Cover Story: Carwash Real Estate Values In 2022
What a difference a year makes. Cap rates for single-tenant net-leased carwash real estate have decreased by nearly 100 basis points, which means the multiple that operators can achieve on the sale of their real estate is significantly higher now than it was just a year ago. T his is great news for carwash operators looking to maximize their value in 2022. T here are many factors impacting real estate values in the carwash sector. All carwash operators should be aware of the following five factors that could drastically influence the value of their real estate.
The CARES act phase-out begins in 2023, meaning real estate investors purchasing property via a sale-leaseback will no longer be able to claim 100% bonus depreciation on carwash improvements after this year. A significant number of investors are buying the real estate solely for bonus depreciation purposes. After 2022, the amount of allowable first-year depreciation will be 80% for property placed in service in 2023, 60% in 2024, 40% in 2025 and 20% in 2026.
Supply and Demand
Even with new development on the horizon, there is still a major lack of available express carwash properties for sale, which is driving up sale prices, increasing multiples and lowering cap rates. There were approximately 30% fewer net-leased carwash sale-leasebacks brought to market in 2021 when compared to 2020 and approximately 34% less when compared to 2019, according to a study by CoStar. Today, there are 40 single-tenant netleased express carwash properties on the market (Loopnet), which is more than double compared to the beginning of 2022. However, there are still more buyers in the marketplace than ever before. For example, our firm arranged the sale of 18 single-tenant carwash properties in Q4 2021 and we have 15 more under contract or sold in Q1 2022. Our company anticipates a record number of carwash sales by year end.
The cap rate spread between what real estate investment trusts and what private investors will pay for sale-lease-backed real estate has widened. Historically, private investors (like a local family office or a 1031 exchange buyer) were willing to pay around a 50-basis point premium above the price that institutional groups would pay for single-tenant net-leased express carwash properties. Today, this spread is at least 75 basis points and, in many cases, 100 basis points. One big reason for this is the fact that private investors value the depreciation advantages of a carwash more than institutional buyers. Another reason is 1031 exchange buyers are less influenced by the market and more focused on wealth preservation than typical institutional buyers. Interest rates We are in a rapidly rising interest rate environment, which is even more significant to carwash real estate than you might think. Due to the rise in construction costs, the average sale-leaseback price has also increased. Over the last six months, the average sale price for a carwash sale-leaseback increased by nearly $500,000. Prior to 2021, there had only been five carwash sale-leasebacks to sell over $6.5 million. In Q4 2021 and Q1 2022, there were a total of six carwash sale-leasebacks to sell over $6.5 million and our company sold four of those six properties. This means that more buyers are relying on third-party financing to purchase a property. Based on today’s interest rates, there is little to no spread between the cap rate and the interest rate. As rate increases continue, the highest-priced carwash real estate will be the first to be impacted.
Carwash operators might be surprised to learn that one of the main factors that can drive the value of their real estate is not necessarily how well that particular site is performing, but instead the unit’s geographic location. For example, when we sell a portfolio of carwash properties separately to individual buyers, the success of a location does not always lead to the highest price. In some cases, the worst performing unit in the portfolio could sell at a higher price than the best performing unit depending on the physical location of both units. As another example, a carwash in Bozeman, Montana, with a population of over 54,000, would sell for 50 basis points better in pricing than a carwash in Chicago (estimated population of 2,671,635), which has nearly 50 times the population size. This is because there are these unique “pockets” in the country where demand for real estate is considered nearly inelastic. In these locations, private investors are willing to pay a large premium to buy real estate there. The sales price has little to do with how the business is performing other than it dictates how much rent a seller can put on their property. With the unprecedented demand, the lack of supply for single-tenant net-leased express carwashes and 2022 being the last year for 100% bonus depreciation, combined with rising interest rates, 2022 could be the year that carwash real estate values peak. Therefore, it is prudent for all operators to understand the value of their real estate so they can make the best decisions for the future of their businesses.