Four common misconceptions about auctions

NATIONAL REPORT – As maturing debt and refinancing options remain major challenges for borrowers and CRE investors, hotel auctions are slowly becoming a preferred method of transaction in the commercial real estate space. Despite its growing popularity, misconceptions about the process still persist. While once associated almost exclusively with distressed assets or lender-driven sales, today's hotel auctions are evolving into a strategic tool for brokers, owners, and investors alike.

#1 Auctions about distressed deals

One of the most prevalent misconceptions is that if a hotel is being auctioned, it must be in distress. While this might have been more accurate in past market cycles, particularly with lender-controlled assets, the current landscape tells a more nuanced story.

Yes, some properties in auction are distressed, particularly those taken back by special servicers or lenders due to borrower defaults or refinancing challenges. But increasingly, brokers are choosing auction platforms to sell well-performing or stabilized assets.

There has also been an uptick in hospitality brokers from various brokerage shops bringing auction platforms like Marketplace deals that are not truly distressed. Brokers are often looking to have a widely marketed process where competition is created, and the auction is a great place to do that. These properties may have strong fundamentals but are brought to auction to generate a competitive bidding environment and maximize sale price.

#2 Auctions signal market weakness

For some investors, especially institutional buyers, there is still some hesitation around the auction model. The concern often centers on the levels of transparency, competition, or the upfront due diligence required. There's a common perception that entering into an auction means accepting rigid terms, such as hard deposits and as-is conditions, without enough room for traditional deal negotiation.

However, those same elements can actually benefit both sellers and buyers. Auctions bring a great level of transparency and speed to the process. Buyers know exactly who they’re competing against and can watch bids in real-time through a few clicks.

Sellers benefit from a process that naturally fosters competition and urgency, often resulting in pricing and values that are above initial expectations.

#3 Institutional buyers don’t participate

Another well-known myth is that institutional investors shy away from auctions as they may not be accustomed to the auction environment. While some may prefer the slower pace and flexible terms of traditional sales, the reality is that well-capitalized buyers are showing increasing interest in auctions, particularly when the deal is robust.

Here’s the truth: if an institutional buyer genuinely likes an asset, they’re willing to do upfront due diligence and move quickly on the deal. In fact, this upfront underwriting can reduce the traditional “throw out a number” sometimes seen in traditional deals, where buyers get the deal under an LOI, conduct their due diligence then re-trade after securing exclusivity.

Auctions require more precision from the outset, which can actually streamline transactions and improve their accuracy.

#4 Auctions only work for smaller deals

While mid-market deals (generally in the $5 million to high-teens range) may be the sweet spot for hotel auctions, the format has proven effective for larger assets as well. Bigger deals may require more customized structuring, but they are happening and often with outperforming results.

For example, take an extended-stay hotel in a secondary market that was originally in distress. With proper asset management, modest capital improvements and the right marketing through an auction, the property sold for nearly $2 million above the lender’s initial ask, exceeding expectations and delivering a positive result for all parties involved.

The growing acceptance of auctions in hospitality real estate reflects a true shift in mindset. Owners and brokers are recognizing that auctions can create value, bring deals to market quickly and deliver clean, competitive outcomes, even for properties that are not always “hairy” or underperforming ones.

As debt markets remain tight and refinancing challenges persist into 2025 and 2026, auctions are a practical way to access liquidity. For many, they are no longer a last resort, they’re a strategic move to navigate the current environment and stay ahead of the competition.

Contributed by Justin Mayers and Damian Smoter, CWCapital, Washington, D.C.

The views and opinions expressed in this content do not necessarily reflect the opinions of Hotel Investment Today by Northstar or Northstar Travel Group and its affiliated companies.