Following a banner year in 2021, the future looks bright for triple-net leased car wash real estate in 2022. In the last 5 months of 2021 at B+E, we arranged 7 net leased car wash transactions for a collective total of more than $35,000,000. We executed those transactions at cap rates within a 100 basis point range from 6.50% to 5.50% and at an average cap rate of 5.99%. Of those 7 transactions, we executed 5 at a 6.00% cap rate or lower. Our final 3 transactions of the year were all executed below a 6.00% cap rate.
We witnessed cap rates decline in the market for high-quality car wash assets consistently throughout last year, with a sharp move lower occurring in the last quarter of the year. In some cases, we saw cap rates for similar tenants in similar markets drop by 50 basis points or more in a matter of weeks as supply dwindled, and investors scrambled to secure properties before year-end. Despite some of the year-end fervor abating since the start of the new year, there is no sign that this market will cool off soon.
Last year’s rally was driven largely by two factors – the first being unrelenting demand from depreciation-motivated buyers, which we describe in more detail below. A more important and equally impactful driver was the increased acceptance by the NNN investor community of net leased car washes as a viable alternative to more traditional net leased retail assets such as QSRs, pharmacies, and dollar stores. This secular shift in investors’ attitudes should support car wash pricing for the long term, even if depreciation-motivated purchases become less numerous when tax laws change at the end of this year. For now, both influences are still very present in the marketplace and should contribute to another explosive year in this space.
What are depreciation-motivated buyers, and how are they impacting the car wash market? Depreciation-motivated buyers seek to purchase net leased car washes specifically to take advantage of 100% Bonus Depreciation. The Tax Cuts and Jobs Act of 2017 (TCJA) increased the Bonus Depreciation deduction for property improvements from 50% to 100%. Importantly, however, the 100% Bonus Depreciation deduction will only be available through the end of 2022. In 2023, the deduction decreases to 80% and continues to decrease by 20% each following year until it is completely phased out by 2027.
“In many cases, car washes are eligible for the 100% Bonus Depreciation deduction in year one of ownership. Depreciation-motivated purchasers of car washes generally seek to offset significant capital gains or other passive income on their tax bills with the generous Bonus Depreciation deduction that car wash ownership affords them,” said B+E broker, Jim Ceresnak. “I’m not qualified to speak on the more specific nuances of the TCJA, so investors should always consult a tax professional before making their investment decisions.”
In our experience, we’ve seen these buyers consistently pay the highest prices for high-quality car wash real estate. As 2022 is the final year that taxpayers can take advantage of the 100% Bonus Depreciation, we expect these investors to be an even stronger force in the car wash market in the months ahead.
“We’ve had conversations with several buyers seeking to secure car wash properties as early as possible in 2022,” Jim continued. “They’re hoping to avoid another mad scramble at the end of this year.”
A broader acceptance by the NNN investor community of net leased car washes as an attractive alternative to other net leased assets was the second significant development that we saw in the market in 2021. The successful Mister Car Wash IPO in June 2021 helped to pique interest in the space. The US car wash service market size was valued at $14.21B USD in 2020 and is expected to expand at a compound annual growth rate of 4.8% through 2028, according to Grand View Research Inc. With new operators entering the space every day and existing operators growing at a breakneck pace, we expect the market for net leased car wash real estate to expand and deepen in lockstep with the industry.
We’ve also witnessed new investors drawn by car wash properties’ relative value versus other net leased assets. Cap rates have plummeted over the past 2 years in more traditional net lease verticals, such as convenience stores, QSRs, pharmacies, and dollar stores. While car washes have benefitted from the broader market rally for net leased assets as well, they typically still trade at more attractive cap rates than other retail alternatives – a gap that is quickly narrowing.
As an increasing number of investors are now looking into car wash real estate, they are becoming more familiar with the modern car washing business model. Modern operators focus on building and operating express conveyor washes in highly trafficked areas that require minimal staff. In many cases, these businesses are generating more than 50% of their revenues from subscriptions or memberships. Few, if any, net lease tenants run businesses that are as well-positioned for success in a post-COVID world. As this business model becomes more widely understood, and as operators continue to get larger through M&A, we expect investor interest in net leased car washes to increase even more dramatically in the months and years ahead.
B+E continues to be extremely active in the car wash space, with 3 active listings and several off-market opportunities available. Using our industry-leading, real-time data, we can observe trends more closely, price assets more accurately, and ultimately achieve better results for our clients. If you are considering selling or buying a car wash, or simply have questions about what we are observing in this arena, contact us with the form below.
