Investment Properties
In recent years, numerous national chains employed a sales-leaseback strategy by listing their properties on the market, sometimes even before completion, at cap rates ranging from 5.5% to 6%. This approach likely resulted in profits of approximately $2 million before the establishment’s opening. While this strategy was rational in a low-interest rate environment, it has become increasingly challenging for investors to evaluate future decisions, especially within just one year. This challenge arises from the current market conditions, which are now yielding cap rates between 6.25% and 6.5%.
Driven Brands
Take 5 Car Wash, under Driven Brands, revealed a strategic shift during their recent “Investor Day” presentation. COO Danny Rivera admitted to unsatisfactory performance and signaled the need for change. Consequently, they plan significant cuts in growth capital, suspending acquisitions and development until 2026. Rivera even suggested potential closures for underperforming locations. It’s vital to watch if other national chains follow suit, as Take 5’s halt in expansion, while good for market saturation, raises questions about oversaturation in certain areas.
Developing in Lower Traffic Counts
While development activity remains robust, the landscape has become more challenging. High interest rates and escalating land and construction costs have driven a 20% increase in development prices. Furthermore, the scarcity of prime roadways with substantial traffic counts has led national chains to actively pursue sites with less than 20,000 vehicles per day (VPD).
Gentlemen’s Agreement From 3 Miles to 3 Parcels
The days when it was considered a gentleman’s agreement not to construct another car wash within a three-mile radius of an existing one are behind us. National chains have shown no hesitation in developing right across the street or within three parcels of an existing car wash.
Accelerated Depreciation Phase-Out
The Tax Cuts and Jobs Act has a phased bonus depreciation reduction, starting at 80% in 2023 and declining by 20% annually until it vanishes by 2027. Consult a financial or tax advisor for specific inquiries. As this benefit diminishes, it will affect EBITDA multiples and cap rates, influencing today’s market values.
Where We Come In
Our car wash team thoroughly tracks the market to know where assets would trade in today’s evolving market. We know that each property is unique, and while these averages are an informed baseline, it does not always factor in real estate, location, and business potential, true values are obtained by looking at all factors and financials. Call or email to receive a detailed analysis of your car wash business and property.
Comments