The triple net lease (NNN) car wash real estate market continued to mature and expand in 2022, with more than 245 leased properties changing hands for a gross market value of more than $1 billion, according to CoStar data and B+E research. The average sale price of a NNN car wash was $4,480,273 and deals traded at an average cap rate of 5.79 percent.
“We saw some very impressive trade points in 2022,” says Jim Ceresnak, a director at B+E who specializes in car wash dispositions and acquisitions. “Interest in the net lease car wash market remains high, and the robust deal activity we saw last year reflects that.” B+E advised both buyers and sellers on an estimated $100 million of NNN car wash property transactions in 2022.
While the 2022 transaction statistics for the car wash sector are impressive, they do not tell the full story of a market that faced headwinds as interest rates rose and as inventory surged in the second half of the year. With many buyers unable to secure financing at rates below 6.00 percent, many investors who would have otherwise purchased a NNN car wash to capture bonus depreciation sat on the sidelines.
The buyers who did participate in the market could be choosier, as the number of available NNN car washes ballooned to more than 160 properties by November 2022 — more than double the number of available properties at the end of September 2022. In one six-week period from October 1 to November 15, roughly 100 new car wash listings were brought to the market.
Nevertheless, dozens of NNN car wash transactions were completed in the last four weeks of 2022. And many were still executed at historically low cap rates as bonus depreciation-motivated buyers did eventually emerge. Institutions, such as REITs, stepped in to absorb some available supply at year’s end as well.
These year-end transactions helped to decrease the NNN car wash inventory going into 2023. But the influx of new supply shows no signs of slowing down. More than 35 new NNN car wash properties have been listed since January 1. As of January 31, 2023, just under 90 NNN car wash properties were listed with an average lease term of 18.4 years, an average asking price of $5,198,165, and an average asking cap rate of 5.77 percent.
WILL DEMAND OUTSTRIP SUPPLY IN 2023?
The key question for the NNN car wash market in 2023 is whether buyers will absorb the current and future supply of properties as the year goes on. Larger inventory is not unique to the NNN car wash vertical, as inventories surged during the same time period for convenience stores, auto parts stores, and pharmacies. The broader single-tenant net lease (STNL) real estate market saw a nearly 140 percent spike in new listings during the fourth quarter of 2022, according to B+E’s Q4 Net Lease Cap Rate Report.
Buyers have more NNN options to choose from overall. And if the first month of the year is any indication, the large amount of inventory is unlikely to decrease soon. But NNN car washes occupy a unique place in the broader real estate universe, which positions them to outperform even in a shifting market.
DEPRECIATION STILL MATTERS
As has been the case each year since the Tax Cuts and Jobs Act of 2017 made car washes eligible for a more generous bonus depreciation deduction, depreciation-motivated buyers were once again the most aggressive purchasers of NNN car washes in 2022. And while the bonus depreciation deduction has decreased from 100 percent to 80 percent this year, many buyers still plan to include car wash purchases as a part of their tax strategy in 2023.
“The impact of the deduction decreasing from 100 percent to 80 percent appears to be minimal,” says Ceresnak. “We are currently helping clients purchase car washes for tax purposes and have had conversations with several others who plan to purchase one or more car washes later this year. A car wash is still one of the best things you can buy to capture depreciation,” Ceresnak notes.
HIGHER YIELD THAN NNN ALTERNATIVES ATTRACTS 1031 BUYERS
Currently listed NNN car wash properties are offered at an average cap rate of 5.77 percent. Common net lease alternatives, such as credit-tenant convenience stores, quick-service restaurants, bank branches, and pharmacies have traditionally been offered at lower average cap rates and remain so currently. That helps NNN car washes stand out, particularly to 1031 exchange buyers, versus an increasingly crowded net lease field. It also sets up car washes to be one of the first beneficiaries of a decline in interest rates if one occurs later this year.
“Car washes will fly off the shelves if we see a decline in financing rates,” says Ceresnak. “Car wash assets will be some of the first to enjoy a better spread over debt if that happens. There is a lot of pent-up demand from buyers that simply can’t make the numbers work with rates at these levels,” adds Ceresnak.
IMPROVING CREDIT AND INDUSTRY GROWTH
Car wash operators continue to scale rapidly through a combination of greenfield development and M&A activity. An industry that had traditionally been dominated by local operators with only a few locations has seen an influx of private equity investment that has fueled growth and consolidation. As this trend is likely to continue with more private equity groups investing in car wash platforms each year, NNN car wash real estate assets should only become more appealing in the years ahead.
“The net lease car wash real estate space is becoming more and more investible as operators are getting larger and credit quality is improving,” says Ceresnak. “Investors continue to be drawn by the positive trajectory of the car washing industry and the strong business fundamentals of the modern express car wash.”
With offices in New York City, Chicago,Atlanta, Tampa, Charlotte, Orange County, San Francisco, and Dallas, B+E boasts the first NNN trading platform consisting of user-friendly dashboards, real-time predictive pricing and an AI-driven exchange — all leveraging the largest data set in the NNN industry. For more information, please visit http://tradenetlease.com.