CRE Auctions Get Their Moment In The Sun. Will It Last?
Real estate auctions in the U.S. have long been considered a domain of bank foreclosures and little else, but as the coronavirus pandemic increases the need for online transactions — and foreclosure auctions — it has also started to encourage more people to see them as a legitimate way to buy and sell commercial real estate.
Greater transparency, advances in technology and people’s desire to transact quickly are all pushing investors to opt for auctions, particularly as stress ripples through the market as the crisis wears on, proponents say. Short supply of stabilized assets for sale also means more people will look to buy via public bids, sources said.
But the long-standing American stigma surrounding auctions in the U.S. persists, as does the attachment to the traditional style of buying and selling, both presenting major roadblocks for auctions becoming more widespread.
“In the United States, commercial real estate auction is a dirty word," Ten-X Senior Director Ian Grusd said. "When people think of commercial real estate, they think of desperate and distressed … if I'm dealing with a generational owner of real estate, who has been around for a long time, their initial reaction is, ‘I don’t want the stigma of selling my property through auction.'"
Some traditional investment sales brokers may need to be talked around to the idea, too. Compass Vice Chair Adelaide Polsinelli, a veteran of New York City investment sales, said the idea of a property going to auction indicates a motivated seller, translating into a good deal for a buyer.
With a once-robust real estate market now heading south, she expects auctions will be far more frequent — but sellers will still be wary.
“The philosophy of auction selling is that it exposes the asset to a large audience in hopes that competitive bidding will ensue and heady bidders will get seduced in the moment, consequently bidding up the price,” she wrote in an email. “But only a small percentage of buyers buy at auction, so how can a seller be sure they sold for the highest price when the buyer pool is limited?”
Buyers still have their doubts, too, she pointed out.
“It’s easy to get caught up in the competitive excitement of an auction,” Polsinelli said. "You may be buying a 'pig in a poke' — so how do you congratulate yourself when you just outbid some of the smartest players in the business?"
Supporters of the auction process argue they allow for greater transparency, which is a win for everyone involved. Marcus & Millichap Senior Managing Director Joseph French, who specializes in shopping center and retail sales, has represented sellers in taking four commercial properties to auction since the pandemic began in March, far more than a normal year.
Those sellers were motivated, but only one of the properties was what he would call distressed: two former retail bank buildings in Connecticut. In that case, the typical methods weren’t working; email blasts, advertising and cold calling were falling flat.
The team opted to list it on Ten-X and take it to auction, hoping a national audience would drive more eyeballs toward the assets. French said it exceeded the reserve by at least $200K, following years sitting on the market.
“Brokers are threatened by auctions, but they shouldn’t be,” he said. "The human touch is still necessary to explain the ins and outs. Without the broker, the sales often fall flat."
B6 Real Estate Advisors CEO Paul Massey, a decades-long veteran of the New York City market, takes a similar outlook.
“I think there is likely some kind of place for auctions where you have very difficult pricing discovery, which is never the case in our dense urban markets,” he said. “I don't suspect that a conventional auction ... is either in most people's best interests or likely to ever see more velocity than they currently get.”
People who are looking to buy and sell in the current environment are interested in certainty, French said, as the pandemic continues to weigh on the country and investors await the economic impact of the upcoming Biden administration.
Plus, there is so little on the market for investors to buy, sellers are looking further afield for assets, seeking out auctions when they normally would ignore them, French said.
"There are just not enough properties to fill the demand at this time, so they are looking at any way they can purchase a property today, and that makes [auctions] more attractive to buyers,” he said. “The beauty of an auction is that a person who signs a contract will almost certainty close, or they will lose their deposit.”
Grusd said Ten-X has sold around 500 properties through the online auction over the last eight months, with around 75% of the successful buyers being first-time users of the platform. The company was formed as Auction.com during the Great Recession to liquidate distressed assets, and it has since expanded to sell non-distressed assets.
CoStar bought Ten-X this year for $190M, and the founder and CEO its new owner, Andy Florance, told Bisnow back in May his interest in the company was the upcoming wave of distress, and he expected to improve Ten-X by bringing more bidders to its platform.
Just like expanded adoption of online grocery shopping is expected to last long beyond the pandemic, the view of online commercial real estate auctions has been fundamentally altered, Grusd said.
“We’ve captured a new buyer audience who had not been transacting online. As we all have adapted to doing more things through e-commerce … we’ve seen the same thing translate through our platform,” he said. “Sellers and brokers recognize that our process and platform does deliver a competitive bidding environment where there is true price discovery."
Outside of the U.S., auctions are far more common. Seventy percent of residential properties in Sydney, Australia, sold at auction aren't in distress, said Robert Hoban, the CEO of Offr, an Irish startup that provides the technology for brokers to sell property, either by online auction or through standard bids.
The company is targeting Australia, Ireland and the UK for expansion, and has been communicating with companies in the U.S. about bringing the company to North America.
He expects more user-friendly technology to raise the profile and market view of auctions in the U.S. Auctions are driven by speed, certainty and transparency, he said.
“The future of the transaction is going to be a digital transaction, but controlled still by the traditional broker who's there for the advisory side of things,” Hoban said.
As more people have experienced online auctions rather than in-person events around the world — thousands of ballroom-style auctions were canceled as international lockdowns were imposed — Hoban noticed people enjoyed the experience of a live bid from home.
“People found it so much more comfortable, because they had anonymity,” he said. "And they felt that they were in control of things, they were behind the privacy of their own smartphone screen or their laptop screen, they could see the other bits, but it wasn't in the intimidating environment of an auction room."
Annelise Osborn, the head of strategy at Metechi, a digital marketplace for loan sales, including REO auctions, has faith that the greater comfort with online buying and selling will shift prevailing views of auctions. But it won't happen overnight, she said.
“Most people actually want to go to old school and they want to have conversations, and we're just giving them the introduction,” she said. “But tech isn’t replacing people’s interaction, I think it's enhancing it … So I think auctions will increase. I think it's a step-by-step process.”