Commercial Real Estate Industry Facing Tough Task of Finding Users for Closing Auto Dealerships
|This former Ford dealership in Renton, WA is for sale for $21 million. Listing agent, NAI Puget Sound calls the 8.4-acre property a "development opportunity -- office, residential, retail uses allowed"|
It appears that vacant auto dealerships may soon join obsolete enclosed malls and the growing inventory of empty big-box stores on the list of former robust retail properties in need of an alternative use.
Already at overcapacity, automakers have been trying to reduce the number of dealerships for years with mixed success. The recession will likely do what the automakers could not -- bring the number of dealerships in line with demand. President Obama's call for more extreme turnaround measures for both General Motors and Chrysler is only expected to add to the number of un-needed dealerships.
Auto Dealership Closures
According to the National Automobile Dealers Association (NADA), approximately 900 dealerships closed and 200 dealerships opened in 2008, for a net loss of 700 dealerships, leaving the country with approximately 20,000 franchised auto dealers. According to Detroit-based research and advisory firm, Urban Science, 2008's decline in auto dealership count is the largest the firm has recorded since it started collecting data in 1991. For 2009, the NADA forecasts a net loss of 900 additional dealerships.
According to CoStar Property Professional, 5.4% of auto dealership properties across the country are vacant and another 3.7% are available for lease, bringing total availability to 9.1%, or 1,023 "spaces" for lease; this compares to 3.5% vacancy about one year ago. Additionally, CoStar COMPS data shows that there are currently 1,861 auto dealership properties actively listed for sale across the country.
Rick Breuer, a leader of SRS Real Estate Partners' Automotive Practice Group (formerly Staubach AutoGroup) said that about 150 dealerships have been listed for sale just over the last 45 days alone, and added that the uptick in properties for lease is partially occurring because dealers that aren't in a "need to sell" situation have chosen to market their properties for lease.
Breuer estimates that the average U.S. auto dealership is comprised of a 15,000 to 18,000-square-foot sales / service building situated on four to five acres. Considering the NADA's estimate that 900 dealerships could close in 2009, this translates into another 13 million to 16 million square feet of buildings and 3,600 to 4,500 acres of land becoming vacant.
Breuer added that the industry is over-saturated with domestic brands (approximately 70% of the 20,000 dealerships are domestic brands), so even if the "Big Three" pull through, there will inevitably be a high level domestic dealership closures. At most risk are dealerships selling only one brand of domestic cars. Of dealership closures last year, 66% were single-brand, and according to Urban Science, about 80% were domestic-brand.
"We'll see even more contraction in the next several years as the Detroit Three strategically rethink their retail counts and locations," said John Frith, VP at Urban Science.
Commenting on automakers' efforts to consolidate dealerships, Urban Science noted, "Proactive consolidation, a process in which an automaker closes a dealership or consolidates it with other nearby franchises, can be complex and expensive. To close down a retailer, state franchise laws and individual sales-and-service agreements must be honored. Automakers must provide compensation for dealer investments, such as new-vehicle inventory, special tools and resalable parts."
Proactive consolidation is the preferred method, but market factors (primarily low credit availability hampering dealers' ability to buy inventory and consumers ability to buy cars) are forcing more and more dealers to shut their doors, explained Urban Science. However, If a dealer plays its cards right by increasing service and parts sales and reducing expenses, it should be able to "weather the storm," said Randy Berlin, global practice director for Urban Science.
What regions are most likely to see the most auto dealership closures? Breuer expects to see the most domestic dealership fallout to occur in the Northeast, where domestic over-saturation is most pronounced. Urban Science said that Rhode Island, California and Massachusetts experienced the largest percentage declines in the number of dealerships during 2008. And if fewer new vehicle sales are a sign of where more closures will occur, the NADA said that Nevada, California, Florida and Arizona recorded the highest percentage drops in new car registrations during 2008.
Further closures and sales losses would be a major blow to the retail industry, as the NADA says that motor vehicle sales account for 18% of total retail sales. Additional blows would also be very harmful to community employment and local government services, as the NADA estimates the average dealership employs about 50 people (translating to about 1 million jobs nationwide)
and in total, auto dealers generate in excess of $20 billion in annual sales tax revenue.
Limited Options for Excess Auto Dealership Property Inventory
Unfortunately, CoStar's statistics show that auto dealership properties coming onto the market aren't going anywhere fast. The current "for sale" inventory not only dwarfs the number of auto lots that have sold so far this year (only 95), but is about equal to the total number of auto dealership properties that sold during 2008, 2007, and 2006 combined
. Additionally, auto dealership properties currently for lease have already been on the market for an average of 9.6 months.
Further, the values of auto dealership properties are depleting and are in less demand. Over the last three years, the average sale price/asking price ratio has declined from 90.1% to 74.2%; the average cap rate has increased from 6.7% to 7.5%, and the average amount of time an auto dealership property spends on the market for sale has increased from 230 days to 362 days. These statistics are only likely to deteriorate in the near term -- based on the properties currently for sale, the average cap rate has crept up to 7.6% and the properties have already been on the market an average of 305 days.
Breuer estimates that only about 25% of his group’s current listings will be bought or leased by a traditional automobile user. That means roughly 75% of auto dealership property on the market will have to be repositioned for some form of alternative use.
Breuer explained how SRS approaches taking on an auto dealership listing that would require an alternative use. "First, we analyze the economics of alternatives and get an understanding of what the current market is, which involves a real education process with everybody involved -- particularly with the property owner and determining where the price is going to be. We have to be astute about entitlements and what current municipal directions are for alternative use. In most cases, auto properties are zoned so that they can go into a retail or commercial direction, but we have to check with the locality to be sure we won't run into a roadblock. Last, we give our clients a probability of success, including what type of timing is involved to attract alternative users or developers," he said.
Aside from traditional automobile sales, auto dealership properties first make sense for other vehicle retailers - think motorcycles, ATVs, boats, commercial trucks, RVs, tractors, construction equipment - although these segments are "feeling the crunch" of this economy, too, says Breuer. Other vehicle possibilities include motor coach tour companies or community bus transit operators. As an example, Breuer's group recently sold a former Honda dealership in Mesa, AZ that included a 27,000-square-foot showroom/sales office building and attached service center located on 3.75 acres, to a marine dealer.
Shopping Center or big box retail is the next most-likely use, said Breuer. Many car dealerships are located on "main and main" locations -- highly desirable, high traffic corners on major retail corridors. Further, the acreage is typically already cleared and paved and only a low-value, small sales/service building exists that could easily be worked around or demolished. Properties such as this are likely candidates for developers on the prowl for Class A parcels available at “distressed” pricing to keep on their books for future use.
And while one would assume vehicle repair / service businesses would be common re-use candidates, Breuer said that is not the case. "It's a pretty focused target area with a lot of properties on the market and there's more supply than demand for these users." Less common is the conversion of auto dealerships into office or residential property because of their retail locations, and rarely are their locations ideal for industrial use.
Breuer gave an example of the creative marketing these auto dealership properties require. For a closed dealership his firm has listed in Scottsdale, AZ, SRS is marketing the property as three pieces: 5.37 acres of vacant land; a 7,018-square-foot former showroom situated on 5.54 acres is being marketed as office/flex space offering room for expansion; and the 29,231-square-foot former showroom/sales office two-story building situated upon 5.66 acres is being marketed for retail/office use.
When Will Conditions Improve for Auto Dealers?
Current retail sales amongst auto dealerships don't point to any near-term improvement. According to the Census Bureau, "Auto & Other Motor Vehicle Dealer" sales in February were down 29% over the year prior; and J.D. Power & Associates forecasted in a recent report that sales of new vehicles in March would be down 41% from March 2008 sales. The NADA said that during 2008, new car dealers sold 18% less vehicles than they did in 2007, and for 2009, NADA predicts an additional 3.8% decline in the number of vehicles sold -- and that's with the assumption that the economy will start improving in the second half of this year.
Gary Dilts, senior vice president of global automotive operations at J.D. Power and Associates said the group isn't ready to predict that sales will continue to decline, “We’re still seeing economic headwinds and reduced consumer demand for new vehicles, making it a tough marketplace. However, we anticipate that improvements on Wall Street and a boost in consumer confidence will help to bring the market back.”
The NADA and other industry executives say that auto industry sales (like the rest of the retail industry) are very dependent on consumer confidence, home prices, and credit availability.
While these factors are hampering auto dealership's sales, its credit availability for dealerships that has become the "last straw that breaks the camel's back." Even dealerships with excellent credit have become victim to inventory financing lenders pulling loans and increasing the cost of credit. "These mostly small, family run businesses are facing the incredibly difficult decision to cease operations due to a lack of affordable credit. On average, a dealer requires $5 million of inventory financing loans," said the NADA. Also, some dealerships say that automakers are delaying payments to dealers for cars sold.
Considering this, it may be some time before auto dealerships regain their economic footing.
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