The headlines are unsettling.
“US auto sales likely down 35% in March”
Nasdaq.com, March 25
“US auto sales expected to fall at least 15% this year due to the coronavirus”
CNBC, March 25
“General Motors to draw down $16 billion in credit, suspends 2020 outlook”
Reuters, March 24
There is no doubt that COVID-19 is causing concern in the automotive industry, but the industry has faced similar challenges before. In fact, there are several parallels to the Great Recession of 2008. Then, as now:
- New car sales decreased markedly in a relatively short time frame—from 16.2 million units in 2007 to 10.4 million units in 2009
- Questions arose about the Big Three automakers’ viability
- Concerns surfaced about dealership real estate values
- The federal government took significant steps to stabilize the industry and spark a resurgence in demand.
As a result of the government’s early actions during the last recession, the industry experienced full recovery within five years. Significantly, most dealerships survived, and the industry enjoyed greater health overall as the downturn reduced weak operators and obsolete dealerships in inferior markets.
Based on feedback from a major lender to automobile dealerships loan losses on dealership real estate in the Great Recession were substantially lower than commercial real estate. Dealership real estate fared as well as it did because it is a required component of the enterprise, and dealerships have several distinct advantages compared to other businesses.
- First, they are highly diversified. Dealerships don’t just sell new cars, they sell used cars, service cars, sell parts, and offer insurance and financial products. While new car sales comprise a large share of a dealership’s revenue (56% in 2019), it accounts for a relatively small percentage of gross profit (25% in 2019).
- Second, dealerships have substantial variable costs. As demand fluctuates, they can adapt quickly to changing market circumstances.
- Last, they tend to be quite profitable ($1.4 million per dealership, on average, in 2019). High profitability is due to restrictions on competition and market realization that the automobile business is cyclical.
Dealers understand and have learned to manage changing economic environments. That said, COVID-19 is a unique circumstance and no one can be certain of anything at this point. However most market participants see the U.S. federal government’s quick passage of the stimulus bill as foreshadowing a rebound like that experienced after the Great Recession.
So, what does this mean for automobile dealership real estate? Based on discussions with market participants, as long as the current new car dealership use under the current brand is the best use of the property, and all components of the property offer utility in support of such use, we should expect the improvement value to remain intact. Any potential value losses will likely be tied to decreased land value. Of course, the recession’s impact on land values will vary by location, meaning supply and demand evaluations for commercial land will occur at the local level. It is critical to point out that these assumptions are based on current market perceptions, and that market perceptions are subject to change.
While COVID-19’s impact on the automotive industry is getting significant press, the industry is facing other significant challenges, and we see potential for significant disruption in coming years. Read more in our 2020 Q1 article: Automobile Dealership – 2020 Industry Challenges.
