The news that Silver Tower’s bank wants to sell its inventory in bulk reminded me that we haven’t seen a major auction of new-construction condos in quite a while.
Following the sale of 45 condos at Vetro in early 2009, there was a sense that buildings that either needed a jolt in sales or that were nearing sellout would go the auction route. Michigan Avenue Tower II and Motor Row Lofts were able to unload dozens of units in an auction in late 2009, but the results of auctions held 2010 weren’t so encouraging.
Yesterday I reached out to an auctioneer who keeps an eye on the downtown market and asked for a “state of the market.” His response was long and focused on several aspects of the auction business; near the end, he cut to the chase regarding the trend toward converting to rental, and his expectations for auctions in 2011:
For the buildings with under 20% sold, rental conversions are what most are trying to do. As you’ve probably seen, the multifamily market is red hot, and if they convert, lease up, and start a revenue stream, they are in a much better position to sell the building to a REIT or other type of investor. The developers are working with companies to buy out the construction loans so they can do the conversion and start that revenue stream. Then maybe in a few years, once the supply/demand equilibrium is fixed, they can convert back to condos. They still run into a few issues here, dealing with the small amount of owners in a building, as well having to manage the building, and a lot of these developers are not good property managers.
Will there be an auction in Chicago in 2011? My guess would be yes, likely in Q3. Bank REO auctions will be the driver. With judicial foreclosures in Illinois taking about two years to complete, there will be a lot of inventory coming under control of the banks this year, and they will need to move it.
You’re seeing some of the junk start to filter out from low-end auctioneers who advertise on TV. These are not great properties, usually in troubled neighborhoods, and a large percentage go unsold, or buyers are unable to close. As for developers, my hope is that someone comes to their senses and realizes the benefit of going to auction. The market needs to see a well-run auction, which hasn’t been seen in Chicago in about two years. Once that happens, I think others will follow. You can only hold out for so long until you need to perform.