When it came time to sell a 43,700-square-foot mixed-use retail and office property located at 1001 Towne Avenue in downtown’s Fashion District, Colliers took an interesting approach and sold the property at an online commercial auction event. Mark Schuessler, an executive vice president at Colliers who represented the seller, expects to see more auctions going forward due to distress found in the Los Angeles marketplace, characterized by rising interest rates and overall high levels of vacancy.
Given the right asset, he said, the auction process has its upside.
Unlike a traditional sales process, which can be lengthy and randomized, auction sales require potential buyers to perform their due diligence up front, meaning, once a seller has accepted a buyer’s offer, it’s a binding deal and that buyer has limited time to wire the all-cash exchange.
In the case of the downtown property, more than 100 confidentiality agreements were signed for the property, which resulted in a $13.5 million sale.
Although this format of buying and selling has been around for quite some time, multiple experts have cited what seems to be the start of an auction wave and predict that this increase will continue to be a trend for the remainder of this year and next.
“Our volume is up 20% (nationwide) quarter to quarter,” Victor Guiterrez, vice president and head of platform operations at Ten-X Commercial Real Estate, one of the leading auction platforms, said. “I don’t necessarily think that’s tied specifically to us as a company, or the auction format. I think it’s really tied to the broader commercial real estate market. Last year, the market was frozen. Transaction volume was down 55% as a whole. I think what we are seeing is the market thaw.”
Within Los Angeles County specifically, in the first quarter, eight properties auctioned on Ten-X’s platform, with the average deal size being $4.44 million. Of the eight, four sold, resulting in a 50% trade rate.
While still relatively small, that auction rate has nearly doubled from last year. In the first quarter of 2023, four Los Angeles properties auctioned on Ten-X, averaging $1.84 million. Three sold, resulting in a 75% trade rate.
“When you’re throwing something up for auction, it’s usually because the market is not particularly healthy,” Adam Bass, president and chief executive of law firm Buchalter, said. “According to data released by the ADP jobs report, the economy added 300,000 new jobs in March. There’s a disconnect between the economy that certain people are seeing and the economy that the numbers are seeing.”
“Auction, whether it’s right or wrong, has really been associated with distress,” Damian Smoter, senior vice president at Real Insight Marketplace, another leading auction platform, said. “I think historically, sellers, buyers, people in real estate, assume if a deal is at an auction, it’s because it’s distressed. I think the change in the market, the interest rate increases, has definitely led to more dislocation in the market, a bigger bid-ask spread. I think that has created some real opportunity at the auction to potentially give sellers and brokers an option to transact in a different way.”
Asset-class breakdown
Although the slight uptick in auction sales hitting the market isn’t anything exclusive to Los Angeles, there do seem to be many consistencies when it comes to what is deemed a more favorable auction asset.
“Price point is really important,” Smoter said. “The auction price that really works well is probably in that $1 million to $15 million range.”
Generally speaking, many of these properties tend to be smaller, lower-class assets, sometimes characterized by low occupancy and negative cash flow, although auction platforms do say they see the full yard, also selling fully occupied multiple-hundred-square-foot properties with brand new triple net leases.
“Auctions sell best when people want to buy most,” said Bob Drury, senior managing director at Commercial Real Estate Exchange Inc., a Playa Vista-based commercial online marketplace. “The auction is a good avenue if you have distress, but it also works really well for stabilized high-quality assets as well. It flushes out what the market’s willing to pay for that asset on that particular day.”
Hospitality products tend to be the most popular asset type for sellers wishing to go the auction route, with retail properties coming in at a close second place. According to Ten-X Commercial’s Guiterrez, hotels are more successful in comparison to some other asset types due to the way in which many prospective buyers see redevelopment opportunities.
“We have people competing for properties, and each of those people might have a slightly different business plan, so they’re each underwriting a slightly different net operating income for the property,” he said. “And (for example) somebody that thinks that ‘my business plan is the right business plan, and I can execute on this business plan and that means that this building is worth say $10 million’ versus somebody else that’s saying, ‘here is my business plan and the building is worth $9.8 million.’ People are bidding based on their business plans. And because of that, you see buyers get more aggressive than other asset classes.”
In terms of retail, Smoter said the properties he sees do best on auction platforms tend to be non-grocery-anchored strip centers. He also noted that, in addition to hotel and retail properties, there’s been a big increase in multifamily and industrial deals over the last year.
“We average 18 bidders per retail deal,” Smoter said. “When you get 18 groups that are competing, the outcome is generally very good. And the price point through a traditional sale versus an auction, when you’re talking about strip center retail, the auction will outprice traditional sales in a lot of scenarios.”
Office buildings, meanwhile, are struggling. “Offices are a little difficult these days. Land is very difficult,” Drury said. “There’s a lot of vacancy in downtown Los Angeles and the office is not the favorite class.”
Does submarket matter?
However, regarding location, some experts believe there is no particular pattern when it comes to where these properties exist.
“I don’t see a concentration specifically in one submarket or even a couple of submarkets,” Chris Maling, a principal at Avison Young specializing in retail capital markets, said. “It’s generally all across the board and it’s situational, based on the product type and based on the basis in the property.”
Others disagree, suspecting that auction sales volume is usually synonymous with that of marketplace distress.
“While we had some distress sale data points in 2023, we’re still working through a wave of loan maturities that will materialize into more sales, many of which will go the auction route,” Schuessler said. “I expect we’ll see them in pockets that are experiencing the most distress.”
Schuessler said that, within Los Angeles, the areas he considers the most distressed right now include downtown, Hollywood, South Los Angeles and North Los Angeles. Yet even in some of the county’s most desirable neighborhoods, auctions have occurred.
“Distressed can mean different things for different buildings. It could be a performing building in a good location that, by today’s standards, is simply over-levered with a loan maturing into a challenging capital markets environment. We will see forced sales of great assets at discounted prices,” he said. “There were at least two smaller auction sales in Culver City last year and one in Santa Monica, which are not submarkets that you typically think of as distressed.”
Why sell via auction?
“The biggest differentiator that the auction provides is certainty of close,” Schuessler said. “In contrast to a traditional sale process, buyers are required to do all of their due diligence prior to the auction date, execute a non-negotiable PSA (binding agreement) within two hours of the auction ending, and typically wire a 10% deposit within 24 hours that is immediately non-refundable. With the volatility in the current market, certainly of close is a huge benefit for a seller.”
“Buyers are all pre-vetted,” added Craig Coan, a partner at Greenberg Glusker LLP specializing in real estate and business. “They have to show the ability to buy the property. There’s a significant earnest money deposit that a buyer has to make in order to bid on the property. It’s very transparent.”
Other benefits include defined parameters, maximum exposure to one’s property, an acceleration of timing and the online convenience of it all.
“In a declined market, where you have further erosion of value, time is your worst enemy,” Avison Young’s Maling said. “If it is imperative to clear something off your books within a defined timeframe, an auction process gets you there.”
From a buyer’s standpoint, purchasing via auction is usually an opportunity to get their hands on valuable properties at what tend to be discounted prices, in a controlled bidding environment.
“In a traditional process, you’re submitting sealed bids and hoping that you’re the one who gets a call back with good news. You have no control over what happens once your offer is submitted. Your offer might even be $1 million above the next highest bid, and you could still lose the deal because the group below you is a large institutional group or has a relationship with the seller that makes them more comfortable,” Schuessler said. “That is not the case in a live auction. It doesn’t matter whether you are Blackstone or bidding by yourself on your iPhone. The auction levels the playing field.”
However, in some instances, the nature of the bidding war can result in higher than otherwise expected purchase prices, another favorable possibility for the seller.
“When you create a live, competitive bidding environment, it can make buyers stretch their pricing outside of where they would in a traditional sale,” Schuessler said. “No one wants to lose a deal over just one click of the button. Even the most experienced real estate professionals will tell you that they’ve bid past their limits in an auction because they got emotional about a deal.”
More auctions are expected
And although auctions have historically possessed a sort of negative connotation, many auction platforms are noticing greater user acceptance, another practicable factor in explaining the slight increase.
“I do think that more and more owners and brokers are open to selling their properties via auction format,” Guiterrez said. He noted that, over the last decade, there’s been a push to destigmatize the auction process as the world of real estate, like many industries, has worked to transition online.
“We’re seeing new motivations that we didn’t see in 2020, 2021 (and) 2022,” Real Insight Marketplace’s Smoter added. “Sellers are coming to us and they’re saying, ‘look we’re selling because we either have to sell or we want to sell, and we’re not just hoping for that homerun buyer.’”
Looking ahead, many experts expect the number of commercial auction sales to continue to tick up over the next few years, given the number of loans expected to mature and as lenders utilize auction platforms as a source of liquidation.
And as auction volume is suspected to continue to increase, many believe sales volume in general will pick up this year, as interest rates are suspected to plateau.
“Los Angeles is not going anywhere,” Guiterrez said. “It’s always going to attract capital; it’s a gateway city. Investors are still curious as to what’s being offered for sale, and we are still getting bidders and people showing up for the auctions and wanting to invest and put money into Los Angeles. It’s just a question of pricing.”
