Parking industry: strategic considerations for investors
The purpose of this analysis is to better educate developers and investors on the various characteristics that go into how investors value parking revenues when sold with income producing properties.
As most investors and developers know, parking is a critically important aspect of development and land use in virtually all cities and can significantly impact the growth of cities. The availability and quality of parking options impacts the way corporate tenants and retailers conduct their site selection and where developers build new projects. According to the International Parking Institute, the parking industry generates more than $20 billion annually in revenue and the United States has more than 105 million parking spaces along with five million parking meters. The purpose of this analysis is to better educate developers and investors on the various characteristics that go into how investors value parking revenues when sold with income producing properties.
Parking Industry Strengths and Risks from an Institutional Perspective
The recent trend towards urbanization and higher density environments have significantly elevated the importance and desirability of structured parking, particularly in markets that do not boast a viable light rail or transit system as an alternative. Additionally, as more development occurs in urban areas, many of the previously serviceable surface parking lots in urban cores have been replaced with new buildings, resulting in a further decline in an area’s overall parking ratio. Collectively, this places upward pressure on a parking facility’s value, both in terms of the consumer and the investor. Monopolistic industry features are also conducive to the rising value of parking; many markets are controlled by only one or two parking operators. Lastly, with the rise of co-working and open-space layouts, office buildings are becoming increasingly dense, further emphasizing the importance of parking availability.
The above notwithstanding, there remains perceived risks within the parking industry. Shifting consumer preferences and the subsequent forecasted decline in car ownership serve as a potential threat. Additionally, the industry also faces a rising wave of competition from ride-sharing companies, improving mass transportation (light rail) and the promise of autonomous vehicles from virtually all automobile manufacturers. Each of these competitive forces could serve as a potential disruptor in the parking industry, with some markets already experiencing an impact.
Ride Sharing: Services like Uber and Lyft reduce the need for car ownership, especially in urban areas, while also reducing demand for parking spaces by simply chauffeuring passengers who historically may have chosen to drive themselves to their destination.
Mass Transit: Most large cities are implementing progressive plans to improve regional connectivity to reduce traffic congestion and promote environmental stewardship. As a result, many metropolitan areas have improved access to suburbs and nearby residential hubs via alternative modes of transportation.
Driverless Vehicles: Many automotive manufacturers expect to be producing highly autonomous vehicles in the next five years. Driverless vehicles are capable of parking themselves and would likely park in “urban edge” locations allowing centrally located parking garages to be redeveloped for a higher use. Furthermore, the lack of human presence within parking facilities could reduce the required width of parking spaces and other facility features such as lighting and ventilation.
The Case for Parking as a Suitable Asset Class
- Reduced Volatility and Stable Income: Parking facilities provide consistent and stable income, high cash yields and long-term revenue growth potential. They have low-recurring capital requirements compared to traditional real estate assets, reduced income volatility through market cycles and the ability to immediately react to market conditions and hedge against inflation as rates can be adjusted daily or even hourly.
- High Barriers to Entry: The existing supply, especially surface lots in urban areas, is being replaced by new developments despite rising demand for parking. Some parking investments are ideal covered land plays, where investors can collect modest income while waiting for the surrounding growth to approach their site, making it feasible for higher density development.
- Not an Actively Sourced Asset Class: Parking assets are not frequently widely brokered, thus command increased attention when brought to market.
Parking Garage Analysis: Three Methods Investors May Use to Underwrite a Parking Facility Tied to an Income-Producing Property
- Stand Alone Basis: Investors apply specific assumptions to the parking garage in this method, “untying” the asset from any office, multifamily, or retail portion (if applicable).
- Apply the Cap Rate from the Attached Product Type: Some investors closely associate performance of the garage with performance of the connected asset and will apply the same economics to the garage.
- Financially Engineer the Transaction: When underwriting mixed-use parking garages, investors may adjust their value of the parking facility in order to receive approval from their investment committees or for purposes of internal reporting.
Key Demand Drivers at Parking Facilities
The following factors play a critical role in the success of a parking asset and will be closely studied by any operator or investor.
- Location: Buyers are more attracted to assets that are conveniently located and surrounded by amenities that will increase transient parkers (entertainment, hotel, retail, nightlife, office, etc.).
- Population and Employment Growth: Powerful urbanization trends occurring in most urban cores across the country have increased the demand for parking spaces, while also spurring new development that has the potential to reduce the supply of surface lots and parking supply.
- Parking Rates and Services Offered: Does the asset offer services that may attract additional vehicles such as car detailing, mechanical services or valet? Do the additional services provided justify elevated parking rates?
- Convenient Ingress/Egress: Naturally, assets that are easy to get in and out of are more compelling to parkers.
- Transportation Alternatives: Availability of public transportation, walkability and/or the prevalence of ride sharing.
- Facility Condition: Safety, security and curb appeal support healthy demand in structured parking facilities.
- Strict Enforcement of On-Street Parking Regulation: Strict meter monitoring and regulation of on-street parking by the municipality drives increased occupancy rates at privately owned parking facilities.
- Technology: Implementing user friendly technology that streamlines payment and access can increase parking revenues.
Additional Factors of Parking Facility Analysis
In addition to market conditions and the demand drivers listed above, below is a list of considerations that go into the calculus for evaluating the financial prospects of an income-producing parking facility:
- Capital Needs: Impending capital needs such as restriping, structural upgrades and more can have a negative impact on pricing.
- Air Rights and Future Development Opportunity: Air rights and the ability to add vertical density on top of the garage give a buyer additional optionality and act as a security blanket for their exit strategy.
- Tourism: Does the city have multiple qualities that drive tourism? Is tourism driven by government, culture, etc?
- Opportunity to Add Revenue Streams: If there are signage, advertising or additional service offerings that could be added in order to increase revenue, buyers are more likely to aggressively pursue the asset.
- Nearby Construction: If there are proposed developments nearby or infrastructure projects planned, how does this impact traffic and ultimately parking revenue for the duration of the project? Would a short-term inconvenience lead to long term increased demand and elevated parking rates?
- Municipality Parking and Regulations: Understanding municipal involvement in local parking is crucial for underwriting parking investments.
- Basis Relative to Replacement Cost: Is there an opportunity to acquire below replacement cost?
Strategic Considerations: The Case for Mixed-Use Parking Facilities
When developing or purchasing a parking facility, which was built to serve an urban mixed-use complex, developers should be mindful in how they create a mutually beneficial, perpetual easement for use of the parking facility by all users served.
If portions of the garage are allocated to adjacent office, retail or multifamily users, buyers will closely associate future success of the garage with the expected future performance of these assets. Commercial real estate developers and future parking facility owners must gain a full understanding of any municipal regulations regarding parking allocation requirements to the various users of the facility.
As trends involving urbanization, technology, space plan layouts, public transportation systems, etc. continue to evolve, the importance of parking solutions in urban areas will continue to be a very important consideration for commercial real estate investors and developers alike. As outlined in this article, the current dynamics that are creating additional pressures on parking availability could result in strong income growth for parking owners over the next few years, if not much longer. As such, parking facilities should be treated as a worthy asset class and a great complement to income-producing properties that they may support.