Niche properties
What Drives Parking Investments?
Learn how to find profitable returns in this hard-to-navigate market.
By Keith Bawolek |
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.