MIAMI-Given the volume of distressed commercial real estate and the loans collateralized by these properties, one might think that the auction business would really be taking off. But that may not be the case for a variety of reasons.
For one, although there is still hope by investors that a flood of troubled assets will soon be coming to market, thus far, many lenders have not forced owners into foreclosure, choosing instead to “pretend and extend,” thus keeping prices for those assets which have been foreclosed on at higher levels than they might otherwise be.
Howard Michaels, chairman of the Carlton Exchange, says that typically his firm does $5 billion to $6 billion in transactions per year through its auctions. But the volume for the first half of 2010 was just over $1 billion in loans and REOs.
Carlton does private sector work for regional banks, loan servicers and investment banks, selling partially-completed projects, mostly condominiums, as well as land and loans throughout the country. In Florida, where Carlton has $1 billion in loans and properties for sale, the company sells a lot of partially-completed condominiums and hotels in addition to land and loans, he says.
The auction business waxes and wanes, says John L. Johnson, president of Sperry Van Ness Auctions, based in Atlanta. “In the mid-1990s, after the RTC (Resolution Trust Corporation) finished its work, the market stabilized and we sold properties for people who had bought properties from the RTC and wanted to maximize their value,” he says.
In this cycle, says Johnson, the uptick in commercial real estate foreclosures began about a year ago. And the sector most affected has been retail, he says. “Retail properties are the canary in the coal mine,” says Johnson. They are the first to take a significant hit because the rooftops necessary for their success often didn’t materialize, or homeowners were foreclosed on and had to leave, he says.
Of those commercial properties and loans which do end up on the auction block, from whatever sector, not all are sold, says Michaels. In some cases, buyers and sellers don’t agree on the price, he says. “There is a lot of liquidity, so investors want to buy loans (Carlton sells more loans than anything else), but this is a price- sensitive market and still volatile,” he says. “In the old market, people bought anything that looked good,” says Michaels.
And auctions are not for every kind of commercial real estate asset. At Carlton, the average loan balance is about $5 million, says Michaels, so that leaves a lot of commercial real estate assets which are disposed of in other ways, including by one-on-one deal-making.
The biggest deal that Carlton did in 2010 was arranging the sale and financing of a $100 million loan in New York for a substantially-completed condominium building, but Michaels says he can’t reveal the name of the property.
“We expect to be doing more loan-sale business as banks (that have survived) start to make profits and have the ability to sell loans and take losses,” says Michaels. “The economy is doing better than a year ago and some banks are returning to lending,” he says. “In Florida, some lenders are financing the completion of condo projects where there are hard sales contracts,” says Michaels.
“At the beginning of the year, a lot of people thought things were back to normal, then things flattened out,” says Michaels. “But now, we are at a point in the cycle when lenders and servicers have a better idea of what values are,” he says.
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