Parking Lots & Garages - Alternative Investments

[Michael Bell]

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!