Parking Lots Offer Safe Haven for Real-Estate Investors
Rob Reuteman, CNBC
If you’re scouting the ravaged commercial real estate sector for a safe haven, parking lots may be worth a look.
If you can find one to bid on before it’s snatched up, that is. And if the price isn’t already well out of your range.
“A surface parking lot offers a good rate of return and its rewards are as close to being recession-proof as you’re going to get,” says Ross Moore, chief economist for Boston commercial real estate firm, Colliers International.
“The older ones are nice little cash cows with relatively little maintenance,” adds Moore, who has authored an annual North American Parking Rates Survey for the past ten years.
Says the Alternative Asset Alliance newsletter, “Investors are beginning to realize that a well-located urban parking facility offers stable, long-term revenue growth and that this asset class is becoming an important part of any diversified realestate portfolio.”
The numbers overwhelmingly favor the US parking industry, which grosses some $25–30 billion annually, according to the International Parking Institute.There are nearly a quarter-billion registered U.S. passenger vehicles, which remain parked 96 percent of the time, IPI says.
But two problems loom for the average investor wanting to get into the parking business, says John Roy, co-author of The Ultimate Parking Business Buyer’s Guide.
“Not many show up in real estate listings, and the ones that do are very expensive and usually out of reach for smaller investors," says Roy.
But with the recession pummeling the price of almost all real-estate assets, “This is the best time to get into parking market," he says.
Roy’s online newsletter offers a simple starting point: Do an online search for the term “parking lot for sale,” and maybe add the city you’re eyeing.
A recent search offered slim pickings. There’s a corner, paved lot in downtown Memphis “next to a famous bar/grill” and “near many amenities.” Price: $13,000.
A half-acre paved lot in Cook County, Ill., is selling for $724,000. The much-higher asking price may be why it’s been online for more than three months.
Another, more traditional approach is to find commercial brokers who specialize in parking lots.
Wade Fletcher and Steve Roesinger do just that in Denver for the Newmark Knight Frank Frederick Ross Capital Group. Roesinger has been buying and selling parking lots for nearly 40 years.
He says he’s on a first-name basis with local lot owners he’s been calling on all that time.
“There are a limited number of surface lots out there, but as with any real estate, sometimes people don’t know they want to sell until you present them with an offer,” says Roesinger. “Other times, an illness, a pending move or a financial reversal may trigger a sale. “
While $100,000 might get you a small lot “on the periphery of downtown,” a million-dollar lot will net a profit stream of at least $45,000 a year after taxes, insurance, debt service and on-site operation services, he says. That's a 4.5-percent annual return.
“Find somebody to do it for you and it’s not a complicated business,” Fletcher said. “Lots are pretty easy to run, relative to a lot of other commercial real estate products.”
Beware of 'Leakage' in Parking Business
Other experts would beg to differ.
“It sounds like an easy thing to do, but it’s extremely difficult to make it profitable,” says John Van Horn, editor of Parking Today magazine. “It’s like buying a bar. If you don’t know how to run it, you’ll lose money. Many companies have gone broke. It sounds like a lot of cash, but there are many ways for it to disappear. You’d better have someone who knows about it to work with you as third-party investor.”
In the parking business, disappearing cash is known as “leakage.” Ten years ago, when parking was largely a cash business, 10 percent to 40 percent of the revenue taken in at a lot never made it to the bank, Van Horn said.
Some, not all, was stolen, though. “A lot of it is incompetence. But tens of thousands a month can disappear, and that’s a problem. “
Even today, with many lots offering payment by credit card or even cell phone, Van Horn estimates the parking business is still 60 percent cash-driven.
Larry Cohen, executive director of the Lancaster,Pa., Parking Authority and a member of the Advisory Council of the International Parking Institute, agrees.
“People don’t realize how sophisticated a business it is to operate,” he says. “Many surface lots, if they’re not run as a true full-time business, underperform.”
If the parking cashier is driving nicer car than you are, there might be a problem, Cohen said.
Do Your Homework First
Cohen advises that anyone interested in buying a lot “take the time to do the research, and learn how to manage revenue, construction and design.”
Attend a parking industry convention and ask a lot of questions, he adds. IPI is holding one next June in Phoenix, while Parking Today has another slated for March in in Chicago.
Roy strongly urges any new owner to operate the lot ”hands-on” for a year or two before turning it over to a third-party operator.
“Most people are able to do it,” he says. “It gives them ability to learn the industry — the ins and outs, peak hours, what works and doesn’t, what labor they’ll need. Then, if they decide to turn it over to an operator, they’ll be able to spot leakage and there’ll be no surprises.”
Roy, who also works as a consultant for prospective lot buyers, epitomizes the success a novice can attain. In 2005, when he was studying for his MBA at Notre Dame, he noticed on football game days there was little parking near the South Bend, Ind., stadium. He noticed people parking cars all around their houses, and he noticed the houses weren’t worth much.
So he began buying up properties, tearing down the houses and turning them into dirt-and-grass parking lots. Eventually he sold seven lots to developers who built townhouses and student housing.
Seven years later, Roy and some partners are developing a three-acre parcel of raw land into a parking lot adjacent to a the new $340 million San Bernadino County courthouse in California.
He read about the new courthouse in the paper, and quickly scooped up a parcel of raw land adjacent to it “before it became a big deal.”
Roy outlined several paths for the would-be investor. A buyer with access to $500,000 to $3 million could buy a good existing lot that would generate positive cash flow as they paid down debt.
Another angle, he says, is for smaller players without a lot of money — $250,000 or less.
“We specialize in lower-end investments,” says Roy. “There are cheaper ways to get in and buy a lot.”
Look for opportunities in your area, he advises; if you hear or read about a significant new development, start looking for raw land near it.
“Know your area, listen to the news,” he says. “If something big is going to get built, they’re going to need parking. You get to where everything you read about is a potential parking opportunity. It’s amazing how you look at things differently.”