Parking Lots & Garages - Alternative Investments

24 Replies

Over the past 6 months I have been on a serious hunt to purchase income producing parking lots & structures across several markets.  Three offers made so far but no deals. I just wanted to share some of my thoughts/findings on the asset class and why I am even more bullish on parking today.  I can go on and on about parking, so I will give enough info in each section to at least start a good conversation.

Pros: 

1. Alternative investment option: Investing in income producing parking lots & structures is a good strategy right now considering the current state of the residential real estate market. I LOVE multifamily, but solid deals are getting harder to come by for most investors. Considering the eviction moratoriums, compressed CAP rates, etc., the future is unclear. *But let me be clear, I am not knocking multifamily - I am huge fan and will continue to be. But I do know a lot of investors who are looking elsewhere for a reliable return until the future becomes more clear.

I believe parking to be an ideal place to "park" capital (pun intended) due to the low capital expenditures and operating costs.  I also believe it to be a good inflationary hedge; we all see how inflation on the rise now.

2. Low cost/High margin: If purchased correctly in a prime location with reliable management in place, the investment can be a home run or at least a solid base hit. It can be done, I have spoken to many many owners and operators of lots on the how.  

3. NN (Double net) lease model: Is the ideal model for parking investments due to the reliable income guaranteed by the parking company you lease it to.  The parking company is your property manager and your tenant in this situation.  I strongly recommend against self-managing a lot.  These companies are true experts at what they do and have several levers to maximize revenue (dynamic pricing, economies of scale, technology, etc.).  Most parking companies absolutely DO NOT want to own parking.  They are operations based and will continue to stick to that model.  

Cons: 

1. Lots do not change hands often:  Due to the low cost and low headache to own the investment most owners just don't have a motivation to sell.  That's not to say they would not sale at some point.  Just don't expect an owner to be tripping over themselves to sell you their lot especially when it's cash flowing.  Sidenote: I spoke to an owner who's family owned the lot for over 80 years!  

2.  COVID hit parking really hard:  People could not and would not venture out.  Parking could not generate revenue.  Most parking companies (or at least the ones I've spoken with) tried to convert their NN leases to either revenue share or revenue management agreements.  There was just no way for them to make the agree upon payment schedule.  Although most states are opening back up, I still see some hesitance from parking operators to sign a NN lease.

3.  Most owners want development pricing:  This has been a common obstacle for me, but one that I have been able to overcome over time.  Depending on the market and seller, the development objection can be overcome.  I believe being familiar with market, the path of progress, and the current development projects in the area can all be useful. Using that info as discussion points can help.


Extra Points:

* The numbers do not work in every area. I have avoided 24hr cities (NYC, LA, Chitown) altogether.  Not to say it can't be done, I just don't want to try.  It's a big country out there, with plenty of markets where margins work better.

* Most parking owners are sophisticated. Very sophisticated. I have met some sharks along the way, but mostly good people who know what they are doing.  Rely on the parking operators to help you underwrite the deal. It's in their best interest to be accurate with projections since they are competing to lease the lot from you.  Get multiple RFPs (requests for proposals), to ensure you are making a good decision. I would recommend against just going with the incumbent operator's numbers.  

The parking companies are master operators and highly competitive.  For example: I was gathering RFPs for a 100+ space lot in a midsize city. One company went as far as to place a camera on their competitor's lot to monitor lot traffic 24/7 for 2 weeks straight. They then provided me an excel spreadsheet of every single vehicle entering and exiting.  They then backed that into a monthly projection of what they could realistic promise to pay. Ultimately, I trusted their projections which was significantly lower than what the seller was claiming.  

* I believe there is plenty of opportunity to be had in parking if done right.  I believe the key is embracing the parking industry and working with them to understand what is a good deal.  Also, it is a pretty interesting industry with technological advances occurring at light speed.

* Self driving cars will not kill parking (my sincere opinion).  Even if the technology is widely adopted in 10-20 years, there still needs to be government regulation which takes time.  Consider the cost and time it will take to mass produce affordable self driving vehicles for the everyday consumer.  

Clear example: Electric vehicles have been here for years. Still not really that affordable.  Although, they will get there in the next 5-10 years.  My point is that self driving cars if approved, are a long way off.  And from my contacts in the parking industry (whom I speak with daily) the parking industry is preparing to accommodate these vehicles vice trying to act like it will never happen.

Last points on self-driving vehicles that everyone overlooks...

1. They still have to run on some type of fuel source.  So they have to park somewhere when the owner is not around.  Also, do you really think the government will allow mass amounts of unmanned vehicles to roam the streets?

2. Self-driving vehicles will still be made of degradeable materials.  You can't just allow a car to drive constantly without wearing its parts down.  It will need to be parked.

3. Owners will want their vehicles close by for convenience.

Apologies for the book, but I am truly passionate about parking and have learned a TON.  Would love to continue the discussion with anyone interested.  Cheers!

This was very insightful and has sparked some interest for me to learn more about parking as an alternative investment. What has me interested from your post, is how data driven it is and how masterful the parking operators can be.

You mention you are not interested in the 24 hour cities. Is that because the prices are too high, margins are too low, both or something else? 

Great post!

@Obed Calixte Thanks! Regarding your question about 24 hour cities, the competition is a lot stiffer between developers and parking REITs from what I can see.

I can find better deals with less competition in 12 and 18 hour cities like a Nashville or Phoenix. Also consider that parking works differently in every city. I’ve canvassed cities where 90-100% of the parking is owned by the local government. Or cities where the government only owns a couple of garages. It really just depends on the market.

But one thing is for sure. The national “paid” parking supply is shrinking as cities convert them to higher and better uses. It doesn’t take a PhD to realize a shrinking supply increases the value of an asset class. But buying an income generating parking lot should be a cash flow play primarily in my opinion vice buying and hoping a developer will pay you more for it.

Buying income generating parking in CBDs (central business districts) and major entertainment areas and holding for the long term is the way to go. Just have to find one where the numbers work. Most reasonable owners would sell in the 5-6 CAP range, but I have seen data where deals where done in the 7-10 CAP range but those are few and far between.

All things considered a 5-6 CAP parking deal could be a better alternative to a multifamily deal only generating a 3-4 CAP. That's strictly speaking from a very general apples to oranges comparison.

There are levers to pull in some parking properties to improve NOI, but mostly for garages. For lots, you could implement a cloud base payment system, remove the attendant (if applicable), and most importantly secure a NN lease to guarantee and improve NOI. Also if the location can support it, negotiate a lease with profit sharing pass a certain revenue point and yearly rent escalation.

An interesting perspective. So thank you for that. I had never thought of parking lots but I am personally a bit hesitant about parking now. Or anything commercial at this point.

Originally posted by @Michael Bell :

@Kar Sun thank you for your feedback. I really appreciate it. To your point, being hesitant about any investment class is a good trait to have.

May I ask why your hesitant with commercial grade assets?

Of course. There has been a significant erosion of private property rights for the small business as well as more and higher taxes despite the recent dive the economy took. I have been concerned about "essential business" vs "non essential" business designation that was unheard of prior to 2020. It looks like the small and some medium business has been designated as "non essential" where are large mega corporations have been given green light and have reported significant gains. There has also been a significant downward push to reduce consumption. These seem like significant factors to me. Now waiting to hear about some climate pandemic. Then expect more mandates and even laws to reduce driving or have the taxes to pay for driving "in excess" of what would be allowed. We have to wait 5-7 years to ensure that the "great reset" fails completely before the small business can continue on.

 

A guy who bought the LA Dodgers at one point was a parking lots guy in Boston I think. I have only rented out private parking before and parking lots sounds like a great business plan. Good luck with your search!

Originally posted by @Michael Bell :

@Matt R. Thanks Matt! And that’s great info!! Lol, I should call that guy and ask him how he did it. (Joking)

Sidebar. As I recall he kind of flubbed the equity value in the lots a bit to buy the Dodgers and they kind of made him sell the Dodgers as result but I think he still made a few hundred mil off it. So maybe not the best model for advice exactly there but big money in parking nonetheless. He still owns 50% of the parking at Dodgers stadium is my understanding. (Google)

 

@Matt R. Absolutely agree! First callback I got off one of my mailers was from a guy who owns 71 parking lots nationwide. He’s selling a significant portion of his portfolio now. I suspect to cover the losses elsewhere....but those numbers though. I’ve see some spreadsheet magic from a lot of folks.

@AP Horvath I do not. But I have done light research on ISFs or industrial service facilities. Large lot close by an Amazon warehouse for example. Amazon signs a NNN lease with you to store and service their vehicles there. Also there can be a small warehouse or structure on site to service vehicles.

Extremely lucrative but not quite sure what the barrier to entry is. Do you have any experience?

@Michael Bell

I have a little bit of real estate development experience. In process of entitling and building 13k of office-warehouse. 

When you say "extremely lucrative" --- what do you mean by that specifically?

35% internal cap rate? Project payback period of two years? 100% IRR?



@AP Horvath can’t remember the exact article I read about it; where actual example of investment returns were cited. But I do remember reading it.

Here’s the most recent article I found on it from last month.

https://www.freightwaves.com/news/isfs-could-be-the-next-industrial-real-estate-gold-rush/amp

I plan on digging deeper into this asset class as well.

Originally posted by @AP Horvath :

@Michael Bell

I have a little bit of real estate development experience. In process of entitling and building 13k of office-warehouse. 

When you say "extremely lucrative" --- what do you mean by that specifically?

35% internal cap rate? Project payback period of two years? 100% IRR?



Love this conversation, I have 4 acres that is fully leased for outdoor industrial storage. Its in Plano which is not approving any more of this type of storage. I am bullish on this sector as well and would love to put more capital towards it.

RE: truck parking, I get maybe 2-5 calls a week for tractor trailer parking, I cannot handle the capacity, but there is another competing location in Ft. Worth.


https://www.truckpark.com/truc...

https://saleasing.net/


There is a strong market, I think you need a strong web SEO because my website is #1 or 2 on google which drives the phone calls. I get another 10-15 a week just for boat and rv parking, but we're full! 

 

@Ronald Rohde Thanks for your response. I am very interested in this space as well, but have not made any moves towards it.  I am glad that you are getting a strong response from your SEO; that's phenomenal.  A few questions for you:

1. Are you self managing or using property management?  If so, how does that work?

2. What type of leasing structure are you using for your tenants?

3. How are you determining fair market price for rent since it's just you and another lot in the area?

Thank you!

Originally posted by @Michael Bell :

@Ronald Rohde Thanks for your response. I am very interested in this space as well, but have not made any moves towards it.  I am glad that you are getting a strong response from your SEO; that's phenomenal.  A few questions for you:

1. Are you self managing or using property management?  If so, how does that work?

2. What type of leasing structure are you using for your tenants?

3. How are you determining fair market price for rent since it's just you and another lot in the area?

Thank you!

 Self, but I have staff

Monthly gross

I just raise my prices like crazy. I get 10-20% who saw thats outrageous, another 2-3 pay me. To be clear this is for boat and RV in high demand, I don't have tractor trailers. There is a lot of competition in my space, but everyone is full.

Originally posted by @Ronald Rohde :
Originally posted by @AP Horvath:

@Michael Bell

I have a little bit of real estate development experience. In process of entitling and building 13k of office-warehouse. 

When you say "extremely lucrative" --- what do you mean by that specifically?

35% internal cap rate? Project payback period of two years? 100% IRR?



Love this conversation, I have 4 acres that is fully leased for outdoor industrial storage. Its in Plano which is not approving any more of this type of storage. I am bullish on this sector as well and would love to put more capital towards it.

RE: truck parking, I get maybe 2-5 calls a week for tractor trailer parking, I cannot handle the capacity, but there is another competing location in Ft. Worth.

https://www.truckpark.com/truc...

https://saleasing.net/

There is a strong market, I think you need a strong web SEO because my website is #1 or 2 on google which drives the phone calls. I get another 10-15 a week just for boat and rv parking, but we're full! 

 

I have always liked that model.. not done it but would if the opportunity arose..  especially if you only have to offer gravel parking not paved.

 

Originally posted by @Jay Hinrichs :
Originally posted by @Ronald Rohde:
Originally posted by @AP Horvath:

@Michael Bell

I have a little bit of real estate development experience. In process of entitling and building 13k of office-warehouse. 

When you say "extremely lucrative" --- what do you mean by that specifically?

35% internal cap rate? Project payback period of two years? 100% IRR?



Love this conversation, I have 4 acres that is fully leased for outdoor industrial storage. Its in Plano which is not approving any more of this type of storage. I am bullish on this sector as well and would love to put more capital towards it.

RE: truck parking, I get maybe 2-5 calls a week for tractor trailer parking, I cannot handle the capacity, but there is another competing location in Ft. Worth.

https://www.truckpark.com/truc...

https://saleasing.net/

There is a strong market, I think you need a strong web SEO because my website is #1 or 2 on google which drives the phone calls. I get another 10-15 a week just for boat and rv parking, but we're full! 

 

I have always liked that model.. not done it but would if the opportunity arose..  especially if you only have to offer gravel parking not paved.

 

Thats likely outside city limits which makes it kinda far if there's traffic. I agree its all a trade off, but Plano ordinance requires nonpermeable, concrete or asphalt. Asphalt likely will be torn up with heavy trucks so concrete at $8/psf makes the rents go up. However, my experience is that they are willing to pay more to be closer.

Ultimately, it comes down to what truckers will pay to be closer to family/destination.

 

@Ronald Rohde All good points you make. As far as security of the trucks parked on the lot.....I imagine it would similar to a reputable self storage setup? Fenced-in perimeter, controlled point of entry, and cameras? Am I correct in these assumptions?

Originally posted by @Michael Bell :

@Ronald Rohde All good points you make. As far as security of the trucks parked on the lot.....I imagine it would similar to a reputable self storage setup? Fenced-in perimeter, controlled point of entry, and cameras? Am I correct in these assumptions?

 You'd be correct. Lighting is important too