Despite the current state of the economy, pundits continue to predict unprecedented growth for the car wash industry through 2025 and beyond.
Arguably, this outlook should continue to pique the interest of private equity firms looking for a hedge against inflation and/or an alternative to traditional net lease retail investments.
If so, we should expect increased competition for retail space. According to real estate experts, the demand for retail space is derived from the demand for retail goods and services.
Here, demand for space is a function of the rental price of retail space and the level of retail sales. The demand for retail sales is a function of relative prices and demographic factors.
Supply of space is a function of rental price of retail space and relative cost of producing retail space.
There are a number of methods that can be used for selecting areas for retail development. Some of these follow.
Ratio analysis begins by calculating a market ratio and city ratio. Market ratio is total square feet of existing retail space in the market divided by population in the market. City ratio is total square feet of existing retail space in the city divided by city population.
If the market ratio is greater than the city ratio, then the market may be over-saturated. If the market ratio is less than the city, then the market may support additional retail space.
With per capita sales technique, demand for retail space is calculated as the product of square-feet requirement per capita and population in the subject property’s primary trade area.
Square-feet requirement per capita is calculated by dividing per capita demand by sales per square foot needed to attract a new retail facility to the market.
With buying power method, retail space demand is calculated as a function of households in the market, median household income, and capture rate of household income by retail facilities divided by square-feet requirement per capita.
Another method recommends developers add retail space in those areas where expected sales estimates exceed actual sales. This method depends on estimates of potential market share and probable income growth.
There are special considerations in using such methods. For example, if the market has a higher income level that is substantially greater, the market may be capable of supporting extra retail space.
Pent-up demand (e.g., post-pandemic) and extent of subscription programs and recurring revenue generated may cause ratios to vary from area to area.
On the supply side, researchers find cost of producing space is most related to variations in price, land availability, land use regulation, and cost of capital.
Here, price and land availability were found most important. We see this in the location strategies adopted by consolidators. Here, car wash developers have mirrored the brick-and-mortar strategy of the quick-serve restaurant and convenience-store industries.
Here, best location means large sites in high traffic locations that have excellent visibility, great access, and robust surrounding development. Today, a first-class facility is a prerequisite as is the prime real estate to place it on. It is not uncommon for developers to pay $1 million per acre or more. Consequently, the cost to produce space continues to increase.
Based on what I’ve seen over the last year, the typical all-in cost to build a conveyor car wash was between $4 and $5 million. The highest was $7 million.
In this range, buildings measure between 3,750 square feet and 4,500 square feet. So, if typical sales are $1.75 million, sales per square foot needed to attract a big car wash to the market would be $389.
Conversely, recent acquisition financial data shows average sales price of $1.6 million or $364 sale price per square foot (implies 4,400 square foot building) for washes with average net operating income of between $150,000 and $160,000.
This underscores the big upside potential of acquisition. As for the risk of building a new store, it will probably become greater as prime sites become scarcer and more expensive and the lag factor in producing space tempts new entrants to squeeze in.
Retail Space Demand and Supply: An Integrative Model, John D. Benjamin, G. Donald Jud, and Daniel T. Winkler
The Supply Adjustment Process in Retail Space Markets, John D. Benjamin, G. Donald Jud, and Daniel T. Winkler
Market Analysis for Real Estate Concepts and Applications in Valuation and Highest and Best Use, Stephen F. Fanning