You can’t pick-up a magazine or newspaper today that doesn’t warn that the upcoming onslaught of self-driving cars will change the world’s driving (and parking) habits forever. Urban parking garages will be extinct in a few years? While the true impact of a 100% self-driving society is many years away, there are some other current trends that are affecting the long-term value of urban parking garage investments today.
That being said, there are positive dynamics that cause me to be bullish on urban parking garage investments.
Third-Party Ride Share Services
The advent of third-party ride sharing services such as Uber and Lyft have had a measurable impact on auto usage and parking demand. Although many of us in the parking industry are trying to come up with an exact measure the influence these ride-share services will have on future parking revenues and growth, taxi cab usage and rental car companies appear to have borne the initial brunt.
Event, on-airport, and off-airport parking revenues have not been immune to this new parking/driving dynamic either. Additionally, valet revenues at urban garages are now trending lower, especially if those facilities have restaurants and hotels functioning as demand generators.
Real Estate and Parking Taxes
While the emergence of the driverless car and third-party ride sharing services is forcing parking garage owners to come up with new design, revenue and marketing strategies (including the growing acceptance of third-party aggregators), the biggest detriments to the long-term value of an urban parking garage investment are rising real estate and parking taxes.
Federal, state and municipal agencies are faced with widening budget deficits caused by under-funded pension liabilities and decreasing financial support from federal and state budgets. This has led to rising real estate taxes and has forced municipalities to pursue other sources of revenue such as the implementation and/or an increase of parking taxes, which are typically a significant percentage of gross parking revenues.
Increasing real estate and parking taxes are the biggest impediment to the long-term value of your parking garage investment; not driverless cars and third-party ride
sharing services.
Bullish on Urban Parking Garage Investments
While there are certainly headwinds facing the parking industry, there will always be some select, unique opportunities to invest in urban parking garages. Well-located stand-alone garages will always have a future, if not as a central facility to park all those driverless cars in the future, certainly as a redevelopment site.
The recent boom in new construction in many first and second-tier markets has eliminated a significant amount of surface and garage parking spaces to allow for buildings with more density. Developers aren’t required to replace all the parking spaces that they’ve eliminated. In some areas, urban planners and local economic development officials have adopted a strong sustainability and transient-oriented mission statement where new zoning codes no longer require that parking be built as part of a new development — and if parking is required, it’s at much lower ratios. New buildings are being built along with new parking demand generators, but with less or no parking. Increased demand and less supply; that’s a good thing isn’t it?
Lenders now understand this asset class and long-term, fixed-rate, 65% loan-to-value financing for decent parking properties is much more readily available than it was 15 to 20 years ago. Although 10-year interest rates are rising, rates are still at low levels. Parking technology continues to evolve which assists owners and operators in reducing labor costs and increasing profit margins.
One caution ahead: It remains to be seen if owners will be able to pass-through increasing real estate and parking tax burdens.
Although not for the faint of heart, I remain bullish on urban parking garage investments. Well located parking garages are not going extinct and deals can be bought. We are just facing new challenges in how to underwrite future rate and income growth, which ultimately affects the value of the garage today. The expertise of those with a long-term knowledge of parking industry operating and investment fundamentals should be relied on as a valuable resource if part of your future investment strategy includes buying parking assets. The huge prices that have been paid for urban garages in the past 36 months are a thing of the past, but there will continue to be some exciting opportunities ahead.
Keith Bawolek is the managing principal and CEO of Vermillion Realty Advisors, a real estate and investment firm specializing in parking. He can be reached at kbawolek@vermillionrealty.com.
