The door is slamming on more than 2,100 car dealerships nationally due to a sharp downturn in the domestic auto industry and the U.S. economy, coupled with a change in consumer behavior. The sight of shiny new cars parked under bright lamps and helium balloons won’t disappear from the American landscape, but it promises to be less pronounced. Currently there are 2,149 car dealerships for sale across the nation, according to CoStar Group, a provider of commercial real estate listings and research. Of that number, 168 are located across California, and 12 are in San Diego County.
Tony Villasenor, a 26-year veteran retail broker with Voit Real Estate Services in San Diego, has witnessed the growing trend of dealerships closing and remaining idle for an extended period. The senior vice president is scrutinizing the growing number of available car dealership sites on behalf of prospective tenants and owners. Villasenor recently spoke to NREI about the investment rewards these sites can generate, and how the growing closures will impact the retail market.
NREI: What attributes make car dealerships appealing to investors or retailers?
Villasenor: If you think about most car dealership sites, they have attractive features that users require when seeking new locations. Those characteristics include highly visible locations ideally suited to exposing retail products and stores, fast-food services and impulse-buy offerings. The signage opportunities are above average, and the parcels often need little grading work because dealerships are typically built on flat, street-level parcels. Auto dealerships typically enjoy easy ingress and egress to major freeways and arterials.
NREI: How are the closures of car dealerships affecting commercial real estate?
Villasenor: Whenever you have a substantial upward spike in inventories of large parcels, land values across the board will start to see downward pressure. Consequently, the continued closure of car dealerships will lead to a rapid reduction in land values.
However, these properties are unlikely to start selling until lenders return to the lending business, and tenants start expanding into new space. That sequence will follow housing market stabilization, which of course will vary depending on each market area.
NREI: How many dealerships have been closed so far and how many have been announced?
Villasenor: In San Diego County alone, we have already seen the closure of more than eight car dealerships in recent months, but there will be more to come both here and across the region. Even as consumer spending picks up and we start to see an increase in car sales, there will be consolidation as the marketplace has fundamentally changed.
The Internet has changed the way consumers buy cars. Car dealers can spread their message a great deal farther than was possible in the past; they can attract customers from a much wider consumer base. Buyers can search for their perfect car without having to leave their homes. As a consequence, neighborhood car dealerships will suffer in the face of this new trend and greater competition.
NREI: How much land is expected to come on the market, and is it concentrated in any particular geographic location?
Villasenor: The average dealership size is three to five acres, with no particular geographic location getting hit harder than others.
NREI: How do rental rates for car dealerships compare with similar sites occupied by non-dealership tenants?
Villasenor: In many cases, the rental rate for car dealerships is two to three times above the market rate generated from similar properties occupied by non-dealership tenants. Owners will have to adjust their expectations for non-car dealership uses going forward. In some cases, the highest and best use of any given site might be a hotel, apartment complex, or an office building. Some owners may find themselves in a better position over the long haul if they can obtain temporary leases.
As financing for hotels and commercial real estate is essentially non-existent in these times, owners will also find that joint ventures may be the most attractive option because projects can take two to five years to get preleased, financed and to obtain the necessary zoning and permit approvals.
NREI: San Diego is a land-constrained market. Has that affected investor interest in car dealerships locally?
Villasenor: Highly visible available land in San Diego along major freeways is a rare find. Investors and developers know this well. However, since construction financing is difficult to obtain today and fewer tenants are making new deals to expand, speculative development has recently been non-existent. Until these factors ease, buyers of vacant car dealerships will be limited to tenants who own their own properties and investors looking for long-term holds.
NREI: Can you give us an example of a car dealership in Southern California that was closed and then either sold or retenanted for another use?
Villasenor: The Guy Hill Cadillac dealership — northwest of downtown San Diego on Mission Bay Drive — closed more than a year ago and has since been utilized for various temporary uses such as boat parking, towing companies, and by the San Diego Sheriff’s department for the purpose of training police dogs. There have been numerous offers to build hotels, office buildings, and other uses, but here again the lack of available financing has hurt the chances of those projects coming to fruition today.
On a more positive note, a Ford dealership recently closed and is preparing for a new life. The site is under contract to be redeveloped for an office building, a retail center and parking structure, as well as a park-like setting for the neighborhood.