Institutional and Private Investors Go After Net Lease Car Washes

Interest Rates Will Impact Cap Rates

(excerpt)

Though industry experts anticipate that higher interest rates will impact cap rates on net lease car wash properties, most feel confident that transaction volume will continue to be strong as long as institutional capital continues to saturate the sector.

“Car washes are one of the most popular types of net lease investments,” says Jim Ceresnak, director with B+E Net Lease. “We continue to see interest from REITs, funds and individual investors that traditionally buy drugstores, banks and fast-food restaurants.”

Ceresnak and the B+E team closed seven net lease car wash transactions totaling $35 million during the second half of 2021. The transactions traded at cap rates ranging from 5.5 percent to 6.5 percent, with an average cap rate of 5.99 percent.

Many of B+E’s deals were driven by investors who wanted to take advantage of the 100 percent bonus depreciation deduction outlined in the Tax Cuts and Jobs Act of 2017, according to Ceresnak. However, this bonus depreciation will be available only until the end of 2022. After that, it decreases to 80 percent in 2023 and continues to decrease by 20 percent each of the following years until it completely phases out by 2027.

Cap rates for net-leased car wash properties located in the Sunbelt states, specifically in California, Arizona, Texas, Florida and Georgia, are typically the strongest, according to Austin Blodgett, senior vice president of investment sales for RealSource Group, a Newport Beach, Calif.-based real estate brokerage firm.

For operators with 10 units or fewer, cap rates range from mid- to high-6 percent, while operators with roughly 20 units garner cap rates nearly 100 basis points lower, depending on the location and lease term. The largest operators, which typically have the strongest credit and corporate guarantees, are trading in the low-5 percent range, and even into the mid-4 percent range, Blodgett says.

During the first quarter alone, The RealSource Group sold more than $51 million in express car wash sale-leasebacks. The deals, totaling 10 single-tenant net-leased sites throughout the Midwest and Southeast, were leased to two operators and showed strong sales and EBITDA. Blodgett notes that transactions represent the first sale-leasebacks for both owners, each of whom operates fewer than 10 units.

“We generated multiple all-cash offers … and procured a different buyer for each transaction to achieve the highest price possible,” Blodgett says, adding that the properties were existing locations with new 20-year leases, like the majority of the single-tenant car wash properties that have traded recently.

Many car wash operators have expanded their greenfield development programs in the last 18 months, Blodgett notes. “We can expect to see more new construction properties and pre-sales to be sold later this year in third and fourth quarter 2022, which is great news for investors,” he notes.

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