Parking facilities now present intriguing commercial real estate investments. Traditionally, most parking-related opportunities have not appealed to pension funds and institutional investors, but parking assets' low cost of capital and strong underlying fundamentals are generating new interest in this relatively undiscovered investment niche. While parking facility investment options exist in many markets, success largely depends on location. Finding prime opportunities can be a challenge for large and small investors alike.
Investors are beginning to realize that a well-located urban parking facility offers stable, long-term revenue growth and that this asset class is becoming an important part of any diversified real estate portfolio. The ability to significantly reduce operating costs through automation as well as change parking rates for a short period are just some of the advantages of investing in parking facilities.
Depth of the Parking Market
The parking industry generates more than $20 billion annually in gross parking revenues, according to International Parking Institute estimates. The United States has more than 105 million parking spaces and 5 million parking meters, IPI reports.
While impressive, these figures greatly exaggerate the available acquisition market's size. For instance, many parking facilities are located within office buildings, hotels, and mixed-use projects. In some cases, revenues are depressed by free or below-market parking due to municipalities' public policies or the price-sensitive nature of parking-demand generators, such as universities, hospitals, public transportation, and retail centers.
Parking demand logically follows growing economic development. New office, hotel, retail, and other projects in redeveloping urban cores often replace existing parking garages and surface lots. The supply-and-demand effects are dramatic: Not only do new developments reduce supply, but they also create more demand. In addition, municipalities that restrict new construction or make it very expensive to build greatly increase existing parking facilities' value.
Investors should analyze parking-structure and surface-lot investments as extensively as any other commercial real estate type. Location, ingress/egress, and traffic patterns are just as important as capitalization and growth rates. And parking facilities' dynamics can change quickly, catching uninformed owners by surprise and, more importantly, affecting projected investment returns. Therefore, prospective investors should carefully scrutinize parking assets in conjunction with the local market's general economy.
The lack of a national, comprehensive resource of parking facilities and owners adds to the difficulty of finding attractive investments. In addition, many local brokers, investors, bankers, appraisers, and parking operators aren't well versed in parking facility nuances. However, commercial real estate professionals' local market knowledge gives them an advantage over national buyers in locating and purchasing local parking investments.
Unfortunately for small investors, when opportunities become available in major markets such as Chicago, Boston, and San Francisco, they are marketed aggressively to large institutional and private capital sources. As a result, sales prices usually go up and cap rates go down, making it very difficult for small investors to get in on these deals.
Public vs. Private Investments
The parking acquisitions market is divided between municipal and privately owned facilities. Municipalities and private owners usually have very different financing needs and structuring requirements. Each group offers unique and sometimes complex investment concepts, which are important to consider when analyzing properties' potential opportunities.
Municipalities, including many quasi-governmental agencies and authorities such as airports, convention centers, and sports stadiums, own the majority of parking spaces nationwide. The current economic climate and federal and state subsidy cuts are prompting municipalities to develop creative funding methods for necessary programs and services. One such method is divesting municipally owned assets such as parking facilities.
However, municipal asset purchases are subject to the public bidding process, which usually extends the acquisition time line. In addition, legal and tax issues and municipal politics can further complicate transactions. In many cases, obtaining fee-simple title to municipal-owned parking facilities is cumbersome.
Private transactions are more accessible and easier to structure than municipal purchases. Typically, private transactions can be consummated in a much shorter time frame and usually with less burdensome contract terms and conditions. Although dealing with private sellers offers its own set of challenges, such as tax basis and estate issues, these are usually easier to overcome than the obstacles presented by investing in publicly owned assets. An advantage unique to private transactions is that in some cases the asset can be purchased without the property ever being exposed to the market.
Parking Market Segments
The parking industry comprises three major segments. Each segment reflects different demand generators and contains varying underlying trends and investment returns.
Urban Garages and Surface Lots. Well-located, privately owned urban parking garages are the most attractive parking investments, especially if they serve multiple daytime and weekend demand generators. Desirable urban parking facilities are located close to theaters, restaurants, sports arenas, and hotels that complement daytime office uses.
Surface lots may be good real estate investments, but they aren't necessarily attractive parking investments. Surface-lot sales prices usually are based on the site's future use, not its current net income. These lots typically are bought as land plays in which the income covers all or a majority of the ownership costs until the parcel is ready for a change of use. These are solid investments in markets focused on urban revitalization and where available downtown parcels are limited due to zoning or natural boundaries such as highways, lakes, or rivers.
Municipal garages' cash flows often fail to support the debt service associated with the bonds issued to build the facilities. In fact, many municipal garages are loss leaders built to support expanding convention centers and other publicly funded projects. However, subsidized municipal parking is vital to sustain or promote thriving urban districts. When analyzed with the corresponding increase in visitors to downtown restaurants, hotels, theaters, and sports arenas, municipal garages usually translate into sales tax and other revenue increases.
Nevertheless, these facilities are challenging for investors to purchase. In addition to the aforementioned acquisition hurdles, municipal parking facilities' outstanding bond debt typically exceeds the garages' value, even when using an aggressive single-digit cap rate. Also, municipal garages' parking rates intentionally are set below private garages' rates, lowering revenues. In addition, municipal facility purchases may include future rate increases and restrictions on staff reductions. Finally, buying a municipal asset puts a previously tax-exempt property back on the tax roll.
Airports. On-airport parking investments are attractive, but the red tape associated with buying municipal assets can complicate transactions. In addition, airports' cost of capital usually is very low, forcing interested private investors to accept very low going-in cap rates to be competitive. Airport security and liability issues add further ownership risk to on-airport parking facilities.
Growing air travel and full airport lots create demand for off-airport parking facilities in many primary, secondary, and tertiary markets. Off-airport facilities typically are large surface lots with enhanced services, such as shuttles to and from airport terminals. These facilities' success largely depends on proximity and access to airports, effective marketing, and good customer service. Parking rates usually are competitive with airports' long-term parking rates.
While well-located, properly marketed off-airport parking facilities can provide attractive investment returns, this segment is subject to risks that aren't as prevalent in other parking investments. For example, airports' low cost of capital allows them to expand existing on-airport facilities, sometimes adding enough supply to satisfy demand for several years. This dilution of the existing market supply forces off-airport facility owners to lower rates, decrease shuttle service, and reduce other service amenities to retain their customers. In addition, staffing is tied to the airport's demands. Round-the-clock staffing and shuttle service costs, such as labor, insurance, maintenance, and repair, raise off-airport parking facilities' operating expenses above those of other parking investments.
Hospitals and Universities. Medical centers and colleges own and operate many large parking facilities. Parking demand at these locations is high, but rate structures usually are low or free. At most college and university parking facilities space turnover is limited as most spaces are used by the quarter or semester.
Like municipalities, many hospitals and universities benefit from privatizing their parking assets. As both types of institutions struggle to meet growing capital demands, selling existing parking structures frees up funds for other uses. However, hospital administrators and school officials rarely use this capital-raising strategy, making these types of parking investments scarce.
Premier parking investment opportunities are hard to find. Unless subsidized by local municipalities, new parking facility development is economically unfeasible in most markets due to high land costs and real estate taxes. Select investment opportunities exist, but finding them requires keen understanding of the parking industry and local market factors.