By Alysha Webb, Editor & Publisher
There may be plenty of buy sell activity in the dealership world, but there seems to be less enthusiasm, says Brad Carter, a principal at Greystone Valuation Services. Buyers are getting more realistic about pricing, he says. But, they may be ignoring long-term trends that have big ramifications for dealership valuation.
“This is more a market for realistic sellers,” Carter tells Automotive Buy Sell Report.
Greystone Valuation Services focuses on real estate appraisal. Its people regularly interview brokers, operators, and lenders. It recently issued its year-end 2016 Automobile Dealership Report.
They found buyers to be more focused on the facts than the fantasy, says Carter. By that, he means a seller “whose pricing reflects market realities instead of a hope to find someone who is more about eagerness than prudent investing.”
The slowdown in sales growth is a major factor behind that growing realism, he says. In 2016, dealers sold a record 17.4 million new cars, according to NADA. But that was up only slightly compared to the previous year. This year’s sales are expected to drop slightly compared to last year to 17.1 million.
That plateau “sucks a lot of energy out of demand,” says Carter. That doesn’t mean it is a bad time to sell, at least not for everyone. For those for whom selling make sense, for reasons related to succession or other factors, this is a good time, says Carter.
But, the way a deal is structured can be impacted by the plateau. Dealers are seeing margins tighten, says Carter, and “any squeeze on profits lessens the propensity to buy the property” as part of the buy sell.
Real estate is a large part of any dealership buy sell, though most of the dealers he talks to aren’t interested in being in the real estate business, says Carter. “Most dealers I talked to are interested in selling cars and not much else,” he says.
When they look to acquire a new dealership, they don’t want to get too involved in the real estate side of the deal, says Carter.
To be sure, there are ways to acquire a dealership without taking on the full real estate cost. The property could be on a long-term lease and a buyer could assume that lease, or do a sale leaseback with a third party.
But the dealership real estate market is, in the longer term, heading for a change, and dealers should be thinking more about that trend, says Carter.
Due to the growing prevalence of online sales real estate will become a less and less important part of the value of a dealership going forward, he says.
“Prime location was key,” says Carter. “Now people pick their car before they pick their dealership. There isn’t a need for quite as prime a lot as before.”
That means that there might be a better use for the real estate in those prime locations than a car dealership, he says.
“I think there is a resistance to acknowledge that the real estate isn’t as big a part of the deal as it used to be,” says Carter. “That would make sense, but I am not seeing many people thinking about it.”
Factory image programs continue to dominate the real estate component of automotive dealerships but “perhaps OEs will become more flexible,” says Carter.
The auto industry should, at a minimum, consider the book store cycle, he says. First mom and pop bookstores were run out of business by chains that built huge facilities that needed to be around for a long time to pay off. Then the internet came along and devastated their business.
“The booksellers didn’t get the message,” he says.
The long-term implications of the changes in the automobile retail experience’s impact are a fall in dealership valuation, says Carter. That won’t happen quickly because franchise laws give dealers some protection. But when it does, the impact will be large.
“I think it won’t seem to happen very quickly until it starts to happen,” he says. “It will seem like off in the distance until it is on top of everybody.”
Brad Carter is a principal at Greystone Valuation Services, a real estate appraisal and counseling firm. He can be reached at bcarter@greystonevs.com, or 678-904-9822.
