By Austin Blodgett and Eric Wohl, Hanley Investment Group
The professional car wash industry is more than 100 years old. Yet, the category has only recently picked up steam as a viable alternative to traditional net leased retail properties for private investors. Savvy private investors in today’s complex real estate market are following in the footsteps of what some of the larger REITs are looking to acquire. Namely, single-tenant express car washes. Unlike a McDonald’s or a Starbucks, net leased car wash properties are still a relatively new category for private investors. In the past, car washes were only sold with the business and equipment to owner/users looking to start their own business. Now, they are being viewed as extremely profitable and safe investments by large private equity funds, publicly traded REITs, and individual net lease investors.
Austin Blodgett, Hanley Investment Group
Only two single-tenant net leased car wash properties in the U.S. were sold to individual buyers in a five-year period between March 2012 and March 2017, according to CoStar. During this time behind the scenes, however, large institutional real estate investors had begun purchasing portfolios of net leased car wash deals as off-market sale-leaseback transactions. From March 2017 to December 2018, 14 single-tenant net leased car wash properties were sold to private buyers, which demonstrates the rapidly growing interest in the property type.
There are approximately 30 car wash properties currently listed for sale in the Western U.S., according to CoStar. About 75 percent of these are mom-and-pop users and single-unit entity deals, not large car wash chains with strong credit backing the lease. We expect to see rapid growth and expansion to continue into the Western states, which will lead to more sales of larger car wash operators over the next few years. Historically, it has been easier for these large operators to expand in other parts of the country because of lower land acquisition costs. However, more institutional money coming into the sector is allowing these operators to do merger and acquisition deals or buy land in states where prices are typically higher.
Eric Wohl, Hanley Investment Group
Now that operators have realized they are leaving money on the table by doing off-market portfolio transactions, many have decided to sell their properties in the open market. This allows individual investors an opportunity to purchase these lucrative investments. It’s a win-win situation. The operator makes a little more spread by not selling in bulk and the individual investor takes home a 6 percent to 7 percent cap rate (depending on the operator) for a new absolute, triple-net 20-year deal with annual increases and frequently a corporate guarantee with a strong guarantor. That is the ideal deal profile for a 1031 exchange buyer looking for a passive, internet-resistant investment — our typical buyer profile for these assets.
Express car washes are a service-based, internet-resistant business and typically operate with a long-term lease with fixed increases. Also, car wash locations are often fundamentally sound sites that are located at high-traffic-count intersections with dense surrounding populations. Investors have the security of valuable leasehold improvements in the form of expensive car wash equipment that can qualify for accelerated depreciation giving the investor extensive tax advantages.
The International Carwash Association estimates that there are approximately 80,000 professional car wash locations in North America, which includes 24,000 express locations. The majority of car wash locations in the United States are owned and operated by small- to medium-sized independent car wash companies. Mister Car Wash is the largest car wash operator in the United States operating 280+ car washes in 22 states with nearly 50 years in the business. Other operators include Zips Car Wash (140 locations), International Car Wash Group (134 locations), Autobell Car Wash (81 locations), and Quick Quack Car Wash (74 locations).
Hanley Investment Group has completed the sales of more than $74 million of single-tenant car wash properties across the country since January 2018, with another $21 million currently listed or in escrow, making Hanley Investment Group the most active brokerage company in the net lease car wash sector. Hanley Investment Group was also one of the first brokerage companies to market and sell multiple car wash sale-leasebacks for a major operator. On all car wash sales completed by Hanley Investment Group, 83 percent of these buyers came from California. Hanley Investment Group was able to guide California-based 1031 exchange buyers who were in search of internet-resistant net lease investments to properties located in the western U.S., resulting in premium a premium cap rate for the car wash chain.
The express car wash model is now the industry standard for any operator looking to grow their car wash business. It also fuels net lease sales to individual investors. This model offers quick service with an average ticket price between $5 and $10 per customer. A large portion of customers pay for monthly subscription services that allow unlimited washes per month. The express car wash model is highly recession-proof because it is a low-cost alternative to the more expensive full-service hand-wash formats. This business model also offers the speed and convenience increasingly demanded by time-starved, value-conscious consumers. These locations are very profitable because there is little overhead with a maximum of three people typically working at one time, and the unlimited wash program subscription model is growing year-over-year, giving these operators consistent monthly cashflow.
With the average car price now topping over $34,000 in 2019, according to Experian, one of the big three credit scoring agencies, people are holding on to their cars longer. The average car age in the U.S. is 11.4 years and, to protect their investment in the car, car owners are more apt to wash their car. But, the majority of consumers are looking for a “Do-it-for-Me” car wash and not a “Do-it-Yourself” option. We also think that the burgeoning rideshare business has increased the need for more consumers to have a “clean” car to help them achieve top ratings. Furthermore, the express car wash model is very eco-friendly. Soap and chemicals are not running down the driveway into the storm drain.
Today, the $11.2 billion car wash industry has a more retail feel than a decade ago as mergers and acquisitions activity, new investor money and expansion efforts increase. With strong investment from both institutions and private investors, we feel that the car wash industry is poised for long-term growth. We expect to see cap rates remain steady within the sector and the number of sales to rapidly increase over the next 12 months. This is bolstered bythe strong growth of express car wash properties being built or acquired, as well as the increased acceptance of private investors to purchase these properties.
— Austin Blodgett serves as senior associate and Eric Wohl is executive vice president of Hanley Investment Group, a nationally recognized real estate brokerage and advisory firm specializing in retail property sales serving clients from across the country from its offices in Corona del Mar, California. To learn more, see www.hanleyinvestment.com.
This post was published as part of Shopping Center Business’ Retail Insight series.