Polish Your Portfolio
Carwashes provide a clean path to profit for local investors.
Specialized retail businesses pose risks for commercial real estate investors, but they also can provide rewards in the form of strong return on equity. Carwash investments are on the fast track to becoming a top-performing retail niche in many parts of the country. Locating carwashes on unoccupied outparcels and pad sites can greatly increase a retail center’s cash flow and value. In addition, freestanding carwashes on underperforming commercial infill sites can be a viable business opportunity for commercial real estate investors who wish to expand their portfolios. With the right demographics and location, return on equity out of pocket for carwash investments can be 100 percent in the first year alone.
Carwash Industry Recap
The carwash industry is comprised of establishments that provide vehicle cleaning services to motorists, car dealers, fleet operators, and other businesses. Carwashes generally are classified as self-service, in-bay automatic, or conveyor.
At self-service carwashes customers clean their own vehicles with hand-held devices. In-bay automatic systems keep vehicles stationary while the equipment moves back and forth, cleaning and drying cars. Conveyor carwashes pull or push vehicles through the wash bay where the equipment is arranged according to the steps needed to wash and dry.
The first automatic carwash opened in 1946. By 1987, there were about 9,100 carwashes nationwide. In the 1990s, a dramatic influx of new investors and a trend toward automation and professionalism propelled the industry. Today there are approximately 101,500 retail carwash outlets, according to the International Carwash Association’s 1999 carwash census.
While rapidly growing, the industry is highly fragmented, and most operators own one or two locations. With the exception of wastewater regulations, there are no professional requirements to own and operate carwashes. Many experts believe these factors provide entrepreneurs with the opportunity to create a highly personalized business.
The carwash investor market has changed considerably during the last decade. Today’s investors are more sophisticated and financially savvy. Their ranks now include attorneys, doctors, commercial real estate investors, and other professionals looking for places to park their money and generate cash flow. Typically, these investors are drawn to the industry’s hottest construction trends — in-bay automatic and express exterior conveyor, both full-size and compact or mini-conveyors.
Site Selection and Demographics
In-bays and mini-conveyors are ideal for infill sites because they are compact and can be operated attendant-free 24/7. A single in-bay or mini-conveyor can be placed on an outparcel, which includes the land surrounding the concrete pad site, as small as 6,000 to 13,000 square feet. This includes irregularly shaped lots that typically are not suitable for retail uses. However, sites must allow ample stacking space for vehicles and adequate turning radii at the wash bay entrance and exit. Actual structures typically measure 16 feet to 20 feet wide and 38 feet to 50 feet long with an 8-foot to 10-foot wide equipment room.
Carwash structures should be designed to enhance their surroundings while being strong and durable enough to handle weather and conditions within the wash bay. Construction can include brick, block, modular, or pre-engineered buildings. Sites also should be well-lit so they are noticeable and inviting.
In-bay and mini-conveyor sites generally come equipped with automatic tellers, touch screens, entrance gates, and automatic sliding doors, which allow for unattended operation. Today’s wash systems also come with computerized operator interfaces that provide advanced marketing capabilities such as networking with adjacent businesses, accommodating fleet accounts, handling debit/credit cards in addition to full billing and statements for tax purposes, and video security via Internet access.
Shopping destinations and residential neighborhoods are the key location factors underlying most successful carwashes. Targeted locations include pad sites and outparcels within shopping centers or outside malls, franchisees or businesses with leftover land, and freestanding sites in high-traffic areas. In fact, drive-by traffic at shopping centers is likely to be the quickest and most inexpensive form of carwash marketing.
The demographic requirements for carwashes are similar to those of gas stations, convenience stores, and fast-food restaurants. The trade area boundary is fairly small: typically a three- to five-mile radius or 10-minute drive. The ideal market is middle- to upper-income areas with populations of about 30,000. To be successful, carwashes also must have roadway visibility and access, daily traffic counts of approximately 25,000 cars, travel speeds of 45 miles per hour or less, and proper zoning. The trade area analysis can be achieved using site analysis tools to evaluate locations and analog or gravity models to determine anticipated customer traffic.
Maximizing Investment Potential
In-bay automatic and mini-conveyor sites offer high income potential by providing value-added services and low labor costs. Automatic tellers greet customers, provide instructions, and allow for several payment options. Owners and investors can maximize income potential by choosing a wash system with extra features such as under-carriage rinse and rust inhibitor, tri-foam polish, clear-coat wax, windshield rain repellant, spot-free rinse, and tire shine. This provides customers with a selection of desirable services and increases the average income per wash.
Carwash projects share many of the same issues facing today’s more-traditional commercial developments including lengthy design, engineering, and construction permitting.
The simplicity of pre-engineered buildings provides a consistent product for permitting and a dynamic image. Innovations such as state-of-the-art equipment with marketing capabilities and water conservation also are key components that help to accelerate an owner’s time frame for opening a location.
The costs to own carwashes depend on land, building structure, and equipment. (See chart.) Investors can develop on land they own or lease land. Building costs depend on local codes that may limit style and the use of certain materials. Equipment costs depend on the make, model, and optional features.
In-bay or mini-conveyor sites can be very profitable businesses. Expenses depend on climate and utilities costs, taxes, maintenance, and labor. Operating expenses (excluding debt service) typically are 45 percent to 50 percent of gross sales. The factors that lead to profitability include low labor costs (one part-time attendant for housekeeping and maintenance), low direct operating costs, no accounts receivables, small inventory, and 24/7 operation. In addition, carwashes are a year-round market where anyone who drives a vehicle is a potential customer. Easy management, high returns, minimal labor issues, few cash flow control problems, and tax incentives are some of the reasons why investors continue to build in-bay and mini-conveyor locations.
Single in-bays or mini-conveyors, such as the Bubble Wash Express at the Blue Hills Shopping Center in Manhattan, Kan., can be placed on outparcels as small as 6,000 to 13,000 square feet. Photo credit: Bubble Wash Buildings LLC
Operating expenses for carwashes such as the Circle K Car Wash in Corpus Christi, Texas, generally average between 45 percent to 50 percent of gross sales excluding debt service. Photo credit: Crystal Structures
The most common pad deal for carwashes is the triple-net-lease structure. This requires property owners to create separate parcels and pad sites to lease to tenants who build the carwashes. Tenants pay rent, insurance, and taxes. This is an attractive arrangement for owners because it limits expenses, generates cash flow, and increases the property’s value.
Rental incomes are fairly easy to estimate. For example, the average monthly rent triple-net-leased carwashes command is about 22 percent of gross sales, according to carwash industry benchmarking surveys. Based on sales of $210,000, a 6,000-sf outparcel could support annual rent of $46,200.
Carwashes also can be built to suit. The risk of this approach can be minimized with pre-engineered buildings. If the tenant vacates and the property becomes difficult to lease, the building and equipment can be disassembled and sold or moved off-site. Owners also can sell the pad to generate one-time revenue. Building a carwash on an infill site carries the risk of capital loss, which is a function of real estate development and investment ownership as well as business operating risks faced by the tenant, which translates into leasing risk. The principal operating risks include competition and the site’s ability to produce adequate gross sales. In addition, owners must consider if adequate management can be provided to ensure an effective economic and customer-centric operation.
Property owners can minimize these risks by considering private investors who are financially qualified to purchase and operate carwashes and have proven track records of success. Common experience shows that economic failures are extremely rare when operators provide adequate housekeeping, management oversight, and routine maintenance and repairs. As such, the risks would be much lower than with a typical start-up venture.
The common exit strategy for carwashes on infill sites is straightforward. The owner/operator generally oversees the property until it rises to a higher and better use. With a ground lease, the operator continues until the lease options expire. In that case, the operator disassembles, removes, and sells the assets or relocates them to another pad site.
If the carwash performs at less than 75 percent of projected sales volumes, it is not likely the operator or owner would choose to continue. In these cases, the underperforming assets generally are sold to a third-party buyer.
The sales volume levels needed for loan payoff and recovery of equity are a function of net operating income; the lower the sales volume, the lower the NOI, and the lower the price. The operator or owner should strive to sell to a third-party buyer priced to yield a positive return on the new buyer’s equity after all operating costs and overhead are covered. In general, most investors pay four to six times earnings before interest, taxes, depreciation, and amortization.
Building carwashes on infill sites is not rocket science. However, property owners should do their research and thoroughly investigate financing strategies, lease issues for the pad, and lease restrictions from other tenants. Additional development costs may involve consulting fees for parceling and feasibility studies, legal fees, and utilities installation.
Investors who take the time and effort necessary to analyze an infill site’s potential for a carwash may result in a rewarding financial opportunity. With the right demographics and location, carwashes can significantly increase a property’s cash flow and value.