A real estate bubble is an economic phenomenon that occurs periodically in markets typically following a boom period. The bubble forms while supply is still increasing. In other words, demand decreases while supply increases, resulting in a fall in prices.
Pervasiveness of risk throughout the system is triggered by losses suffered by property investors and owners, mortgage lenders, and mortgage investors.
The last housing bubble affected over half the country. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2012.
On December 30, 2008, the Case–Shiller home price index reported its largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble was considered an important factor in the 2007/2009 recession.
Just as many people bought houses they couldn’t afford, irrational exuberance led many investors to over-build car wash projects or build them where they shouldn’t have.
Then when adjustable mortgage interest rates skyrocketed and consumer demand tanked, real estate prices plummeted. This accelerated the foreclosure cycle and panicked banks and lenders.
Subsequently, it became more difficult for developers and nearly impossible for mom and pop to borrow money for car wash projects. How the market has changed over time.
Back in early 2000s valuation multiples for self-service washes were between 4.0 and 6.0 times income whereas multiples for conveyor washes were between 8.0 and 10.0 times earnings.
After the bust, multiples for self-service and conveyor dropped by 25 percent and 35 percent, respectively.
Since then, self-service values have remained depressed whereas valuation multiples for conveyor now exceed 2000 levels, which has given rise to an increase in merger and acquisition activity.
According to George Odden with Commercial Plus, over 200 car wash properties were purchased by top consolidators alone in 2017. Odden attributes this increase in activity to improved economy, express business model, availability of capital, and fragmentation of the industry.
According to Jeff Lefko, senior associate at the Hanley Investment Group, washes were typically sold with the business and equipment to owner/users looking to start their own business or in a net lease portfolio to real estate investment trusts.
Today, however, Lefko says given the premium investors are willing to pay it might make more sense to put in place a long-term lease and sell off the real estate to a private investor looking for a fixed return.
For example, between 2012 and 2017, there were only two single-tenant, net-leased car wash properties sold to individual buyers (CoStar). Between 2017 and 2018 there were 12.
As of April 2018, there were 16 washes on the market or in escrow (Loopnet). One quarter of the properties listed has a lease guaranteed by a dominant regional operator or large firm.
Since valuation multiples have exceeded those reached during the last car wash boom, does this signal an upcoming burst of the bubble?
According to analysts at Colliers International, gains in industrial and multi-family housing have offset losses in lodging, office, and retail sectors making a real estate market crash less likely.
Moreover, car washes are different from many other types of retail businesses because you can’t get the product online. Customers must drive to the wash to get services. And there is plenty of fuel to burn.
According to Odden, car wash M&A volumes have been trending upward and reached over 1,000 transactions in 2017, this is up from 500 in 2008.
Equipment manufacturers have ramped up production capacities and attendance at expositions and road shows is robust.
How long it will remain this way is anyone’s guess. Arguably, a downturn in real estate is inevitable but it doesn’t appear that one is going to occur in the car wash industry anytime soon.