Auctions Help Set Benchmark Pricing

The numbers have been well-reported yet are still sobering. Commercial property prices are off 41% from their peak in 2007. More than a trillion dollars of commercial mortgages scheduled to mature over the next decade are unlikely to qualify for refinancing without substantial equity infusions from borrowers. Prices will continue to plunge, well into 2010.

In Southern California, the data speaks to the same national pain. About 15.6%, or approximately 29.9 million square feet, of office space in the Los Angeles area sits empty according to the latest data by Grubb & Ellis Co. Day after day, new data comes out that predicts another part of the commercial real estate market collapse. With the drumbeat of bad news and negative forecasting, the commercial real estate markets have been caught in a downward spiral for over two years.

Especially problematic has been the lack of sale comparables caused by the continuing pricing spread between seller-ask and buyer-bid prices. Even with sellers lowering their asking prices, buyers continue to sit on the sidelines, waiting for the bottom of the market. Very few deals get done, leading to fewer comparables, which in turn adds to the market uncertainty.

To break the logjam, the market needs to establish comparables. Without these benchmarks, pricing will remain uncertain. Buyers will continue to sit on the sidelines, and sellers will remain reluctant to set realistic prices.

One bright spot in this market has been the rise in the use of commercial real estate auctions to set benchmark pricing. In 2008, $15.5 billion in commercial real estate was sold via auction, and that number is likely to double in 2009.

In a stagnant real estate market, auctions are proving to be a good way of bringing buyers and sellers together. By providing bidding transparency, auctions give buyers the confidence that they are not over-paying for an asset. As the old auctioneer’s adage goes, “You’re only paying a dollar more than you need to!” For the seller, not only is he or she able to sell the auctioned asset by a certain date, but the asset value is maximized through the competitive bidding format. Auctions are a “win-win” proposition: bidders buy assets at historically low prices with the knowledge that they didn’t overpay, and sellers dispose of assets quickly and for maximum value.

Auctions only work, however, when the right bidders are assembled on auction day. This can be a difficult task in the commercial real estate world, where the right pool of buyers for assets varies dramatically depending on property type, size and geography. Traditionally, commercial real estate auctions have applied the same principles and followed the same formats as auctions for antiques, art and furniture—generally, oral-outcry auctions held in hotel ball-rooms. Auction companies with limited knowledge of the real estate are often asked to market these auctions.

To make auctions more effective, and realize their full potential to assist this market, we need to capitalize on the strengths of the broker system, and to harness technology.

The next evolution of commercial real estate auctions must involve participation by real estate brokerages. Brokers are the parties who best understand the local real estate market and buyer pools; it makes sense for brokers (rather than auction companies) to market the auctions.

Instead of holding auctions using the old-school, low tech methods of a century ago in hotel ball-rooms, technology now allows for brokers to run auctions on-line, one property at a time. In today’s market, when waiting for offers and counter-offers can take months or years, the certainty and speed provided by the auction platform will become attractive to sellers of commercial real estate. In response, forward-thinking commercial real estate brokerages are increasingly adding auction capabilities to their marketing tool kits.

The views expressed in this column are those of the author and not necessarily GlobeSt.com.

Keith Yang is co-founder and president of AuctionPoint, an online auction solution company for commercial real estate.