Bring on the Auction Hammer

Posted by urbandigs

Thu Feb 26th, 2009 01:59 PM

A: The NY Times discusses a batch of new development units that are going to be auctioned off in April. The meat of the article suggests that bidding will start some 40% - 45% below peak asking prices in the 1Q of 2008. I think its fair to say that PEAK in Manhattan was contracts signed anytime between 1Q of 2007 and 3Q of 2007, closing thereafter. I used contracts signed as an indication of where peak was, even though the transaction didn't close for months or in some cases, years later. The reason is that psychology started to shift around 4Q of 2007, as the credit crisis evolved from early 2007 statements by HSBC and the failure of two Bear Stearns hedge funds in mid 2007. From bidding wars, weak dollars & foreign demand to new development auctions, Manhattan has come a long way in a very short period of time! I discussed the potential problems of 'New Dev Closings', way back in October, 2007, and here we are today.

From the NY Times, "And Do I Hear $2 Million? No? $1 Million? Sold!":

Real estate auctions, rarely used in New York, have the potential to both move property and indicate to reluctant buyers what the true market prices are. Given the current sales drought, even a handful of auctions could reset prices for new condominiums citywide, said Jonathan J. Miller, the president of Miller Samuel, a Manhattan research and appraisal company. He said he expects the auctioned properties to sell for 40 to 45 percent below the asking prices of the first quarter of 2008, when the market peaked.

Accelerated Marketing Partners, a real estate marketing firm, is discussing auctions that will start as early as April on five mid-range to high-end projects in desirable neighborhoods of Manhattan and Brooklyn. “We’re in a deflationary, devaluating market in which no one knows the value of anything anymore,” said Jon Gollinger, the co-founder and chief executive of the firm, based in Boston.

In the auctions run by Accelerated, only a portion of a building’s unsold units are sold in one swoop, to avoid depressing values more than necessary. The remainder are marketed the traditional way, at the new, lower auction prices.

“The general impression I get is that this period of denial — the market-will-get-better mentality — is coming to a close,” said Mr. Miller, the appraiser, who will likely be working with Accelerated to determine the market value of units put up for auction.
Some great statements in this piece that accurately describe the deflationary forces and the effect it has on buy side psychology as this cycle plays out.

  • "Deflationary, devaluating market" - Yes. No matter what way you slice it, asset prices are coming down as the core engine that drove prices higher (ez credit, healthy securitization market/model, highly leveraged bank balance sheets, cheap money, positive wealth effect, high paying jobs / bonuses, etc.), is drastically changed. Some people still don't 'get it'. You really can't help these people, and they will continue to believe what they want to believe. If you believe the banks are solvent and well capitalized, well, then you probably also believed the chairman of Bear Stearns comments two business days before his firm was forced into a fed sponsored rescue with JP Morgan.

    The deflationary process is exactly that, a process. It will continue. The household side has not fully deleveraged, and the hit to the local economy is in its early stages. You may have started to notice a helluva lot more empty retail spaces available in Manhattan; so either you view this as a great time to start a new business or you view it as a symptom of a severe economic slowdown.


  • "The general impression I get is that this period of denial — the market-will-get-better mentality — is coming to a close," - Yes. It is. Denial marks the early phase of the asset cycle where the seller of the asset is anchored to peak pricing. Afterall, it is their home, and their home cant decline in value! This is enhanced when multiple brokers fight for the listing, and promise to deliver a peak level transaction because of their amazing marketing services that allows their sellers to bypass the deterioration in buy side confidence.

    guiness.jpgThe denial phase is still in play, but not nearly at levels it was 4-6 months ago. Sellers are starting to get it, but not en masse. We declined very sharply, in a short period of time, and we seem to hit a comfort zone; for now. I advise all sellers to get their property sold by May! Once we hit the slow days of summer again, traffic will be significantly lighter than it is now and reducing your asking price to re-stimulate demand will be your best option to get bids. Even still, you don't want to be forced to hit a bid when the market is very slow and illiquid, like it was in the 4th quarter!


  • "The remainder are marketed the traditional way, at the new, lower auction prices" - Hallelujah! So you are saying, the developer will auction off the first batch to see where the market values the properties and then price the remaining units at or near that level of price discovery?

    BRILLIANT! Just like those Guinness commercial guys! The market will determine the value of these products, NOT the broker or the sales office! Re-pricing your inventory to where the market values them, is the first step out of denial and on the road to moving inventory! Sure, it won't be pretty, but nobody said deleveraging and deflation was the American way.

    The new level of price discovery will set the benchmark for future valuations placed by buyers. Yes, I recall reading that somewhere on UrbanDigs by that Noah guy! Until then, there will be deals done at every price, and the process will play out in stages - not in one full swoop.



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