Midwest Real Estate News November December 09 : Page 1

midwest WWW.REJOURNALS.COM by Dan Rafter, Editor Evan Gladstone has some advice for brokers turn- ing to the auction format to sell their hard-to-move com- mercial properties: A commercial real estate auction isn’t a magic wand. In today’s tough commercial real estate market, a growing number of brokers are taking their hard-to-sell retail, office and industrial properties to auctions. The hope is that they’ll be able to sell these properties quickly, and for a fair price. Gladstone knows that auctions can work wonders. He’s the executive managing director of NRC Realty & Capital Advisors, a Chicago-based firmthat specializes in selling commercial properties through live auctions, online auctions and sealed bid sales. But Gladstone also knows that commercial auctions aren’t a cure-all, and that they’re not appropriate for every property. “The auction format is not a magic wand,” Glad- stone said. “Not every property is suitable for auction. Not every seller is suitable.” Gladstone points to industrial buildings in Chicago as an example. The Chicago area is experiencing high vacancy rates in its industrial buildings. Brokers who try to sell a vacant industrial building at auction won’t attractmany, if any, good offers today, Gladstone said. “The number of industrial users out there is few and far between. Their willingness to bid on a vacant building when they can probably buy buildings at cap rates that are higher than they have been in years wouldmake it difficult to justify doing a vacant industrial building auction by either a live auction or sealed bid auction.” Gladstone’s point is key: Auctions are an impor- tant tool for brokers struggling to sell their properties. Formany properties, the auction format is the best way to generate quick interest and solid offers. But brokers need to do their research before taking any property to auction. If they don’t, they’ll simply be wasting their time andmoney holding an auction that generates little attendance and no good offers. Finding a good fit Brokers need to study their local commercialmar- kets to determine if the auction format is right for their hard-to-sell office, industrial or retail property, saidMike Jones, president of Kansas City-based United Country Auction Services. Each market is different, Jones said. While office buildings may sell well in Cleveland, they may not move as well in Kansas City. Brokers, then, who don’t do the appropriate research run the risk of taking a property to auction that will generate little interest. And that simply results in a waste of time for every- one involved, Jones said. “When you are trying to paint a story about auc- tions, there are no broad strokes that you can paint with because the markets across the country are all so dif- ferent,” Jones said. “The Atlantamarket, for instance, is very different fromthe Floridamarket. If you try to com- pare those to Houston and Dallas, you can’t do it. The Redevelopment Bringing new life to St. Louis brownfields Page 14 R E A L E S T A T E N E W S® THE DAKOTAS | ILLINOIS | INDIANA | IOWA | KANSAS | KENTUCKY | MICHIGAN | MINNESOTA | MISSOURI | NEBRASKA | OHIO | TENNESSEE | WISCONSIN NOVEMBER/DECEMBER 2009 VOLUME 25, ISSUE 7 The growing business of commercial auctions Texasmarket, though it’s not as vibrant as it once was, is still strong in comparison, say, to Phoenix or Vegas, that are getting hammered now in commercial space.” Despite these market variances, a growing num- ber of commercial brokers are turning to the auction format to sell properties that they have otherwise strug- gled to move. The reasons are obvious: The auction format is the best way to sell a property quickly and for its best value. A well-marketed and –planned auction can generate high attendance, and several offers, for a commercial property. And auctions aren’t just for distressed properties. Brokers often sell properties that aren’t facing foreclo- sure. Their owners, though,may need to sell the prop- erty as quickly as possible.Ormaybe the owners aren’t happy with the offers they’ve received on the openmar- ket. In such cases, brokers may decide that the auc- tion format is the best choice. The tough economic times have brought many brokers to the auction format for the first time. These brokers often make common mistakes that make their auctions less than successful. continued on page 25

The Growing Business Of Commercial Auctions

Dan Rafter

Evan Gladstone has some advice for brokers turning to the auction format to sell their hard-to-move commercial properties: A commercial real estate auction isn’t a magic wand.<br /> <br /> In today’s tough commercial real estate market, a growing number of brokers are taking their hard-to-sell retail, office and industrial properties to auctions. The hope is that they’ll be able to sell these properties quickly, and for a fair price.<br /> <br /> Gladstone knows that auctions can work wonders.<br /> <br /> He’s the executive managing director of NRC Realty & Capital Advisors, a Chicago-based firm that specializes in selling commercial properties through live auctions, online auctions and sealed bid sales. But Gladstone also knows that commercial auctions aren’t a cure-all, and that they’re not appropriate for every property.<br /> <br /> “The auction format is not a magic wand,” Gladstone said. “Not every property is suitable for auction.<br /> <br /> Not every seller is suitable.” Gladstone points to industrial buildings in Chicago as an example. The Chicago area is experiencing high vacancy rates in its industrial buildings. Brokers who try to sell a vacant industrial building at auction won’t attract many, if any, good offers today, Gladstone said.<br /> <br /> “The number of industrial users out there is few and far between. Their willingness to bid on a vacant building when they can probably buy buildings at cap rates that are higher than they have been in years would make it difficult to justify doing a vacant industrial building auction by either a live auction or sealed bid auction.” Gladstone’s point is key: Auctions are an important tool for brokers struggling to sell their properties.<br /> <br /> For many properties, the auction format is the best way to generate quick interest and solid offers. But brokers need to do their research before taking any property to auction. If they don’t, they’ll simply be wasting their time and money holding an auction that generates little attendance and no good offers.<br /> <br /> Finding a good fit Brokers need to study their local commercial markets to determine if the auction format is right for their hard-to-sell office, industrial or retail property, said Mike Jones, president of Kansas City-based United Country Auction Services.<br /> <br /> Each market is different, Jones said. While office buildings may sell well in Cleveland, they may not move as well in Kansas City. Brokers, then, who don’t do the appropriate research run the risk of taking a property to auction that will generate little interest.<br /> <br /> And that simply results in a waste of time for everyone involved, Jones said.<br /> <br /> “When you are trying to paint a story about auctions, there are no broad strokes that you can paint with because the markets across the country are all so different,” Jones said. “The Atlanta market, for instance, is very different from the Florida market. If you try to compare those to Houston and Dallas, you can’t do it. The Texas market, though it’s not as vibrant as it once was, is still strong in comparison, say, to Phoenix or Vegas, that are getting hammered now in commercial space.” Despite these market variances, a growing number of commercial brokers are turning to the auction format to sell properties that they have otherwise struggled to move. The reasons are obvious: The auction format is the best way to sell a property quickly and for its best value. A well-marketed and –planned auction can generate high attendance, and several offers, for a commercial property.<br /> <br /> And auctions aren’t just for distressed properties.<br /> <br /> Brokers often sell properties that aren’t facing foreclosure.<br /> <br /> Their owners, though, may need to sell the property as quickly as possible. Or maybe the owners aren’t happy with the offers they’ve received on the open market.<br /> <br /> In such cases, brokers may decide that the auction format is the best choice.<br /> <br /> The tough economic times have brought many brokers to the auction format for the first time. These brokers often make common mistakes that make their auctions less than successful.<br /> <br /> The good news is that brokers can avoid almost all of these mistakes by working with the right auction professionals, Jones said. Thatmeans working with an auction company that specializes in selling commercial real estate.<br /> <br /> Auctioning commercial properties requires different skills than does selling residential real estate, Jones said. And brokers who make the mistake of working with an auction firm that does not have experience in commercial real estate may find that they don’t sell their properties for the highest price possible, Jones said.<br /> <br /> “There is a distinct difference between someone who specializes in commercial real estate versus residential, land and agriculture,” Jones said. “Commercial is unique. There are different terminologies involved. They are dealing with cap rates. It’s a different vernacular that people use.” Another common mistake that brokers make? They bring properties to auction that aren’t a good fit for the format, Jones said.<br /> <br /> “There are certain criteria that make a property a good auction property,” Jones said. “The seller has to have a sense of urgency, naturally. If there is no sense of urgency, I wouldn’t consider a property to be a good prospect for auction.<br /> <br /> It’s always good, too, for the seller to have some good equity in the property.<br /> <br /> That allows sellers to bemore negotiable about what they can accept as a final sales price.” In today’s auction industry, more brokers are taking properties that are owned by multiple partners to auction, Jones said. One or more of the partners wants to get out of the partnership, so a quick sale is essential.<br /> <br /> “In this kind of market, you’ll find more and more partnership and group buys where the partners decide that they need tomove on,” Jones said. “They decide to put their money into something else. They’ll say, ‘Let’s divest ourselves of this property and invest in other properties.’ They’re taking advantage of the market. If all their money is tied up in assets that they’ve had for a while, and they’ve created some equity in these assets, they can divest themselves of these properties and buy more real estate at lower costs. Now is a great time to buy.” Determining real value John Cuticelli, chief executive officer of New York-based private investment firm Racebrook Capital, isn’t surprised to see so many brokers flocking to the auction format. His company runs a busy auction business under the Sheldon Good & Company name.<br /> <br /> Brokers have found, especially in these trying economic times, that the auction format is the best way to determine the true market value of a property, Cuticelli said.<br /> <br /> “How do you determine the real value of the property? That is the ageold question,” Cuticelli said. “How do you determine what a buyer is ready, willing and able to pay? The auction format has the unique qualification of focusing the market’s attention and creating a sense of urgency.” Like others in the field, Cuticelli recommends that brokers work only with auction companies that boast extensive experience in the commercial market. It takes too much time, money and effort to hold an auction. It’s a shame to waste all that by working with a company that doesn’t know the basics of selling office buildings, industrial properties or retail centers, Cuticelli said.<br /> <br /> “You have to make sure you have an auction company that has the size, the breadth, the scope and the real estate expertise to properly move your property,” Cuticelli said. “There are very few auction companies that are staffed with real estate professionals. That’s a common mistake people make when selecting an auction company. You have to make sure it’s a real estate-focused company. You’re not just holding a carnival here and you need to hire someone to chant an auction cry. You need someone who can help you structure, understand and analyze the market.” John Johnson, managing director of Atlanta-based Sperry Van Ness Accelerated Marketing, said brokers usually regret not doing their research before hiring an auction company.<br /> <br /> What usually happens is that they leave the auction either without making a sale or grudgingly accepting a low-bid offer.<br /> <br /> “The first thing brokers need to do is to contact someone who has been through the process already, who understands how it works,” Johnson said.<br /> <br /> “We’ve seen a number of auctions, some high-profile, in which the brokers listed the property for auction, did the marketing and hired an auctioneer to call bids. Many of those high-profile commercial sales ended up not in closing because the broker was not educated to push the seller hard enough on what a minimum was. That might not have happened if the broker had worked with a company that specializes in commercial real estate auctions.” Auction pros predict that the auction format will only continue to grow in popularity as the national economy, and the commercial real estate industry, continues to struggle.<br /> <br /> “When you are in a market like the one we are currently in, the ability to gain the kind of exposure that a seller would want is increased when you go to auction,” Gladstone said. “If you had one tree and there were 50 in the forest that were all for sale, how would you get your one tree spotlighted? The accelerated salesmethod puts a spotlight on that one tree. It builds awareness on the part of the buyers that this property is up for sale, and that if they don’t act on the specific date that they will lose the opportunity.”

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