Investor demand for service-based, internet-resistant retail has created a new class of net lease investments: car washes. The single-tenant net-leased car wash industry has emerged as a viable and sustainable alternative to common net-leased retail properties for private investors. Since January 2018, Hanley Investment Group’s senior associate Jeff Lefko who, along with EVP Bill Asher, has completed the sale of over $15 million in single-tenant car wash properties across the country, accounting for nearly 25% of all car wash properties sold since March 2017. The newfound interest represents a change for the category.
“In the past, car washes were typically either sold with the business and equipment to owner/users looking to start their own business or in a net lease portfolio to real estate investment trusts,” said Lefko. “Today, savvy car wash operators and merchant developers have realized that they can maximize value by putting in place a long-term lease and selling off the real estate to a private investor looking for a fixed return. In general, it has resulted in a viable alternative investment for private investors and an approximate 100 basis point premium in value for car wash operators and developers, compared to selling to an institutional buyer.”
Only two single-tenant net-leased car wash properties in the US were sold to individual buyers in a five-year period between March 2012 and March 2017, according to CoStar. However, from March 2017 to March 2018, 12 single-tenant net-leased car wash properties were sold to private buyers, marking a 450% increase in single-tenant car wash sales, notes Lefko.
According to Lefko, car wash properties offer a wide variety of benefits that many other single-tenant investments can’t compete with. He says that outside of quick-service (QSR) restaurants, there aren’t a multitude of options for passive investors looking for service-based retail under long-term (15 and 20-year initial term) leases with fixed increases and strong guarantees. Investors have more recently been attracted to car washes for the intrinsic value of the property. Typically, car wash locations are fundamentally sound sites that are located at high traffic count intersections with dense surrounding populations. Investors also have the security of valuable leasehold improvements in the form of expensive car wash equipment, so that if the tenant were to leave, the investor has a high likelihood of either opening their own car wash business or finding a new operator to replace the original tenant. Additionally, compared to a QSR, a single-tenant car wash is usually sold for a lower price per square foot for the land, Lefko tells GlobeSt.com.
Furthermore, the majority of net-leased car washes that are being sold are express conveyor car washes. These offer quick service with an average ticket price between $5 and $10 per customer, says Lefko, and this insulates them from an economic downturn. “A large portion of customers pay for monthly subscription services that allow the customer the convenience to get unlimited washes per month. The express car wash model is highly recession-proof because they are a low-cost alternative to the more expensive full-service hand wash formats.”
Lefko continues, “As of April 2018, there were 16 car washes on the market or in escrow (according to LoopNet and CREXI). A quarter of these properties listed for sale have a lease that is guaranteed by either a dominant regional operator or a large company; both provide investors with a secure investment. The car wash industry is an extremely segmented business, but it is becoming exponentially more consolidated with large operators such as Mister Car Wash, International Car Wash Group, and Zips opening locations at a pace that has not been seen in the past. Approximately 75% of the properties currently on the market are leased to one of the top 10 largest operators in the country.”
Similar to other net lease property types, California-based investors have proven to be the leading buyer of car washes located both in California and throughout the US, says Lefko. In January 2018, Hanley Investment Group completed the sale of two single-tenant car washes in submarkets of Chicago. The properties were newly built, with long-term leases that sold at a premium to two separate Southern California-based buyers, both private investors who were in search of service-based retail investment opportunities. Lefko notes that these car wash properties provided a better return than if the buyers had purchased a national single-tenant fast-food or coffee net-leased investment in California.
“Comparable single-tenant car wash properties are selling in today’s market across the country at similar spreads compared to typical single-tenant net lease investments,” said Lefko. “However, in California, pricing remains at a record level.” In March 2018, Hanley Investment Group sold an “iconic” single-tenant car wash on Ventura Boulevard in Los Angeles County. According to CoStar, the 3.87% cap rate and $6.3 million sales price marked the lowest cap rate and highest sale price for a net-leased car wash in the US. Even though the car wash was leased to a single-unit operator, the cap rate rivals some of the most aggressive cap rates for properties leased to national tenants such as Starbucks, McDonald’s and Chick-fil-A, Lefko tells GlobeSt.com.
What does the future hold for this category? Lefko expects that the supply of net-leased car washes will increase by a substantial amount over the next 12 months as car wash operators begin to consider more sale-leasebacks that are geared to attracting the private investor willing to pay historic level premium pricing in today’s market. He expects the demand to stay strong as additional investors look for service-based alternatives in the form of car washes over the typical net lease investment.
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