Eighty-four percent of foreclosed commercial properties and bank notes up for auction this week in Nevada sold for more than $341 million, prompting analysts to suggest it will set a bottom price and spur investors to jump into the market.
The online auction that ran Tuesday through Friday via real estate auction company Auction.com resulted in the sale of nine of 10 foreclosed-upon commercial properties and 50 of 60 notes held by lenders, officials announced Friday. Nearly all the properties auctioned were in the Las Vegas Valley.
It was once billed as the largest commercial property auction in the nation at more than $1 billion, but banks removed properties from the bidding process over the past three weeks.
That didn’t dampen interest for office buildings, retail centers, industrial buildings and apartments in an auction that many brokers were skeptical would have many transactions consummated. One analyst predicted 30 percent would be sold.
While investors are interested in distressed properties, there were questions about whether they would be interested in an auction primarily consisting of bank notes. Those who buy the notes have to foreclose on the properties, and the process can take years, especially if someone files for bankruptcy protection.
Kevin Higgins, a vice president with Voit Real Estate Services, said the sales are a reflection of a lack of distressed commercial properties coming on the market and pent-up demand.
There are a lot of equity funds and other groups looking for a bigger return than the little they are earning on a money-market account, he said.
“That tells me there’s a lot of money out there looking to find a home and that people are willing to take bigger risks to get those returns,” Higgins said. “In the past, you wouldn’t have seen as much activity, so it surprised me for sure.”
Investors have been clamoring for commercial real estate in Las Vegas, hoping to pick it up for pennies on the dollar. Just like the housing market, commercial real estate values have fallen sharply as the economy weakened, but banks up until last year have been reluctant to dispose of those properties as happened with housing. Las Vegas is ranked No. 1 in the nation in percentage of distressed commercial assets, which was tabbed at $18 billion earlier this year by Real Capital Analytics.
With a few exceptions, many of the properties sold for within 10 percent of where many people expected they would go, Higgins said. The biggest surprise was that there were some lower-level office and industrial buildings that weren’t on prime intersections that were sold, he said.
Buyers had to post 10 percent of the purchase price by the end of today and have 10 days to complete the all-cash transaction. Higgins said it wouldn’t surprise him if borrowers bought some of their own notes to avoid foreclosure.
Gary Banner, president of Commercial Alliance Las Vegas and a multifamily broker with Colliers International Las Vegas, said the auction tells him this is the best sign yet of the bottom of the commercial market in the apartment sector.
Banner cited the sale of a note with a current balance of $35.7 million for Wellington Meadows, a high-end 332-unit complex on West Sahara Avenue. It sold for $28.6 million.
“If they would have bought it as (a foreclosure) they would have paid this price, but they were willing to pay that for a note, and they still have to foreclose,” Banner said. “That is strong sentiment from investors that says to me that prices are going to go higher.”
Banner said investors are going to be eager to purchase more distressed assets after this because they will think the bottom of the market has been set and prices won’t fall any further.
“We’ve heard from investors who said they weren’t getting involved in the auction because you don’t know what you’re getting, but now that it has occurred, they are saying prices are at bottom and are ready to start looking around,” said John Stater, research director of Colliers International Las Vegas. “It’s a good thing to get the conversation started and getting a few comps (comparable sales). It’s a positive for the community.”
Most of the buyers remain unknown for now but are considered to be domestic.
Several analysts said one of the biggest surprises was the premium paid for the note on a three-story office building at Green Valley Corporate Center South, 2200 Paseo Verde Drive next to The District at Green Valley Ranch. Owned by American Nevada Company, the note sold for $172.19 per square foot for the 59,800-square-foot building.
The bidder paid $10.3 million for a note that had a balance of $12.5 million after bidding started at $2.9 million, Stater said.
“That is a premium price, and might be too premium,” Stater said.