during the savings and loan debacle. "Auctions became prevalent with government-related sales and maintained a good amount of business as the market improved," says Frank Diliberto, a managing director with KPMG Corporate Finance LLC's real estate services team, who has been in the auction business for 19 years.

The growing popularity of auctions is evident in the number of large corporate and institutional owners that use accelerated marketing programs. Last year, sales generated through auctions (including residential, commercial and agricultural properties) reached $58.6 billion, according to Overland Park, Kan.-based National Auctioneers Association.

Technology giant Intel Corp., for example, worked with Diliberto to auction off a chip manufacturing plant in Puerto Rico after the plant languished on the market for two years with no buyers. By using an accelerated marketing program, Diliberto was able to off-load the asset within 12 weeks.

Sperry Van Ness' Accelerated Marketing Company Inc. had record years of production in 2007 and 2008, according to President David Gilmore. He expects the firm's production volume to increase substantially in 2009 because he's talked with a number of lenders that wanted to use accelerated marketing to dispose of portfolios of underperforming assets.

Sense of urgency

Auctions are particularly attractive for owners and lenders that need to dispose of commercial property as quickly as possible. Traditional marketing programs can take several months, and many owners today just can't wait that long, says Donna Kolius, a senior vice president with, CBRE Portfolio Services, who focuses on auctions. "When owners have debt coming due, it creates time sensitivity," she explains.

Lamar Fisher, president & CEO of Fisher Auction Company, says many owners don't even think about accelerated marketing programs because they believe these programs are only for marginal or low-quality assets. But, the John Hancock Building in Boston is proof that high-quality properties and even trophy assets are being sold on the auction block.

"Owners need to realize that auctions are a tool that will allow them to save their credit and preserve some of their investment," Fisher says. His firm, which was one of eight national auction firms to handle RTC work, is working closely with global real estate services firm Cushman & Wakefield to spread the word among commercial property owners.
 
Similarly, Colliers International in Houston has teamed with United Country Auction Services to provide an auction solution to its commercial real estate clients in North America, according to President Patrick Duffy. Instead of rebuilding an auction platform internally, the firm reached out to the Kansas City, Mo.-based United Country, which is one of the oldest auctioneering firms in the country.

"In today's market, many buyers are standing on the sidelines, and that makes it even more difficult for owners who need to sell quickly," says Mike Jones, president of United Country. "Auctions create a sense of urgency. We have a saying that auctions create action,  and it's true." 

Establishing value

Aside from a quick sale, auctions are also successful in establishing market demand and valuation for properties.

In a market where traditional sales volumes are down more than 70 percent in some regions, establishing value is one of the biggest challenges for both buyers and sellers. Fisher says he receives three to four calls a week from appraisers wanting to know what types of prices his firm has achieved with its auctions.

"In this market, pricing is illusive," Jones notes. "Through the auction process, you can find pricing because the high bidder sets the value of that property." Recently, United Country and Colliers International auctioned a resort hotel in Big Bear, Calif.,  after a traditional marketing approach failed. Previously the property had been listed at $8 million, and it sold at auction for $10.3 million.

"When you get people in a room and get them revved up, you may be able to generate a higher value," Duffy says.  

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