Auto Is Rocking the Retail Market

LOS ANGELES—Despite relatively flat retail sales nationally, auto sales have remained strong throughout the year. In fact, auto sales have increased for the last six years in a row. To find out how this activity is affecting the auto retail niche, we sat down with Jodi V. Meade, a principal and national director of the automotive properties group at Avison Young, for an exclusive interview. Meade recently sold seven acres in Claremont for the development of a new Chrysler, Dodge, Jeep and Ram auto dealership and is an expert in automotive real estate. Here, we talk about development, increasing auto sales, the challenges of the niche and what investors should know before jumping in.

GlobeSt.com: Auto sales are up, despite relatively flat national retail sales this year. Why is auto retail performing so well? What are the drivers?

Jodi V. Meade: Yes, auto sales are up which is great news for the industry as well as the economy. The National Auto Dealers Association (NADA) projects 17.3 million new vehicle sales by the end of 2015. This is a number we haven't seen since the early 2000s. Additionally, since the historical low point in annualized sales in 2009—we have had six consecutive years of increasing vehicle sales. I believe that the declining gas prices, a continued environment of low interest rates on auto loans, and moderate wage growth, will continue to drive new vehicle sales higher into 2016. Manufacturer incentives will need to continue to push future growth past the performance expectations of 2016.

GlobeSt.com: You recently sold a land site for an auto dealership development, and it was a difficult process. What are the challenges of building this type of retail product?

Meade: The first challenge for this transaction type is finding the right location and parcel size to fit the brand. Once that happens the next challenge is working with the manufacturer to ensure that the proposed location is outside any potential "protest area" with other dealers of the same brand. Protest areas, also known as radius restriction zones, are created to protect the current dealers from other same brand dealers infringing on their "owned market area." This process is monitored by both the manufacturer and DMV. If a dealership selling the same brand is proposed to be located within a radius restriction zone, all parties must negotiate and agree for the same brand dealership to enter that location. In mature markets such as Southern California, there is often limited availability of real estate for new dealerships. The negotiation process can be very long and tedious, but often times it ends in a successful resolution of the issues.

GlobeSt.com: Is there demand for more auto dealerships? Have you seen an increase in development?

Meade: Yes, there is a continued demand for both new dealership development and redevelopment entering the marketplace. The majority of new development is occurring by the entrance of newly established brands coming into the market or manufactures identifying a market that isn't current serving their customers. The best example is with Tesla, which has been able to locate in existing buildings as a newcomer to the market. For all manufacturers, new areas must demonstrate they can support a brand based on density, median income, and retail buying patterns specific to the manufacturer requirements. When all is said and done, manufacturers want dealers to be successful and the goal is to ensure they are not flooding the market with too many stores. This very strategic growth is one more reason auto dealerships are coveted by investors—there isn't one on every corner!   

GlobeSt.com: How have strong auto sales impacted the CRE market?

Meade: Mirroring the rise in pricing in all real estate sectors, there has been a very positive impact on automotive property. The greatest demand is for well-performing, high profile sites with visibility from a freeway or major roadway. Investment in this property type is also considered stable in terms of tenancy. Unlike your typical retail store that can see tenants come and go, auto dealerships tend to be long-term tenants with very low turnover. It is extremely difficult for a dealer to pick up and relocate. As I mentioned before, this is due to radius restrictions and the intensive and detailed approval process with the manufacturer and DMV.  

GlobeSt.com: This is a unique investment niche as well. Tell me about the process of purchasing an auto retail property and what investors are looking for.

Meade: It is certainly a unique property type and like other retail property investments, the value of an asset is largely based on the success and brand name of the occupier. Seasoned properties with higher profile dealer groups command premium pricing. Similar to other NNN core retail investments, buyers look at the size of the tenant's franchise portfolio; structure of the lease; gross sales; and location. As the auto industry grows, we will continue to see even more investor attention in 2016 for these unique retail assets.