Commercial Real Estate Auctions in Soft Markets

By October 26, 2009April 19th, 2021White Papers

We all know the volume of commercial property auctions swing with the macro real estate economy.  When the market is hot, real estate auctioneers often are put on the sidelines.  We look at the great listings on Loop Net and Co Star and say, “If we only had those properties in this market….” However, our business does not work that way.  When brokers are receiving competitive multiple offers, and buyers are eagerly trading up, auctions rightfully take a back seat.  The current economic cycle is bringing commercial property auctions once again to the forefront.  This paper will address several key components to guide sellers through the benefits and risks of commercial property auctions in less liquid and more competitive soft markets.

Point One:  Get your asset auction ready before marketing commences.

The highest probability of a successful date-certain sale is only achieved by sellers prepared to do the work up front.  Traditional brokerage provides for a myriad of contingencies on inspections: environmental, zoning, financing, plan permits, occupancy leases, and many more.  To be auction ready, this checklist and others must be addressed up front.  If a phase two environmental is required, the capital advanced prior to the auction marketing will pay dividends by affording bidders confidence that they have mitigated their risk.

Point Two: Know your choices, and make sure you’re comfortable.

Commercial property sellers have dozens of decisions and choices on both advisor sale terms and many auction formats. Whether to sell to the high bidder regardless of price, or subject to a minimum acceptable bid may be very different for a builder with personal guarantees than a lender facing a significant carrying cost.  There are dozens of different approaches, from selling subject to final confirmation to only auctioning to pre-qualified bidders. Each asset deserves its own unique plan.  If the building is a very customized asset, like a semiconductor fab with clean rooms, an open outcry auction may be too risky.  In this instance, there could be only one truly right buyer who will bid very aggressively in a sealed bid format.   At an open outcry event, the second high bidder may not advance the bidding to the one right buyer’s top bid.  The opposite impact can occur when you know there are several potential buyers, and the only sale barrier is price point, due to a soft or down market.  In this instance, assembling all the bidders at an open outcry event will often create both a sense of finality and a fear of loss that heightens competition.

Point Three:  Embrace the brokerage community.

Real estate transaction sales are complicated, and many buyers are reluctant to attempt risky due-diligence without a trusted advisor.  Heritage Global Partners always partners with highly respected commercial real estate firms, who in turn act as listing brokers, or work with the seller’s existing firm.  On each project, we advise our seller to offer a generous commission to the buyer’s broker.  This incentive achieves two important functions. First and foremost, the word of an available great asset on the auction block, travels fastest through the brokerage community and assures the highest exposure.  A second important function is that buyers represented by trusted brokers can leverage the due diligence process and can routinely bid with greater knowledge and confidence.

Point Four: Aggressive promotion is essential.

Auction ads are bigger than traditional listing ads when the seller and auctioneer decide to increase exposure and sale probability.  The commitment to large and frequent announcements creates a sense of urgency with buyers and demonstrates the seller’s intention of getting the deal consummated.  To quote Ted Turner, “Early to bed early to rise.  Work like heck, and advertise.”

Ross Dove
October 2009