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Why Car Washes Might Actually Be Great Real Estate Investments

Apr 26, 2021 by Marc Rapport
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In the city where I live, it seems when a smallish piece of vacant land along main drags of commercial real estate gets developed these days, it will most likely be one of two things: self-storage or a car wash.

If you've noticed that in your neck of the woods, too, it's probably not your imagination. Here at Millionacres, we regularly chronicle the continued popularity of self-storage and the real estate investment trusts (REITs) that offer easy entry into that market. Car washes are enjoying many of the same dynamics powering their growth.

Coming clean in a fragmented business

From the direct-investment perspective, car washes share some characteristics with self-storage businesses: relatively low cost of entry and management expenses, for starters, and car washes take up even less ground space.

But while specialized REITs play a major role in the storage space, they don't in the car wash biz. According to the International Carwash Association (ICA), the majority of car washes in the United States are owned and operated by small- to medium-sized independent companies.

As for the car washes themselves, there are three main types: the conveyor style that pulls the car through, the in-bay types where you sit there while mechanical brushes do their magic, and the totally self-serve ones.

The ICA says companies of five or more locations own only about 15% of those conveyor locations, with the largest operator owning only about 2%.

"Fragmentation is even more significant in the self-service segment, while convenience and petroleum retailing organizations typically control larger networks of in-bay automatic locations," the ICA says on its website.

In car-crazy America, car washes have been a growing business for decades. "In the United States, the percentage of drivers that report most frequently washing their vehicle at a professional car wash has increased from approximately 48% in 1994 to more than 77% in 2019," the trade group says.

In early 2020, the trade group determined that there were 62,668 total locations in the United States, comprising 28,999 in-bay automatic operations, 17,487 conveyor operations, and 16,182 self-service operations.

The business also has proven to be profitable, by and large -- with retail sales of about $15 billion a year, the ICA says -- and apparently recession-proof, even as people stayed home during the pandemic. (Cars gathering dust and pollen in the driveway need to be cleaned, too.)

If that's not appealing enough: "What's more, the fee-simple, triple net leases that have become increasingly standard for car washes means little risk for landlords and lots of benefits, including through their taxes," the Commercial Observer says in an April 21 article titled "Car Washes Shine as CRE Investment Coming Out of COVID."

Triple net leases, of course, are a popular feature for REITs, passing the responsibility for property taxes, building insurance, maintenance, and utilities on to the tenant.

The Commercial Observer article says car wash leases also tend to be 15 to 20 years in length, with rent coverage ratios at least two times EBITDA.

The Millionacres bottom line

Another obvious attribute of the car wash business is its immunity to e-commerce. No one's washing the family people mover online. All these factors combine to make a successful car wash business what the Commercial Observer article calls "an unusually durable commercial real estate asset."

Of course, aspiring owners of such "an unusually durable" asset will need to do their due diligence around the location, market, and financing versus expected return, but it does seem like in the right situation to be an opportunity with some shelf life.

An example: About 25 years ago, the CFO of a successful local firm where I was working decided to try his hand at CRE investing and built a franchised little self-serve car wash on a main road here in Columbia, South Carolina. I don't know if he still owns it, but the car wash is still there.

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