Real estate investors looking for a safe place to park money coming out of COVID might consider the humble car wash. The sudsy byproduct of the automotive age has, in just a few short years, become an unusually durable commercial real estate asset.
It is largely immune to the encroachment of the internet — unlike so much brick-and-mortar retail — and its leases run to the long side: 15 to 20 years usually, with rent coverage ratios at least two times earnings before interest, debt, depreciation, taxes and amortization (EBITDA).
These fundamentals, too, appear to be recession-proof, even when it comes to a downturn spawned largely by a pandemic that kept Americans off the road in record numbers. 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.
“I’m selling a Mister Car Wash now, which has a little bit of term burned off, but there are absolutely zero landlord responsibilities on it,” David Wirgler, an Associate Director in the Newport Beach, Calif., office of investment sales firm Stan Johnson Company, said in early April. “It’s not uncommon to come across that.”
The investment evolution in car washes has been much shorter than this physical one. At the start of the past decade, small, independently owned chains and individual sites dominated the industry. Over the last few years, though, private equity money has poured in and the ownership structure for car washes has evolved into a readily scalable — and salable — pattern identical to one often found behind dollar stores, fast-food restaurants, big-box outlets and other free-standing, single-tenant properties.
Private equity investment in car washes hit a decade-long high of $112.6 million in 2017 through 21 deals, and was $110 million in 2018 through 22 deals, according to research portal PitchBook.
As more institutional money settled on car washes, fee-simple, triple-net leases became the preferred ownership structure and a big reason for the industry’s durability as an investment. In a fee-simple, triple-net lease, an owner has total ownership with the tenant responsible for all costs, including maintenance. Owners can also claim depreciation to reduce taxable income — often accelerated depreciation, given the specialized nature of car washes. Rent increases are often baked into the deal, too.
“If you’re talking to a high-net-worth individual who is looking for a long-term, stabilized asset that they’re going to basically mailbox money, the car wash lease structure will kind of check all of those boxes,” Wirgler said.
The private equity investment also ensures an increase in the number of car washes. Funds going in want a profitable exit from their investment, and one way to do that is by increasing the number of locations.
“When you have private equity going into a space, they obviously want to increase their cash flow, so that when they go to sell, they’re selling on a larger EBITDA,” said David Annett, an Associate Director in Stan Johnson Company’s Tulsa, Okla., office.
Favoring growth, too, is the fact that no one chain currently dominates the industry. The largest — Tucson, Ariz.-based Mister Car Wash Holdings, which private equity firm Leonard Green & Partners acquired in 2019 in a deal worth $380 million — drew 4.4 percent of the industry revenue in 2020, according to IBISWorld. The next three biggest — Autobell, Mike’s Carwash and Wash Depot Holdings — together accounted for under 2 percent.
At the same time, more car wash chains are embracing subscription models to get rid of one of the few risks in the business: a lack of brand loyalty. The subscriptions allow customers not only to book washes online and via apps, as well as to earn freebies, they also allow investors to better gauge future cash flow. That makes car washes even more sure as a bet coming out of COVID.
The growth, though, could end up being the industry’s biggest enemy. That lack of brand loyalty won’t be overcome quickly, and, in the meantime, too many competitors opening up in one area could eat up marketshare. The 2019 ICA survey found that three-fourths of consumers picked their regular cash wash because it’s one they happened to have driven past.
“A lot of these are driven by the direction of traffic,” Wirgler said. “You don’t really care if it’s pink bubbles or blue bubbles hitting your car.”