Will Real Estate Values Rebound From The Great Recession?
2011 may be transition year with real estate prices bottoming out followed by a return to property appreciation
Have we passed through the valley of the shadow? The last decade saw the most difficult economic period for real estate prices since the Great Depression of the 1930s. Convenience store real estate prices peaked in 2006 at just under $1.4 million, according to CoStar. This median price reflects c-stores with fuel service. C-store sale prices declined in 2009 and 2010. Although it is too early to tell, 2011 may be a transition year with a bottoming of real estate prices followed by a return to property appreciation. Some preliminary real estate market data suggests this may be the case. Moody's National Commercial Properties Index shows general commercial real estate prices down 39 percent from their peak in late 2007. The median price of c-stores is down 44 percent over the same period, to $780,000 in 2010.
Today, c-stores with fuel service are selling for about $350 per square foot of store building area. This price reflects the total value of the real estate, which includes the site, store building, fuel service and canopy. For example, a location with a store of 2,500 square feet and an 8-position fuel service would be expected to sell for $875,000 today, based on national average prices (2,500 multiplied by $350 = $875,000). This is the value of the real estate, which does not include the inventory, personal property or intangible business value.
Real estate values for c-stores are ultimately determined by the earnings potential of the location. One widely used relationship between earnings and real estate value is the Gross Profit Multiplier, or GPM. The GPM is calculated when a c-tore sells on the open market. The sale price of the real estate is divided by the average gross profit. GPMs are usually in the range of 2.5 to 3.5. An average GPM in the U.S. is about 3.0. So, as a rule of thumb, a location with an average gross profit of $500,000 can be expected to have the associated real estate priced at about $1,500,000 ($500,000 multiplied by 3.0). Gross Profit Multipliers are one of the tools used by real estate appraisers to estimate the value convenience stores.
For c-stores, the real estate often makes up 90 percent of the value of the going-concern. Today, average real estate values are back at 2004 to 2005 levels. As more sale data is compiled for 2011, we will know in a few months whether real estate prices have reached the bottom. Real estate prices usually follow rather than lead in an economic recovery. Let us hope the worst is over.
Robert E. Bainbridge is an author, instructor and expert witness in the appraisal and valuation of convenience stores and gas stations. He can be reached at [email protected], or (541) 823-0029. More valuation info at www.castorevalue.com.
Editor's Note: The opinions expressed in this column are the author's, and do not necessarily reflect the views of Convenience Store News.