Sellers of Auto Dealership Property in Drivers Seat But Strong Demand May Be Peaking

Posted on May 21, 2014

As real estate brokers who handle automobile dealership property sales can attest, investors and car dealers have been clamoring for lots, causing the pace of auto dealership sales to accelerate at double-digit rates since 2009.

In addition, the number of new auto dealerships is increasing again following fuller economic recovery. According to The National Automobile Dealers Association, there were 17,635 franchised automobile dealerships as of Jan. 1, 2013, which was up from 17,500 from a year earlier. (Newer numbers are to be released in July).

Those numbers don’t include the approximately 37,026 independent used vehicle dealers in the retail automotive industry.

Auto Dealers Enjoying Record Profits

“Auto dealers are enjoying record profits, new vehicle sales are strong and rising, and the economy is improving. Those factors are driving (dealership) valuations to all-time highs. It’s an ideal environment for sellers,” said Alan Haig, head of Haig Partners LLC in Fort Lauderdale.

Haig, who led the automotive retail practice for the investment banking arm of The Presidio Group LLC and was head of AutoNation’s corporate development group, is considered a leading authority on dealership valuations.

Public investors committed more than $1 billion to auto dealership acquisitions for the first time since 2006. The value of public dealerships’ acquisitions climbed 16.5% from 2012 levels while the number of private transactions rose 14%.

According to CoStar COMPs, the sale of auto dealership properties trading for $1 million or more has grown steadily since 2009 when sales totaled about $800 million. In 2013, sales hit $3.25 billion. The number of dealership sales has doubled in that time frame.

The buy-sell market is expected to remain relatively robust for several reasons.

“Certainly the recovery of the economy, as evidenced by year-over-year growth in automotive sales, has given dealer groups both large and small access to more funds that can now be used to further their growth strategies,” said Jodi Meade, principal of Avison Young in downtown Los Angeles and who specializes in automotive retail properties. “There is a greater focus and desire to own the underlying real estate their dealership buildings are sitting on and remove themselves from the uncertainty of market conditions at lease expiration and/or renewal.”

The most active players in the marketplace are still the dealers themselves motivated by still somewhat reasonable market pricing, added Meade.

“There still tends to be limited debt resources for investors to purchase dealerships on a net leased basis since the downturn in the economy, although there are a few of these transactions taking place,” she added.

For now, sellers’ advantageous position doesn’t appear to be deterring buyers, according to Alan Haig.

“It’s a low-yield world with few attractive alternatives for investment capital. Even with high purchase prices, dealership acquisition returns are very compelling,” said Haig.

Private buyers are very active and interested in both single-point stores and larger groups. Also, with one exception, every publicly traded auto dealership retailer has publicly expressed a desire to grow through meaningful acquisitions, Haig said. Many dealership groups have the capacity to make commitments of $100 million or more, with several capable of $500 million deals.

Also, the range of attractive brands is broad: the 10 largest dealer groups acquired 16 different franchises in 2013.

Could Car Dealership Sales Decelerate?

At the same time that demand for dealerships is high, investors are carefully monitoring a new challenge to the traditional dealer sales model posed by premium electric vehicle manufacturer Tesla Motors, the latest to propose a direct to consumer from manufacturers’ sales channel for automobiles.

The auto dealership industry, which has legislative protective status in most states, is vigorously fighting the concept. In March, New Jersey started enforcing a ban on direct sales by Tesla Motors, whose direct sales have also run into hot water in a number of other states: Ohio lawmakers are debating a ban on Tesla’s direct sales and Texas, Arizona, and Virginia are also opposed. In Massachusetts this month, the state Supreme Court started hearing arguments on the issued.

In the Massachusetts case, the Supreme Court invited Prof John E. Kwoka, Jr. at the Department of Economics at Northeastern University in Boston to submit an amicus opinion on the topic.

Kwoka was clear in his opinion: “Allowing incumbent dealers to veto the distribution methods employed by an entirely different automotive brand with which they have no contractual or business relationship is contrary to the public interest and would harm consumers and competition. It would substitute a competitor’s judgment-with its clear interest in minimizing competition-for that of consumers and the marketplace. It would have the predictable effect of raising costs and prices, limiting choice and innovation, and generally stifling competition.” The Massachusetts court has not yet made a ruling.

Policy planners at the U.S. Federal Trade Commission also have weighed in on the issue. Andrew Gavil, director of the Office of Policy Planning; Debbie Feinstein, director of the Bureau of Competition, and Marty Gaynor, director of the Bureau of Economics, recently expressed their views on who has the right to decide how consumers should shop for cars.

“In buying cars, however, these new ways to shop (created by the Internet) may not be available to consumers,” the three wrote in an opinion piece on the FTC’s blog pages. “For decades, local laws in many states have required consumers to purchase their cars solely from local, independent auto dealers. Removing these regulatory impediments may be essential to allow consumers access to new ways of shopping that have become available in many other industries.”

Out of 15 million cars sold in the U.S. in 2013, Tesla accounted for a little over 22,000, which the three policy planners pointed out is hardly a serious competitive threat to established dealers, but the new sales model could usher in real change to the way cars are sold.

FTC staff has commented on similar efforts to bar new rivals and new business models in industries as varied as wine sales, taxis and health care.

While acknowledging that such changes can be difficult for established competitors that are used to operating in a particular way, the policy planners said “change is a critical dimension of that competitive process,” and have consistently urged legislators and regulators to consider the potential beneficial consequences that such changes can have for competition and consumers.

Avison & Young’s Jodi Meade said it is still too early to tell what effect Tesla’s push for direct car sales will have on market sales.

“Dealership and manufacturing sales laws differ from state to state. Where it is prohibited for a manufacture to own and operate a dealership without an operating dealer or dealer group there certainly is no concern of lost sales on a direct basis,” Meade said.

“The historical trend of individuals wanting to test drive the car they are buying is still very evident,” Meade added. “As new generations jump into the purchasing power driver seat, they will influence and shape how the face of all retail must change, not just with the auto dealership sales experience.”