July 3, 2018
Brace yourself for some good news!
After nearly a decade of tracking executive sentiment in commercial real estate, data by top U.S. law firm Akerman LLP show industry leaders display unwavering optimism about America’s economic strength. Nearly 70 percent of executives and investors surveyed in the ninth annual Akerman U.S. Real Estate Sector Report say they are even more optimistic for 2018 market activity than in the last two years — an overwhelming 25-plus percent jump, firm records show.
(See: www.akerman.com/en/perspectives/2018-akerman-u.s.-real-estate-sector-report.html for full report available by subscription.)
T. Row Price’s Midyear Market Outlook, which was released on June 25, is predicting “favorable” economic conditions for the rest of the year, though volatility is likely to continue. High valuations across most global asset classes and a range of economic and policy risks—including the threat of trade protectionism, growing by the day—create the potential for volatility to persist moving into the second half of 2018. (See: https://seekingalpha.com/news/3366065-t-rowe-price-sees-u-s-economic-growth-continuing-also-volatility for free download of report.)
The growth outlook is most robust in the U.S., where confidence remains high on the heels of last year’s tax cut legislation for individuals and corporations, the report asserted.
Earnings growth is strong and not expected to slow dramatically over the next few quarters …. Other recent reports have offered similar findings about the longevity of the current expansion
The First Quarter 2018 SIOR Commercial Real Estate Index rose to its highest value since its creation in 2005, according to the Society of Industrial and Office Realtors. With a value of 100 on the index indicating a balanced market, the national index closed the first quarter of 2018 at an all-time high of 134, reflecting a positive expectation for the remainder of 2018 among survey respondents.
The organization calculates the index based on the results of a U.S.-based member-wide survey. With gains in business investments, exports, as well as consumer and government spending, the SIOR CRE Index points to an essentially positive environment for economic growth.
The majority of SIOR members expect conditions to improve, with 64 percent of respondents foreseeing growth.
Too much good news? There are more believers and Kool-Aid drinkers of national and higher prominence that could be quoted here, but you get the idea. With such near-unanimous optimism how could anyone remain a doubting Thomas?
The above opinions are reflected in record levels of consumer sentiment (see last month’s Market Comments), and bear out daily in our phone and email inquiries. This even spills over into lending and credit activity. We get lender calls and emails daily from loan officers wanting a shot are our next financing, all assuring us they can do the deal … more than a little unbelievable since they don’t know what the deal is! The rise in interest rates has made lending a profitable part of the banking business again.“Market Comments” typically covers a period of about 3 months past (history) and 6 months or so into the future. For the time being we’ll go with the flow. Pricing and terms for gas station/c-store businesses and real estate haven’t blow off yet (exception: CA). There’s still enough caution among buyers and lenders to provide an orderly market. There are several economic and market indicators available to provide alerts to the potential extravagance. (Many or most of these were available during the dot com bubble burst in 2000-01, and the credit melt-down in 2007-08.)
June 4, 2018
Consumers are still fairly optimistic about the economy, the Conference Board reported on Tuesday, which is decidedly good for the state of the economy and spending on such things as retail goods. The company’s Consumer Confidence Index increased in May, following a modest decline in April. The index now stands at 128.0 (1985 = 100), up from 125.6 in April. The Present Situation Index increased from 157.5 to 161.7, while the Expectations Index improved from 104.3 last month to 105.6 this month.
“Consumers’ assessment of current conditions increased to a 17-year high, suggesting that the level of economic growth in (the second quarter) is likely to have improved from (the first quarter),” said Lynn Franco, director of economic indicators at the Conference Board, in a statement.
“Consumers’ short-term expectations improved modestly, suggesting that the pace of growth over the coming months is not likely to gain any significant momentum. Overall, confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term,” she added.
Consumer confidence tends to be one of the best forecasting indicators of individuals propensity to spend and invest. Investment decisions however, also consider longer term indicators besides employment data, including wages. Interest rate movements & trends, inflation, Fed activities & policies (monetary), and federal tax (fiscal) policies are watched for reinforcement or cautionary signals beyond the short term environment. Since CRE and business acquisitions are typically leveraged, liquidity in the credit markets (banks willingness to lend) is a key to supporting, or not, what the investor may want to do.
When reviewing market data that exists today we are seeing the results of prior decisions … history-based. There is a convenience, perhaps comfort, in extrapolating yesterday’s trends into the future. Consider the graph above. The consumer confidence trend since about the middle of 2016 has been in fairly tight uptrend to its current 128 level. Headline data suggests this should be expected to continue in the near term. It’s been well documented, however, that the current economic expansion is getting long in the tooth. Public market data (stock, bond, futures) have been giving signals of cautionary behavior by participants. May unemployment fell to 3.8% - lowest since 1969 – and wages increased .3%. How much better might it get, we wonder.
Our best grass roots indicators at MJG tends to be how many phone & email inquiries we get – both buyer and seller, and how aggressive are their buying & selling signals. We get a good gauge on market liquidity by how many cold calls we get from lenders wanting to provide loans for acquisitions. These signals have been strong since the first of the year, and haven’t waivered much in light of rising interest rates, the rise in the price of oil (crude at the wellhead) or the price at the pump, or the latest Trump tweets. In fact, continuous antagonistic political behavior from Jerry Brown (CA governor) has precipitated more buying calls from his constituents.
For now, we reiterate our last month’s position that we expect support for a strong market by all the participants over the “near term” – consider this to be through Q2-19. Consider what happened to consumer confidence between 2007-2009. Leading to 2007 it was all fine until it wasn’t. The various markets have their own charts reflecting this period. We may in the CRE and private business markets extend longer, and perhaps higher, and probably will. But history advises us to not be surprised by the next “black swan” event.
Apr. 4, 2018
To start out I’d like to offer a quantitative look at our (MJG) listings from the couple websites that provide market activity feedback, Loopnet and BizBuySell. These also happen to be the dominant public websites for CRE (Loopnet), and businesses (BizBuySell). You can compare your statistics with these to get a gauge on how your business and/or property is competing with the buyer audience.
Loopnet: Average hits/mo. (excludes businesses only): 1,713
BizBuySell: Average range of hits/mo. (excludes real estate only): 1,400-3,848
Average percent of Views/Hits: 5.1%
Operating businesses that include the real estate tend to be the more popular in attracting buyer interest.
Businesses offering historical financials not older than 90 days garner more “continued interest” from initial inquiries.
Quality of the financials – appearance of being prepared by an accountant – provides confidence to the buyer that the price is justified.
Pricing based upon market multiples of Seller’s Discretionary Earnings offers buyers the best justification, absent an appraisal.
Market multiples of the business remains firm in spite of the public markets (stock markets) increase over the past several years. Increases in overall prices are attributed the increased real estate values. These are taking their lead from traditional CRE markets – these statistics, indices are not largely publicized – you’ll find these mentioned from time-to-time in the MJGBlue Paper.
Reading the Signs:
Early explorers, mountain men, and pioneers followed animal trails, rivers, and Indian paths to open up the west. They looked for signs along the way to develop expectations of what was ahead – most of the time it worked, to a degree, other times not so well.
Today the modern explorers of the markets, the financial and investment future look for their own signs to forecast expectations. Picking up signs we attempt to connect the dots that lead to expectations from which we can render decisions about the best (or at least better) course to take for our particular journey.
One such dot …
Early last month President Trumps Chief Economic Advisor, Gary Cohn, resigned. He was widely considered the force behind Trump’s tax cuts. Absent Cohn’s steady rudder… many fear the economic ship will take a perilous heading.
Trump’s trade warriors like adviser Peter Navarro will rise in his place. Protectionism and a global trade war are next, they fear, another Smoot-Hawley Act in the making. (Google Smoot-Hawley Act for this event and the results that followed.)
Michael McCarthy, chief strategist at CMC Markets Asia Pacific, speaks for many, as quoted by Bloomberg:
“It’s clear at the moment the markets (public investment markets) are likely to price the worst-case scenario on tariffs”… “Markets are very concerned about the impact on global growth,” given the “potential for tit-for-tat” protectionist moves in the wake of Europe’s retaliation threat following the move on U.S. steel and aluminum tariffs.”
Michael O’Rourke, chief market strategist at Jones Trading Institutional Services, adds his voice to the rising chorus:
“Of all the Trump administration resignations, this will be the one most meaningful for markets… Cohn was the administration official financial markets had the most confidence in. This opens the environment up to a whole new wave of uncertainty. The likelihood of a trade war just jumped dramatically.”
Regardless, the happy mainstream consensus holds that coordinated global growth is jumping. But is it? (Change is hard to accommodate … accepting the potential for change.) Goldman now claims that “global economic momentum” has fallen to its lowest in two years. Seven of ten components in its proprietary “Global Leading Indicator” slipped in February. (another sign)
Is global growth at “peak bullishness”?
We noted earlier how unemployment is often lowest immediately prior to recession. If it drops below 4%… recession almost invariably follows. Unemployment is currently 4.1%. (another sign)
Meantime, the Federal Reserve has embarked upon quantitative tightening… and central banks around the world are looking to tighten. (Interest rate increases and balance sheet “normalization”.)
The global credit impulse — the rate of credit growth — has fallen recently to levels unseen since 2008. As analyst Kevin Wilson warns:
“The global credit impulse is plummeting, suggesting the imminent end of the global credit cycle and signaling (another sign) high potential for recessions and/or financial crises. All of these risks and challenges are difficult to quantify and nearly impossible to time; …”
None of this should be construed as offering investment advice, but only to share with you some of what investment, financial & economic sign readers are observing.
Dec. 4, 2017
The Wells Fargo (per their Economics Groups Special Report 11-21-17) forecast for holiday sales this year is for an increase of 4.0 percent on a seasonally adjusted basis compared to only 3.0 percent for last year. Although income measures have not been supportive of stronger consumption this year, consumers have shunned this fact and continued consuming. The most important reason for this continuous improvement, other than the low unemployment rate and the relatively strong increase in employment of late, has been the strong improvement in consumer confidence since last November. The Conference Board provided the most recent evidence that consumer confidence remains high, with its headline index registering a 17-year high in October. Therefore, we believe that the increase in consumer confidence will be enough to carry the consumer forward this year and contribute to make this holiday sales season better than what we saw last year. (Watch for a Q4 bump in household debt when published in Q1-18. This will not be good, and we expect it will be called a surprise by most economists.)
We recently received an email from one of the brokers we have communication with in Southern CA:
“Experienced, high net worth developers approved by all major brands, looking to purchase or long term lease gas station sites and car wash for development. Preferred geographic areas, San Diego, Riverside, Orange and San Bernardino counties. Ready to build pads in retail centers preferred, minimum 25,000 s/f. Will also entertain raw land acquisitions for development.”
We believe this activity is a result of scarce inventory, not just in CA, but in other SW markets where CA operators are interested in expanding. This is reminiscent of the market in the early 2000’s after many stations were closed as a result of required environmental compliance at the time. A then-expanding economy provided demand for units that weren’t there, resulting in new-builds being the solution. This activity ran from about 2000 through 2007 and the 2008-09 real estate melt-down. The situational dynamics are different this time around, but I anticipate the result to be similar. If so, this is a good time to be a seller.
Friday, Dec. 1, the PCE was announced for Nov.: 1.4%. (PCE: Personal Consumption Expenditure) As opposed to CPI or PPI that we all know, this relatively new measure of inflation is the one cooked up by the Fed several years ago to give them a benchmark more suitable to their goal, i.e., call inflation rising. This is the 2% target much talked about and sought after, but sadly, unattained so far. This bears directly on the Fed’s justification for raising the Fed Funds rate at the next FOMC meeting in mid-Dec. (the 13th sounds about right). The model that translates interest rate futures pricing into probability of the Fed raising rates, or not, gave a PCE of 1.6% or more a near certainly of raising the rate, and 1.3% or below a near certainty of not raising the rate. Between there ranges is a crap shoot – where we find ourselves. Weekly labor data will now become the focus of Fed watchers. We expect Yellen & Co. will try their mightiest to raise this rate, if for no other reason than to give Trump a head start on a recession, and her replacement, John Taylor, something to do when he takes over Feb. 1. Not to overlook, the Fed. is still QT’ing … quantitative tightening, i.e., reducing it’s balance sheet. All this has to do with market liquidity. Very simply, increasing liquidity drives markets, reducing liquidity stalls markets. Banks, and non-bank lenders, tend to be very sensitive to increases and decreases in liquidity. It’s generally not a matter of all-or-none, but more the shade of gray. In our business, CRE and business brokerage, it’s not whether a deal can be done, but more to the structure of the deal. Knowledgeable anticipation can be helpful … it helps reduce the risk of the transaction.
We recently had a couple of our properties appraised that were stabilized stations (profitable with good cash flows – SDE) with c-stores in the Phoenix metro market, from which we were able to back into the market multiple. These were branded businesses that included the real estate. These were valued at 10.34 times their SDE. This is an increase in the metro multiple from the 8-8.5 range from a year or so. Rural stations typically have a discount in multiples from the metro, and with this as a benchmark would come in at about 8.0-8.5 times SDE. In allocating the value between the business and real estate, the business enterprise value (intangible value) came in at 2.76 times SDE, and when added to the FF&E produced a business only value of 3.08 times SDE. The business-only value is well within the historic range of 3-3.5 times SDE, which means the expansion of multiple is in the value of the real estates. Notably, we sold what might be considered a comp business in a rural market almost 2 years ago now that valued at 6.4 times SDE. In our observations of rural market businesses with real estate, this range hasn’t expanded Conclusion: the Phoenix CRE market bubbled up over the last few years and has settled back, or at least has begun to, whereas the rural CRE market didn’t get the bubble. Clearly this is a small sample, but we piece together the pieces as they come to us to develop our mosaic of what we think the market is and where it’s going.
One of the structural difficulties that has been on-going in valuing gas stations throughout the state, aside from the form of ownership usually being a business that owns the real estate as one of its assets and the number of transactions provides a very thin market, is compensating for the nature of the improvements among historical sales (comps). Valuing the operating business represents a blind spot for most real estate agents & brokers, and valuing the real estate is equally challenging or omitted entirely by business brokers. The result is what we kindly call an “inefficient market”.
For years we’ve anticipated the end-of-year to be quiet, from about the middle of Dec. until the 2nd week of Jan. For years we’ve been surprised that it hasn’t been. Many of our prospective buyers aren’t big celebrants of Christmas, but use the occasion to escape the northeast and Midwest snow and cold to visit family & friends in the sunny southwest. And many who are in the gas station business back east take the opportunity to identify, explore and visit potential acquisitions in AZ. If you’re listed in the market, be ready for unannounced drop-ins. Some of these that can get traction while here actually develop into transactions the next year.
Sept. 4, 2017
THE GOOD NEWS: tax reform is back on the table; interest rates are down, including mortgage rates; GDP growth was +3.0% in the 2nd quarter, its best 3-month gain since the 1st quarter 2015.
THE BAD NEWS: only 20% of Houston homeowners with flood damage have insurance protection; North Korea continues to rattle nerves with its testing of yet another intercontinental ballistic missile that was fired over Japan; the US dollar is slumping as the Euro has gained +13% vs. the greenback YTD, causing import prices to rise (source: BTN Research).
HURRICANE HARVEY – PERSPECTIVE:
Concentrated Energy of the Gulf Coast: The shutdown of about 15% of US refining capacity in the wake of Hurricane Harvey demonstrates the nation's vulnerability to supply disruptions stemming from its dependence on fewer pieces of infrastructure that are concentrated along the Gulf Coast. (Reuters has the shutdown loss at 22% of capacity.) There are 141 oil refineries in operation today, down from 220 three decades ago, which have nearly 30% more capacity, and are being used about 90% on average, but the good news is that the market has adapted to respond more promptly to disruptions. (Source: Wall St. Journal)
Notable, however, is not just what happens to refinery interruptions, but what this done to refining product output, including gasoline & diesel fuels. An equally important closure as a result of Harvey has been the Colonial pipeline, a major distribution pipeline from the Gulf to the northeast. Within a couple days of this announcement supply limitations at the end of this pipeline sent gasoline prices soaring, as well as jet fuel to the major airports in the northeast U.S. And now we seen the Atlantic coast being threatened by another Cat 4 Hurricane, currently scheduled to hit the weekend of Sept. 9th. (The path is still uncertain, but forecaster’s odds are not good at this time (Sept. 5). Meanwhile, tankers with crude product have been holding off-shore, creating a glut of upstream product for refining. So, while the price of gas at the pump is feeling supply shortages, the price of crude has plummeted due to excess supply. So far, this dynamic has been mostly contained in the central and eastern U.S. We have seen only “sympathetic” pricing movements at this time. But keep an eye on your cash flow; resolution, when it comes, will likely be to the upside in pricing with declines in fuel volume sold.
The Houston metro economy is the 4th largest in the U.S. – see chart below. Within a few days of Harvey making landfall, estimates started out at $15b to re-build; these are now up to $40-50b (and climbing). Initially (probably starting with Q4 data) there will be a hit to GDP for lost production from the Gulf Coast market. Ironically, as the clean-up is completed and the re-building commences this will be a huge addition to GDP. (GDP measures only deal with additions to domestic production, not netting out loses.) This may be a springboard to Trumps obtaining legislative support for his infrastructure program – only sooner and for more money that originally projected. Key to the cost of recovery/re-building is not just the dollars allocated, but the timing of the funding. Estimates today are just that … the final price-tag determined when the recovery is pronounced “done” – this to be years from now.
CONSUMERS STILL CONFIDENT
While I’ve yet to find a direct metric, index, etc. quantifying the optimism/pessimism of the business buyer or real estate investor, I’ve found the consumer confidence index as reflective as any indirect gauge available - gas station buyers are consumers too.
Employers added 156,000 new jobs in August, while the unemployment rate ticked up to 4.4 percent. Average hourly earnings rose a tick and are up 2.5 percent over the past year. Manufacturing activity strengthened in August, with the ISM index rising to a six-year high of 58.8. The Consumer Confidence Index rose to 122.9 in August on improved views of current and expected conditions. Headline and core PCE inflation rose 0.1 percent in July. Core inflation is up only 1.4 percent over the past year, which is the smallest increase since late 2015.
OBSERVATIONS & CONCLUSIONS:
Macro data from our (MJG’s) own listings shows that the number of market inquiries is down, but that the percentage number of views is steady. This suggests that the absolute number of prospective buyers is down, but that the quality of the remainders is steady. This may be seasonal (vacationers in the summer) with an expectation of renewed interest beginning this month into the end of the year, or buyers being overwhelmed and burned out by Washington high-jinx, continuous global contentions, and now, Hurricane Harvey disruptions, fall-out and uncertainty.
Appetites among asset classes show that turnkey businesses still command primary consideration among buyers – a cautionary statement of risk-avertness. Of least interest are turnaround businesses, property for redevelopment, and raw land for development. These will wax and wane in importance over time, not because the macro environment changes, but because the buyers become accustomed to the uncertainty and learn the live with the attendant risks as the new normal. We’ve seen this adaptability manifest numerous over the last decade or so. The global and domestic environment may change, but our DNA doesn’t. Inventory continues to be stingy – not many choices for buyers. Buyers have become frustrated and impatient, but have yet to capitulate. California government policies continue to be caustic-to-punitive to business owners, both large and small, providing a continuing motivation for gas station owners in that state to look for relocation, and AZ is an obvious target. (Many who were considering TX just took them off the list.)
June 7, 2017
Welcome to summer, where in Phoenix we’re logging our 4th consecutive day with a “heat warning”. I’m not sure exactly how hot it has to be in order to call for a warning, but today is calling for 107 degrees. So today we’re going to launch the summer gas-stations-for-sale Comments with a look at what’s for sale in AZ.
Here’s what mid-westerners and Californians will find when they brave the heat for their gas station acquisition.
In Maricopa County: On Loopnet, 13 stations available, including 2 for investment only (no biz), 1 property for redevelopment, and 1 use-restricted (by QT).
On Biz Buy Sell, 14, including 1 for redevelopment and 1 w/o fuel.
In Pima County: On Loopnet, 8 stations including 2 that are closed,
On Biz Buy Sell 2 (!)
All Rural Counties: On Loopnet, 22, including 2 closed and 2 that offer land only,
On Biz Buy Sell, 19
Summarizing: In Maricopa County, 13-14 stations,
In Pima County, about 6 stations,
Throughout the rest of AZ, about 20 stations.
For all of AZ, about 40 stations. (During the 2000-2007 period, Maricopa County would typically have 50-55 stations available, most-to-
all of which were businesses with real estate.)
What’s being offered: Gas station businesses with real estate,
Gas station businesses without real estate,
The businesses offered include both turnkey and turnaround businesses … the bulk today seem to be turnaround, i.e., the buyer will have to make changes to put the business “on its feet”.
Closed stations looking for: an operator (the biz would be a startup), an investor (would have rent-up risk), a re-developer (would have both construction risk and rent-up risk).
Land only: typically judged by the listing broker to be a suitable gas station property.
Qualifiers: The overlap of listings between Loopnet and Biz Buy Sell is in the area of 90-95%. We don’t assume that all stations available are listed in either Loopnet or BizBuySell, although these 2 sites have the dominant market positions for CRE and businesses respectively (MJG opinion). Other listings show up in the gas station and c-store segments of these sites, and include mechanic shops, automotive franchises, grocery stores, and liquor stores – these have been excluded from the above data.
Feb. 7, 2017
The pulse of the commercial real estate market and business brokerage market at this time can best be described as chaotic! Is this a surprise to anyone?
Not driven exclusively by President Trump and company, but clearly influenced by post-election behavior, markets – literally all markets – reflect the uncertainty, top-to-bottom, that is highlighted on the six o’clock news.
The following comments offered up by RICS U.S. and presented in Globe Street (2-8-17) is representative of the CRE industry opinion:
“Even amid the uncertainty brought about by only the second increase in the federal funds rate in 10 years and the advent of a new presidential administration that is already proving to be disruptive on a number of fronts, a survey of US commercial real estate participants predicts a fairly strong year for the industry overall. However, respondents to the Q4 2016 RICS US Commercial Property Monitor see the New York City metro area as a possible exception. Survey respondents expect a positive outlook for rent growth throughout the coming year, with the largest gains projected in the prime office and multifamily sectors, both near 3%. They’re followed by secondary multifamily (2.3%) and prime industrial (2.0%).
Conversely, RICS says expectations for secondary office and secondary retail are a little more downbeat. But the development starts indicator continues to show a positive trend in the pipeline, led by the office sector. Meanwhile, investor demand increased across all sectors and inquiries from international investors also continued growing.
‘There’s some uncertainty due to the Fed raising interest rates and bond rates increasing substantially after several years of very low rates, which will reduce the cap rate compression experienced over the past eight years,’ says Michael Yovino-Young FRICS, president, Yovino-Young Inc., Berkeley, CA. ‘Cap rates have already increased modestly but are predicted to increase further in the next 18 months.’
‘This will be the result of the economy reacting hopefully to the anticipated changes the Trump administration has planned for the investment market, banking industry, Wall Street and other relevant areas,’ he continues. ‘The next year should be very interesting as far as appraising commercial real estate is concerned, but difficult to predict in advance.’”
The quantitative references notwithstanding, we find similar comments and opinions in all of the other relevant markets, e.g., stock and bond markets, commodities, precious metals, currencies, etc.
It’s not lack of activity, but lack of purposeful activity … false starts & stops … hesitant and then retracted decisions … guessing and then second guessing. In visible markets where this behavior is openly manifested, it shows up as volatility.
So is this environment to be considered temporary, or will it settle in to yet another “new normal”? At least for the next 4 years. Too soon to say, but we think not, at least to the current extent.
The extreme opaqueness of the horizon, the clutter that surrounds and hides previously seen signals, disconnects and dislocations of previously visible financial and economic relationships, all serve to heighten the risk of decisions.
The changes being proposed by the Executive Office are revising, modifying, reversing, or eliminating what has been accepted as status quo for somewhere between 1 and 6 decades – this is going to take some time, and “accommodation”. We’ll make headway. We’ve already made some headway. The longer we’re engaged in the process the more we, the recipients as well as participants of change, will become more comfortable with the process. We’ll begin to recognize stable elements within the volatility.
One thing entrepreneurs seem to instinctively recognize is that buried in the all the chaos is opportunity. This is a small percentage in any group being considered, i.e., buyers, sellers, lenders, etc. These people, those we call the pioneers, establish their positions early in the change cycle … get ahead of the herd when the perceived risks are still too high for the average, the norm(al), person. As the risk wanes these early birds profit from their risk acceptance – if they’re right!
All this is nice to consider, but what do we know today?
At this time market inventory of gas stations available is low; at MJG our inventory is to the high side. Quality of the inventory is average-to-poor. Many of the listings for gas stations in the various websites are not gas stations at all, or if they are they’re closed with no businesses, and if closed they’ve had the tanks pulled. Some have been scraped and are really only C-2 zoned dirt – that once was a gas station. Some offerings are by Circle K or QT and have use restrictions on the title, i.e., can’t be used by the buyer for fuel sales or a c-store. This is a particularly frustrating market for buyers who want to buy a turnkey business.
And speaking of buyers, what do they want? The same thing they’ve been after for years now, going back to beginning of the recovery from the last recession, about 2010: stable historical income (EBITDA or sellers discretionary income) with the real estate where the valuation mix justifies 25-30% of the total value from the capitalization (cap) rate of the income stream – this also presents the best bankable profile for the lender.
A brief review of the macro data available from websites indicates buyer search activity has fallen off since Q4-16, but not changed noticeably from Jan. to Feb. December had a little bit of a seasonal surge during Christmas week, but this has become normal. Gas station real estate only, properties for redevelopment, and stations offered for lease are noticeably of less interest than businesses for sale that include the real estate – the relative attractiveness of this mix hasn’t changed over the last few years.
Does this mean that if you’re not a profitable business that you can’t sell your station? Not at all. You’ll just be catering to a smaller audience. Bear in mind, however, that you only need 1 buyer. And not all buyers can afford their appetites. Some will scale down to an affordable opportunity rather than miss the boat all together. All safe havens to park money, or invest, have a risk; if you don’t see the risk where your money is, you haven’t looked hard enough!
I expect the waters to clear significantly over the next few months; I hesitate to say 100 days!
There are 2 (at least) areas of reform that are particularly meaningful to real estate and business investors: tax reform and amending Dodd-Frank. I expect these to be whittled away into new policies and regulations (or elimination thereof) over months-and-years. But I also expect some meaningful improvement with Dodd-Frank regulations in the short term. Tax policy will be more encumbered by the necessary political processes, and can be expected to take longer for changes to show up.
This is not meant to be a political commentary, but the Government has been so successful in infiltrating the public sector over the previous decades that it has opened itself to public sector observation and opinion. We, the public, feel compelled to oblige.
Aug. 1, 2016
The best predictor of future behavior is past behavior. The best influential drivers of the market – any market? Not the price of money, or the most recent terrorist attack, or the price of oil … its fear and greed. These are what drive decisions. And where can you find a “greed-fear” index if you were inclined to look? The economy, every investment industry, and now political pollsters publish data in abundance that can be used to interpret the emotion and mind-set of the sampling. However, a readily-available data point you might check out is the consumer confidence index. (indices actually – there are several of them.) The consumer, the buyer, the investor, the seller, etc. are all the same person. They just express their intent and behavior differently.
It appears that the balance of the year will be a continuation of what we have already seen, not only in the first half but throughout 2015—good, but not great, growth. It is clearly a market of mixed signals. If the driving forces of the market don’t change, is it reasonable to expect the market to change? Probably not.
The CRE market continues to trudge along, reflecting the bifurcation that was initially identified and the term becoming prevalent in 2010; this reflecting the muddle-through economy. The markets continue to reflect central bank activity, and currency translations, with perhaps the biggest structural component change the drill-down of sovereign debt to negative interest rates. The current estimated total of sovereign debt in now around $13 trillion, or about 30% of the total global market for national debt. What’s an investor to make of this? And where to from here? As the clouds clear and the future becomes clearer, I believe the pent-up demand for businesses, including gas stations, will express itself in dramatic fashion. (And make no mistake, there is pent-up demand going back 8 years now since the Fed took interest rates to ¼ point for Fed Funds.)
The price of money (interest rates) is supposed to measure the risk of lending. But with central banks the world over engineering interest rates (lower) in a search being the world’s cheapest currency, thereby becoming the more desirable exporter of goods to the global market and supporting their domestic economies (a winless situation for all of the participants), the risk-basis on interest rates is absent. The spreads between what can be received as a savings/investment return and what it costs to borrow money at historic levels. Within this context, the value of your adjusted cash flow today is some multiple higher than that same number was a year or 2 ago. Will it be as valuable a year from now? This is question I ask buyers regularly.
In the business brokerage and CRE business we sometimes forget to consider the financing piece of the transaction. We get focused on the intrinsic and organic elements of the company and the property. It’s well-known when you think about it that businesses are acquired and run on leverage … borrowed money; certainly this is true also of investment CRE. Today this is the most fickle part of the business and CRE transactions.
Money is out there, hunkered down in liquid funds are basis point returns. It’s there, but it’s becoming stickier to move. This is not only private equity, but also institutional lenders (banks). The buyer interest is there, and the lender interest is there (judging from the number of BDO calls I get about daily looking for deals to work). The issue that soon surfaces is the terms, including rate, and the qualifications of the borrower and the historic financial performance of the business being acquired. SBA lenders continue to be active and in fact are making loans. I continue to have an active 6-8 lenders any given day for gas station loans, although it’s an active pool. Underwriting can be sticky, but not un-doable.
Not to overlook the Brexit event – turns out to be a yawner! The surprise reaction lasted somewhere between a day and 2 weeks, depending on what market you looked at. Fallout, if any, is expected to be contained in Britain and Europe. (Odds, measured by currency translations and the futures market are that Britain will go into a recession in the next year or so – but they could be wrong!) Seems like the greatest intermediate (3-5 yr.) concern is who will drop out next. (My money’s on Italy – not literally!)
Inventory of stations available continues to be poor to lacking, even in Phoenix … perhaps most notably in Phoenix. (Meaning buyers have fewer choices.) Owners and buyers of gas stations keep their eye on the price of crude, knowing the trend here sets their margin. The volatility here, and of all markets, has been a structural part of the business for over a decade now … one of the unintended consequences of high technology and immediately available information … increased volatility in all markets.
Not to neglect the 800 pound gorilla – it’s an election year. This event will increasing be a driver of decisions for the next 100 days or so leading up to Nov. 8, and to a lesser, but more obvious extent through Q1-17. I’ve chosen not to comment on politics or public policy even though this is a (“the” ?) significant factor in the near term. (I also don’t discuss religion or baseball, although I will comment on the Cardinals in their time – coming soon!)
July 15, 2015
Comparative Analysis of the Gas Station Market in AZ: There are essentially 2 public domain websites that house the lion's share of gas stations for sale: Loopnet.com and BizBuySell.com (BBS). Loopnet is focused on the real estate of the station, and BBS focuses on the business on the property. (Loopnet owns BBS, and CoStar owns them both.) CoStar is primarily a research site rather than a marketplace, but carries listings for the CRE members. CoStar caters to, and is used mostly by, the CRE industry.) There are clearly other websites available, but these 2 garner the majority of the activity,a nd also offer the best metrics for activity measurement and market analysis.
The data presented should not be considered to be 100% inclusive. Some listing are not posted to either Loopnet or BBS.
Today Loopnet has 87 gas station properties listed in AZ statewide.
43 properties listed are in Maricopa county (Phoenix) ranging in asking price from $125,000 to $4,950,000. Listings include those with businesses included, closed stations, car washes with no fuel sales or c-stores at all, and investment-only properties (being sold by an investor-landlord with a tenant in place). As you might glean from the mix, valuations are not uniform!! The term used here is an "inefficient market". Valuation is not just a challenge for the buyer and seller, but also for a lender (the slient 3rd party to any transaction using debt financing) and the appraiser.
14 property are in Pima countgy (Tucson).
30 properties throughout the rest of the state.
As a point of comparison, the following metro markets have the noted number of stations listing for sale in Loopnet: (Phoenix MSA pop. is just over 4mm.)
Atlanta 37 6.1mm
Denver 16 2.9mm
Salt Lake City 9 2.4mm
Dallas-Ft. Worth 55 6.7mm
Albuquerque 8 900k
Historically since 2000 Maricopa county has typically had 45-50 stations available at any time. Inventory did fall below that range during the 2009-09 recession, but even then not by much, although the mix (quality) of type of properties and businesses varied greatly, and generally toward a poorer selection. Tucson would generally have 10-15 stations at any time, and the rest of the state (rural properties and businesses) 20-25.
BBS has 46 gas station businesses listed statewide today.
29 businesses in Maricopa County. The owners of these businesses typically own the real estate as an asset of the business.
2 businesses in Pima county. This is light for Tucson, and indicates many of the 14 Loopnet properties available in Tucson are boarded up - closed. This is in fact the case.
15 businesses in rural AZ.
The interpretation of this mix isn't as straight-forward as you might expect.
Much of the listing activity has to do with how the seller perceives his situation. Most think in terms of selling the real estate rather than a business with the real estate. Also, real estate agents and brokers are much more visible and active than business brokers, and there are simply more of them. The sad part is that many real estate agents who list gas station properties don't realize there's a business there to sell also. If you look at stations listed on Loopnet you'll see very little regarding the business - these are dedicated almost exclusive to real estate data.
You generally don't find business brokers outside of the Phoenix metro and Tucson markets, although there are a few practicing in the Prescott market. Business brokers generally don't focus too much on the real estate elements of the gas station, although all are usually real estate licensed. Most non-gas station businesses that sell through operate as tenants in the space, so selling the business only involves assigning or re-executing a lease - conveyance of the property to a new owner doesn't enter into the transaction.
Business brokers tend to list on BBS, and real estate brokers list on Loopnet - not too many cross-overs. It isn't unusual to find a station listed with an agent or broker who practices primarily residential real estate, especially in rural markets where most agents practice as generalists. These brokers typically ost their listings in the MLS rather than commercial public domain websites. A couple things to know about the MLS. Ony NAR and AAR members can use the MLS (Very few business brokers or commercial-only real estate brokers are member of the NAR and AAR in AZ, so these folks won't see commercial listings on the the MLS. Also, the MLS is county-specific, i.e., a listings in Cochise county AZ will only be found in member searches for that county. Most MLS users only subscribe tot he county where they are located.
Activity this summer has fallen off a bit from pre-Memorial Day levels. Lenders have also grown a bit hesitant ... not as aggressive. Much of this, I believe, has to do with non-industry events over the last few weeks: mass-entry of Republican candidates into the Presidential race of nomination, each with a particular resume, but all sounding very similar in what they propose to do; seemingly continuous shootings or random acts of violence by jihadists and domestically by illegal aliens, highlighted by Donald Trump's very vocal and public proposed solutions to the problem; the day-to-day Greek drama (literally) leading to a possible default on loans if they should fail to achieve yet another bail-out, and calling into question the viability of the Euro Union (Eurozone): China's economy falling into the pit, and global deflation from all of the above, and experienced daily by the very visible investment and money markets, and most recently Obama's achievement (capitulation) of a nuclear agreement with Iran. If you're aware of any or all of these it might make it difficult to focus on buying your next gas station.
And the big cloud still hanging on the horizon is when (not if) the Fed will begin to raise interest rates. The Fed has had rates pegged at 0% (.25 target Fed Funds Rate) since 2008. Most folks are aware that markets (stock, bond, commodity, investment real estate) have prospered as an effect of "free" money - whether they have in fact is debatable. Well get ready. Today Fed Chairman (Chairperson) Janet Yellen in testimony before the House Financial Services Committee said such a move is just around the corner. Couched in "Fed Speak" ... "If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy." Currently the "smart money" is betting on Sept; the next best anticipated date in Dec. Many of the global events referenced above will influence the Fed's decision here. As she said. "IF the economy evolves as we expect ...". If you've followed the Fed's forecasting tract record at all, you'll conclude they're not the sharpest knife in the drawer when it comes to economic forecasting.
All that being said we continue to have good buyer interest. We even receive cold calls from bankers now and then looking to place loans ... they all specialize in gas stations of course!!
Jun 23, 2015
C-Store Industry Composition. Single-store operators account for 63% of all c-stores in the U.S., and accounted for more than 83% of total store growth in 2014. (Source: Stagnito Business Info.) With all the middle-market mergers, mega-market spin-offs and IPOs, it's easy to lose track of the market composition. Bear in mind that when 2 companies merge or a larger company acquires a smaller company, this doesn't add to the overall c-store population. If fact, in may cases it reduces the number of stores of the combined entity through mandatory closures or divestitures for FTC transaction approval. The latter activity has been an over-riding trend in the national economy ever since the Fed has instituted its ZIRP policy. One the Fed actually begins to raise rates, and eventually it will, we will see a tapering to the M&A activity ... we always have over longer economic cycles. The follow-on activity as the economy improves toward normalization and the acquisitions have to start paying for themselves is that the lower producing stores will end up back on the market either in small batches or one-offs. A store that can't pay its way in a larger corporate structure can be an acceptably profitable store for a single, or multiple store owner that doesn't need 20% or so of sales to cover corporate overhead.
Oct. 29, 2014
Oil Prices Crashing. As you know, the big news in the gas patch is that gas prices are down. If history can be trusted, your pooled margins have expanded. A importantly, your customer's feelings about wealth and optimism are up. You can read this in consumer confidence numbers. The pricing market for crude tell the story (see chart at right - courtesy of the DailyReckoning.com and StockCharts.com).
Most of us are curious-to-anxious about the causes driving the price spike to the bottom,
if only to guess about how low it will go, and how long this price reprieve can be expected to
last. The whys and wherefores will have to wait for the next Blue Paper (not published on
this website - if you'd like to receive the most recent Blue Paper, contact us.), but we believe
we're about as low (market crude pricing) as we're going to go. For a number of reasons we
anticipate we'll trade WTI between $75-85/bbl for some time, perhaps years. There will be
volatility to be sure within the range, but there should be production market support in the
mid-$70's. This comes from a couple primary producer's costs: Shale oil from fracking -
Continental Oil that owns or controls much of the Bakken production is said not to be able to
bring oil out of the ground for less than$70-75/bbl. And secondly, Saudi Arabia and Russia
(even if you overlook the sanctions) need about $75-80/bbl to break even on their production
costs - a bit higher if exporting. This is in U.S. dollars, before considering currency exchange
rates. Factor in currency translations - the ruble has been getting hammered for the last year
or so, down about 24% since just last June - and the price rises.
After the U.S. (!!) these are the numbers 1 and 2 producers in the world. Saudi is possibly more important since they have global sway with OPEC. which among the member states produces about 40% of global oil production. Russia's economic isolation makes it difficult for her to withhold production in order to raise prices, and the strength of the U.S. dollar poses its own difficulties for global exporters (OPEC). As long as we have the global turmoil that we currently have, international capital flows will continue to strengthen the dollar, and hence keep oil prices (priced in dollars) low.
The dynamics giving us the conditions noted above will likely prevail a year-to-3, depending on the outcome of the mid-term elections (now known). If Republicans are successful in becoming the majority in both houses of Congress, they may be effective in legislating changes in some domestic policies, but they'll not be able to make Obama a leader in foreign policy such that global events may calm and capital flows reverse. If Congress and the Executive Office arrive at a stalemate on foreign policies, the current oil pricing conditions can be expected to be maintained. For Congress to override Executive vetoes of policy takes 60 votes ... meaning if Repubs don't get 60 seats in the Senate (they didn't) they'll need Democrat support on any measure needing a veto. The risk in pricing, then, can be seen as political risk - well outside MJG's area of expertise!
So for current sellers of stations, what to expect ... what to do? Be happy with the improved business you should be experiencing now, and be sure to keep your financials up to day. Recognize the current business climate is likely to be a short-to-intermediate term condition. Longer term, there are many domestic and global economic issues to resolve including deflation-to-inflation conditions, currency exchange adjustments, international and possibly domestic social upheaval, and political policies affecting U.S. energy production dominance. Clarity and settlement, or progress, of these issues will occupy the latter part of this decade. As a seller, you want to sell into the strength of your business and the business environment in general. Leave some anticipated upside in your business to the buyer ... if you don't, you won't find a buyer.
Closer to the bone, day-to-day market activity has slowed a bit within the last few weeks. We suspect in reaction to the upcoming election, the uncertainty surrounding Ebola, and the increase in local terrorist activity (Canada & New York) - it's terrorist activity as usual in Israel ! The election will overshadow the other two areas of interest shortly, and these will be digested to minimal surprise potential by the first of the year. Look for good retail numbers ahead of the Christmas season - fuel prices will still be low and consumers will feel financially better off and spend more freely. Gas station buyer interest should be brisk in Q1-15, and continuing into the new year. Sellers on the sidelines can be expected to be encouraged by favorable economic (and political?) news and try selling into the "good news" ... increased competition among sellers - we're expecting listings to be up. Buyers will still be buying cash flow as opposed to nice looking properties but underperforming businesses. Keep your financial statements up to date.
INTRODUCTION - The following comments are offered to keep you abreast of the market for gas station and c-store sales in Arizona. At MJG, we identify 3 geographic markets statewide: the Phoenix metro area (an MSA), Tucson, and the rest of the state which we identify as "rural". By type of market, we follow and will discuss both the business and real estate markets, in as much as many if not most small business owners of gas stations and c-stores own both the business and the real estate that the business occupies. Our Market Pulse updates will be more frequent and less strategically detailed (dealing with shorter timeframes) than reports found in the News and Reports section of this website. As your read down the Market Pulse, you'll be reading the most recent comments first, progressing to older publishings, which if read in order, will allow you to develop an historical reference to the market. We will general keep 12-36 months of comments online, but will archive older comments. You can request archieved comments by contacting us directly with your request.