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We have been monitoring the gas station market on a daily basis for over fifteen years. A unique set of conditions exist today that may make your gas station property more valuable than it has been over the past seven years but also more valuable than it will be for the next two or three years.
Let me explain.
The hypermarketers (Costco, Safeway, etc.) went from a zero to over 20% market share in the Puget Sound Region over the past five or six years, squeezing both volumes and margins. Oil companies raised rents and entered into a more volatile DTW pricing environment with potentially predatory micro-zone pricing.
Licensing fees, labor, taxes, utilities, underground storage tank insurance, and other operating expenses have increased, creating unprecedented financial pressure on gas station dealers. Negatively amortized "loans" from the oil companies became salt in the already inflamed wound.
Most oil companies also made it more difficult to qualify and get trained as a new dealer and that bar continues to rise. Some owners, often due to their geographic location, suffered more than others, resulting in many longtime dealers leaving the business.
Lenders, many of whom were burned badly by non-performing gas station loans, withdrew from the market, while those who remained tightened their underwriting requirements. Many stations went through foreclosure.
Historically, most real estate-related commodities move in cycles. The downward trend in the gas station market showed signs of ending about a year ago.
Toward the end of 2003 and throughout 2004, we began seeing some optimistic signs in the marketplace. Not only were there more buyers, but more buyers with larger cash down payments. Stations that had lost volume to hypermarketers either leveled off or began increasing volumes and margins again.
According to the C-store industry show in December, 2004, C-store sales nationally were up 5.4% with a comparable increase in gross profits and gallons were up 2.9%. Locally, the economy in general was, and continues to be, in a recovery mode, with the dot-com crowd of unemployed and under-employed steadily being rehired.
Office and retail vacancies have been decreasing and new businesses are starting up again. Interest rates have remained low.
Building crews are busier than they have been in years. For example, a 110-unit condo project in Kirkland, scheduled for completion in March of 2006 sold over 100 of their units in the first two days, at full price. In spite of frequent predictions of the housing bubble bursting, sales of single-family homes have remained robust throughout the normally dormant winter.
Throughout the Puget Sound business community, there is optimism. This leads to expansion, more employees, and more people on the roads selling their wares and consuming fuel. This good feeling is widespread. Think about it --- when was the last time there was real optimism about the Mariners, Sonics and Husky basketball in the same year? Who knows, maybe new football coach Willingham can work his magic and Husky football can join the party!
There's more.
The Northwest has become a magnet for our ever-increasing foreign-born population---the "New Americans." The East Indian and Korean communities, both of whom already make up a large segment of the gas station owners in Washington, are growing. Other Asians are being increasingly represented in our gas station buyer database.
The West Coast has long been a haven for various Asian populations. California has rolled up their welcome mat with an overabundance of anti-small business policies. Even Portland, with its antiquated no self-serve laws, and slower economic recovery, sees a lower level of gas station development than Seattle.
While many, especially in the East Indian community, want to be near Canada, few want to start a business there. Again, the tax policies and the under performing economy, by comparison, encourage entrepreneurs to come to the Puget Sound. Where the stock market had been a logical home for available investment capital, many investors are seeking alternative investment vehicles, and commercial properties such as gas stations are becoming a more attractive alternative.
On the supply side, there are simply not enough high-quality gas station properties available. One reason is that there are not as many high-quality gas station properties! We all know the painful stories of stations that historically pumped over 200,000 gallons per month that are now doing less than 100,000 gallons per month. Many owners, especially those with little or no debt, quite logically chose to sit on the sidelines during this downward cycle. However, I suspect a lot of them are not aware that we are on the upside of that cycle and their properties are now worth much more than they were just a year or two ago.
There is also an increasing demand for sites that can accommodate a car wash or an espresso stand. These have become high margin profit centers and further inflate values. The key to a "high-quality gas station property" and this often seems to get lost in the discussion, is profitability, or in some cases, potential profitability. The value, and the subsequent loan for a buyer on that property, will be determined by cash flow.
It is always easier and less risky to discuss and explain the past than to predict the future. But, I'm going to take a stab at it.
I have outlined here, in some detail, why this is a great market in which to sell a fairly priced gas station property, with real estate. What are the threats to this optimistic outlook?
In our post 9-11 world, there is always the threat of some national catastrophe. The economic impact of 9-11 was, in my opinion, much more devastating to our economy than what most pundits have written. God willing, we won't have to deal with that again. Beyond some terrorist event, the three biggest potential impacts to value are:
1. INTEREST RATES: We talk to lenders in this industry every week. Even though I am on the more optimistic side of the equation -- I do not think we will see dramatic interest rate increases and I am still comfortable with adjustable rate loans for our clients -even a quarter point rate increase decreases the value of a gas station property. As the buyer's monthly payment increases, the after-debt-service cash flow decreases. Unless buyers' return on equity expectations decrease proportionately, the total value of the property must decrease.
2. STATION INVENTORY: There is a shortage of good gas station properties on the market. This trend will not last. Once some of the more successful selling stories are circulated throughout our rather small community, the number of stations on the market will increase, perhaps significantly. The resulting over-supply conditions will dampen station values. This will most likely happen by the summer or fall of this year.
3. OIL COMPANY DIVESTMENT: Virtually every major oil company doing business in the Northwest has been selling some of their properties recently. While I have seen this pendulum swing back and forth over the past decade and a half, most oil companies are in a divestment mode right now and signs are that this will continue. The problem is that by putting dozens of properties on the market at one time, they can almost instantly create an oversupply of properties and this will depress the values. Even if their prices are not particularly attractive, buyers want to see what's being offered and tend to take a wait and see attitude on the dealer owned property on the market.
There are other variables that may also result in a negative impact on profitability---higher minimum wage laws, increased deposits and pecuniary policies by the oil companies, fewer jobbers resulting in fewer options for dealers, and growth, although at a slower pace, by hypermarketers.
There was a long period of time when I advised those clients who were not under pressure to sell and did not shoulder a heavy burden of debt to wait for the market to improve. That time has come.
We have a convergence of several factors that make this the best time to sell a gas station since the heady days of the mid-1990's and it may be a better time to sell than it will be six months or a year from now.
(Dan Fallon, a regular contributor to the AUTO Bulletin, may be contacted at 425-844-1999, or via e-mail at
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