With the wild fluctuations in the stock market, many investors are fleeing to alternative investments in defensive real estate sectors. While the traditional commercial real estate types of multifamily, office, industrial and retail get the most attention, I have found the most success investing in niche real estate sectors. Mobile home parks, self-storage and parking lots are all recession-resistant niche real estate investments you may want to consider when seeking to diversify your portfolio. Here’s a primer on the unique niche of parking lot investments.
1. A Shrinking Supply Of Parking
There are more than 40,000 parking facilities in the country, but that number is shrinking. My analysis of Census data from 2008-2017 shows a 7% decline in the total number of parking facilities. Why is that? As the population grows, cities become denser, and land must be repurposed to fit the needs of the larger population. Owners of real estate in desirable areas will benefit from a shift of this land to a higher and better use. Parking is often the least valuable zoning in a downtown central business district (CBD), so these parking spaces are the easiest to replace.
2. A Growing Demand
As our population grows, demand for parking grows. Parking demand is directly related to the transportation habits and demographic breakdown of our country’s population. When millennials establish households, they need somewhere to park their cars. Today, there are more than 275 million vehicles on the road, and the Center for Automotive Research estimates roughly 17 million vehicle sales each year (download) through 2025. In addition, the demand for parking is somewhat inelastic. Do you stop driving your vehicle when the price for gas jumps 15%? Probably not. Consumers have a relatively constant need for their vehicles and will therefore almost always require parking services. Vehicles have become a necessity, so we will continue to see a growing demand for parking.
3. Stable, Recurring Income
In parking, asset owners have the option to either operate the facility themselves or lease their parking facility to a third-party operator. I recommend signing favorable long-term, 5- to 10-year leases with credible third-party operators. This type of lease is most commonly found in NN or NNN investments, such as Walgreens, CVS, Dollar General, etc. In addition to the base rent, these leases contain annual rent increases tied to the consumer price index (CPI), which protects the investment from inflation risk. These long-term leases ensure parking investments provide stable, recurring income for many years into the future. The visibility of income over the next decade provides safe, predictable cash flow (and clarity) for the owner.
4. Location, Location, Location
Location is everything in real estate. You can find a great asset, but if the location is inferior then you are more than likely stepping into a high-risk investment. By virtue of already having such demand that customers are willing to pay for parking, demand is especially likely in a beautiful downtown central business district or high-demand tourist area where land is at a premium.
In addition, parking is perhaps the least valuable zoning in a given area. Which brings more value to the local economy: a 100-space parking lot, or a 30-story high-rise? Because parking facilities are usually the least valuable zoning in the immediate vicinity, parking lot investors adhere to the age-old principle of buying the worst house on the best block.
5. Dynamic Pricing
With recent advancements in technology, owners can leverage sophisticated third-party operators who can institute a dynamic pricing model to maximize revenue. With this technology, operators can modify the price for parking to reflect the changing market conditions. The higher the demand, the higher the price. This ensures the parking facility maximizes revenue during the workday, at night, over the weekend and for special events.
Parking lots are extremely low maintenance, providing an alternative to the typical tenants, trash, toilets and termites you find in other niches. In a surface parking lot, you typically have nothing other than asphalt, parking lines and bumper blocks. Furthermore, parking facility operators provide a comprehensive, turn-key package to parking owners. They are responsible for providing and supervising all personnel necessary to facilitate daily parking operations. They collect and deposit all parking revenues, restripe facilities as necessary, maintain parking equipment, perform marketing to draw customers and much more.
7. Recession Resistance
Parking provides stable, predictable and recession-resistant income because the demand for parking facilities is often spread among numerous different sectors of the economy. Parking facilities are often in a downtown CBD where they serve multiple businesses: sporting venues, municipal buildings, offices, restaurants and entertainment. For this reason, operators are often willing to sign long-term leases for the right to run parking operations in a parking lot or parking garage.
8. Covered Land Play
An investment in parking can be viewed as what’s referred to as a covered land play. Parking lots are often redeveloped into higher and better use: think high-rise condos and office buildings in urban environments. The covered land play is an investment strategy that mitigates the downside risk by generating positive cash flow today while providing the potential for outsized returns through redevelopment in the future. The current income “covers” carrying costs and provides a secure return in the short to medium term. The “land play” suggests there is upside potential via redevelopment into a higher and better use in the long term. Because parking is often the least valuable zoning in a central business district, these assets (and their associated air rights) become prime candidates for redevelopment in a future real estate bull market. When the development cycle turns and builders consider options, they call owners of parking facilities first.
With the wild fluctuations in the stock market and unpredictability in many cyclical real estate sectors, investing in NN and NNN-leased parking facilities can offer reliable, predictable income for decades, regardless of the economy.