Ideal locations for car washes are like the weather —hard to predict far in advance and always changing. But, knowing how to read the real estate market and its trends can go a long way in helping ensure you make the right site decision.
Keeping an eye on real estate transactions and trends is an important part of car wash ownership, whether building new, purchasing an existing site or just monitoring the developments surrounding your current location. As we look at the direction the market took in 2023 and where it is headed for 2024, one thing is clear: ideal locations for car washes are like the weather —hard to predict far in advance and always changing. Top that off with constantly fluctuating demographics, valuations, interest and density, and it becomes a semi-transparent, slippery ball that’s hard to see and even harder to predict.
“It is extremely important for car wash owners and operators to be thoughtful about their real estate strategy in a holistic way. Site selection is obviously critical. But understanding their real estate’s value and ways to monetize it once the car wash has been acquired, rebranded or constructed is also crucial,” said Jim Ceresnak, director of B+E Net Lease, which provides real estate advice to car wash operators, developers and investors and specializes in sale-leasebacks.
“At B+E, we have noticed a dramatic shift in tone since entering the second half of 2023. Institutions such as REITs [real estate investment trusts] have been and should continue to be active buyers of car wash real estate going into year-end and 1031 exchange buyers have returned to the market. But, most importantly, depreciation-motivated buyers are back and are actively pursuing year-end purchases,” Ceresnak said. At the end of the year, the 80% bonus depreciation benefit for car washes will come to an end and be replaced with 60% on Jan. 1, 2024, and 40% on Jan. 1, 2025. These additional first year depreciation deductions allow businesses to write off the cost of most depreciable business assets in the year they are placed in service. They are part of the phase-out stage of the Tax Cuts and Jobs Act in 2017, which allowed businesses to immediately write off 100% of the cost of eligible property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023.
The market for car wash real estate has been very active in the past few months and should remain so through the end of the year and into 2024, Ceresnak said, as passive real estate investors continue to be drawn to the car wash sector.
“Investors like the subscription-based revenues and strong margins that well-run car washes generate. They also like the tax benefits of owning car washes — specifically the ability to take advantage of bonus depreciation. There have been recent developments in Congress that suggest bonus depreciation benefits may be extended or modified soon. So, I think the long-term demand outlook remains strong for net lease car wash properties,” Ceresnak said.
Net lease arrangements take place during sale-leaseback transactions, which have been gaining in popularity among car wash operators over the past several months and is a trend expected to continue in 2024 as long as financing rates remain high, Ceresnak said. A sale-leaseback is a transaction where an owner sells their land and car wash building to a passive real estate investor, but then remains there and continues to run the car wash via a long-term, net lease agreement with the investor.
“Passive real estate investor demand for car wash sale-leasebacks has remained high, even in the face of rising interest rates. This has made sale-leasebacks a more attractive source of growth capital for operators in an environment where debt has become very expensive,” said Ceresnak.
For operators considering a sale-leaseback, he said having a clear story is key: a clear message about growth plans, company finances and what sets the brand apart from its competitors. The operator must also be thoughtful about the rent obligation that they are taking on and whether it is sustainable long-term.
“All operators should have a conversation with an experienced sale-leaseback broker about what their real estate portfolio is worth. Even if the operator decides not to pursue a sale-leaseback, they will still have a better understanding of their business’ total value,” Ceresnak said.
“High interest rates have created challenges in the real estate market more broadly, and the car wash space has not been immune to those challenges. But, as in other market cycles, participants will eventually adapt to the new landscape,” Ceresnak said. “If the level of demand that we have witnessed in the past few months for car wash real estate persists, I expect to see continued robust deal activity, stable cap rates and an eventual reduction in net lease car wash inventory in 2024.”