Record sales made 2015 a great year to own an automotive dealership. Those sales supported healthy real estate valuations. This year, sales are forecast to once again be strong. But there are some signs that support for dealership real estate values may be weakening, says a new report by Greystone Valuation Services Inc.
“If I were thinking of selling a dealership, I would probably do it now rather than later, or maybe wish I had done it a few months ago,” Brad Carter, a principal and appraiser at Greystone tells Automotive Buy Sell Report.
To be sure, real estate prices in most markets are still holding steady or even increasing, he says. But Greystone is in regular communication with dealers and professionals in the buy/sell industry, and anecdotally it is hearing the upward trend is slowing and may level off completely.
Buoyed by the strong retail market, people weren’t focusing that much on the price of real estate last year, says Carter. But Greystone is hearing that 2015 profit margins were not as robust in all areas of dealership operation as those in 2014. That includes declining margins on new vehicles and a tougher environment in other dealership profit centers.
“I wouldn’t say there is much concern, but I am hearing that it is hard to generate as much return in those other profit centers as it was before,” he says. “Now that things are cooling off a bit, people are taking a more cautious look” at real estate prices.
The two most important factors in dealership real estate value haven’t changed: Location and image compliance are still the biggies.
A site near other dealerships and visible to traffic is still the most valuable, says Carter. But, as the report points out, technology such as goggles that allow you to take a virtual 360 degree look at a vehicle is chipping away at the traditional importance of location.
The internet has turned the importance of location on its head. Dealerships in locations that are only marginal by conventional metrics are able to be successful with a good internet strategy, says Carter.
Those same factors can make investment in image programs more risky. One of the most common changes a manufacturer requires is a bigger showroom. But if customers can look at many vehicles using virtual reality goggles, then that large showroom will be superfluous.
Nonetheless, manufacturers continue to push image programs, and most buyers aren’t looking to acquire real estate development projects, the report points out. With that in mind, make sure a property complies with manufacturer standards, or that the need for image compliance is reflected in the price, says Carter.
“Think of it this way,” he says. “The old saying used to be that the three most important things are ‘location, location, location.’” Now, maybe a more appropriate saying might be location, location, functionality/design!”
Another trend that stands to impact dealership real estate value, the report notes, is a move by some manufacturers to limit the number of franchises of any one brand that one party can own. That directly influences the real property component of a dealership enterprise because franchisees who already operate stores of a given brand are the most likely purchasers of a dealership property.
Interest rates are another unknown in the 2016 dealership real estate environment. Just a few months ago, it seemed rates would begin to rise incrementally. Now that is up in the air. If they do rise, it will increase flooring costs and pinch dealership profits.
“It is really hard to know where things are headed,” says Carter.
This year has started off with a roar, with a January SAAR of 17.5 million, according to NADA. In its January Market Beat publication NADA wrote: “We are still concerned about maintaining this sales pace, particularly in the longer term. But for now, let us all enjoy a great start to 2016.”
Take that cautionary note to heart if you are buying a dealership based on an assumption of increased sales.
Says Carter: “We had a lot of people buying properties in 2011 saying ‘ things will be a lot better than they are now.’ I wouldn’t buy property now in that same mindset. Before was a good time for speculating. Now is a good time for prudent investment.”
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.
