By Brad Carter, MAI, CRE, CCIM, Greystone Valuation Services
In one dealership appraisal I worked on, the real estate was under contract at a given price and the business was being sold at a much higher price. The bank financing the real estate asked for the appraisal. The value turned out to be less than the bank had anticipated so it financed at a lower amount and the buyer had to supply a larger amount of money. That is one illustration of the importance of knowing what your real estate is worth.
If you own an auto dealership, and also the property on which it operates, you are a real estate investor whether or not you ever intended to be. Even if you lease your property, committing to the substantial investment of regular rent payments qualifies you as being in real estate. Welcome to the world of real estate investment.
There is a distinction between the market for automobile dealerships and the market for the real estate from which dealers operate, but the two are intertwined closely enough that it is important to understand how changes in one can impact the other. Take unit sales. How many cars a dealership sells doesn’t directly relate to the real estate appraisal but it does influence it as it can show that the dealership is in a proven location for a particular use.
Like most businesses, real estate runs in cycles. The auto industry, like many industries, was flying high around 2006-2007, on the brink of disaster in 2008-2009, and is now flying high again. The market for the real estate that supports automobile dealerships has run a course that is similar – but not identical. It is more tied to the health of the economy as a whole.
As long as the entire economy does not experience anything better than the current lukewarm growth demand for land will be limited. This limited demand will keep the brakes on the value of auto dealership properties.
Real Estate Cycles
The recession hit in 2008, capped by the financial crisis late that year. By 2009 many dealerships were closing their doors as victims of industry consolidation. The inventory of “dark” (or closed) dealerships grew, and many reverted back to their lender.
By late 2009 the number of bank-owned dealerships on the market grew, and by 2010 some described the rate at which foreclosed properties were being offered for sale as a “flood”. Supply and demand being what it is, auto dealership real estate values plummeted in most markets.
Fast forward to 2014. Auto sales are high, even by pre-recession standards, and the value of dealership businesses are described by many as being at an all-time high. If the business of selling vehicles has spiked, then surely the value of the real estate needed to sell vehicles has also spiked – right? The answer is, it depends and varies by geography, but probably not.
The cost of new construction –which may be the same or less than the cost of the existing facility — often serves as an inherent constraint on the value of real estate. Dealers will generally not pay much more for existing property than the cost to buy a site and construct their own building.
Though the auto industry is booming, that alone is not enough to boost the value of the property. Many other industries are not flourishing, and that is important because it means that in most areas the price of land has not recovered to pre-recession levels.
Given that the land is often a large component of a dealership’s real estate value, auto dealership properties in most markets still cannot be sold at prices that rival the peak of the last real estate cycle.
To sum all this up, many auto dealership businesses are seeing their value increase rapidly while the real estate they occupy is gaining value at a far less dramatic pace. For the value of the real estate to show the same growth as other aspects of a dealership, other industries will need to experience the prosperity that auto dealers are now enjoying.
That will cause land values to rise – which is necessary so that new construction will no longer serve as a cheaper alternative than paying for the existing dealership real estate.
Brad Carter works at Greystone Valuation Services, a real estate appraisal and counseling firm. He can be reached at bcarter@greystonevs.com, or 678-904-9822.
