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Article:
In 2009 we completed an analysis on the automobile dealership market in Illinois that signaled deep trouble due to the massive decline in sales and the major auto producers desire to slash the number of dealerships. As we enter the spring of 2011 while we see some recovery in terms of auto sales, the actual real estate market for automobile dealerships remain in considerable trouble. So many dealerships have been closed that there is a substantial over-supply of empty dealership properties that have seriously hurt rental rates and achievable sale prices.
In 2008 dealers sold 13.2 million units which reflected a 17% decline from 2007. The year 2009 was even worse with only 10.4 million units sold which reflects a further 21.2% decline from 2008. Things improved slightly in 2010 with a jump to 11.5 million sales. 2009 and 2010 where the worst two years of auto sales in the past three decades in the United States. The over-supply of franchise dealerships had been a sore point for GM, Chrysler and Ford for many years but states franchise laws prevented them from culling underperforming dealerships. The collapse of the industry and government bail-out finally allowed them to eliminate many unwanted dealerships. The industry-wide collapse put many more into bankruptcy. When too many GM dealers (or any other brand) are in the same market they undercut each other on price and reduce margins. The big three have enough trouble competing against other brands let alone competing against themselves through too many of their own dealerships undercutting each other.
In 1987 there were 25,150 dealerships in the United States. At the end of 2008 there were 20,700 and by January 1, 2010 there were 18,458. In Illinois the number of dealerships went from 934 on January 1, 2008 to 826 on January 1, 2010 (a 13% decline). Now from a business perspective, it is a good thing for the auto industry to have fewer dealerships. It can increase the profitability of each dealership if they have less competition. From a real estate perspective, however, at least in the near term, it is disastrous. Automobile dealerships are special use properties that are not easily adaptable to alternate uses. If they aren't going to be used as a dealership there is a good chance they would be torn down or sold at a very steep discount.
The following data was derived from CoStar and reflects the automobile dealership market in Illinois from 2006 through January 1, 2011. It includes sales, current listings and automobile dealerships that are under contract. Their coverage includes Boone, Cook, Dupage, Kane, Kendall, Lake – IL, McHenry, Will and Winnebago County's. The one exception, due to some outliers and anomalies in the data is the average sale price per square foot data which only covers Cook County in Illinois.
Costar
The average price per square foot of automobile dealerships in Cook County were a little better than $230 per square foot at the beginning of 2005. Prices held pretty steady until 2008 when the market virtually collapsed. In 2009 they had dropped to around $113.03 per square foot and recovered slightly in 2010 to about $134.92. In other words from 2005 to year end 2010 automobile dealership prices have dropped about 42% in Cook County.
Automobile Dealership occupancy levels have also fallen. In the second quarter of 2006 Occupancy levels were around 96 percent. By the first quarter of 2011 occupancy levels fell to only 87% according to Costar Analytics. We believe this number considerably understates the actual vacancy levels. Based upon costar comps where the data is more current on properties that have been physically been listed through them or sold, the vacancy rate is closer to 33%.
Costar
The number of automobile dealerships for sale in the second quarter of 2006 was about 10 but has increased in virtually every quarter since then. By the first quarter of 2011 there was a EIGHT FOLD INCREASE in automobile dealerships available for sale in Illinois from 2006 (10 versus 80). In terms of square footage on the market during the same period it went from about 200,000 square feet available for sale in 2006 to 1,400,000 square feet by January 1, 2011.
Costar
Costar
It is difficult to grasp the severity of the decline in pricing for the auto dealership market. The potential for over-assessment is very easy. If the assessor relies on a lease signed just a few years ago he could easily put a value on a dealership that is massively over what fee simple market conditions could support on January 1, 2011. Anyone who thinks the uptick in more recent auto sales means a recovery is commencing for the dealership market would be sadly mistaken. Absorption rates continue to be strongly negative and prices could ultimately collapse to underlying land value (less demolition) before they stop dropping.
Costar
These buildings are very difficult to adapt to alternate uses. Even with more auto sales, automobile manufacturers will be very reluctant to franchise new dealerships. One of the historic advantages the foreign auto manufacturers have had over US brands is a more efficient dealership network with far fewer dealerships that weren't undercutting their own brand on prices. Auto producers have spent the past 20 years trying to get rid of excess dealerships and would be unlikely to allow any meaningful increase in their numbers.
Automobile Dealership Market in Deep Trouble
Article:
In 2009 we completed an analysis on the automobile dealership market in Illinois that signaled deep trouble due to the massive decline in sales and the major auto producers desire to slash the number of dealerships. As we enter the spring of 2011 while we see some recovery in terms of auto sales, the actual real estate market for automobile dealerships remain in considerable trouble. So many dealerships have been closed that there is a substantial over-supply of empty dealership properties that have seriously hurt rental rates and achievable sale prices.
In 2008 dealers sold 13.2 million units which reflected a 17% decline from 2007. The year 2009 was even worse with only 10.4 million units sold which reflects a further 21.2% decline from 2008. Things improved slightly in 2010 with a jump to 11.5 million sales. 2009 and 2010 where the worst two years of auto sales in the past three decades in the United States. The over-supply of franchise dealerships had been a sore point for GM, Chrysler and Ford for many years but states franchise laws prevented them from culling underperforming dealerships. The collapse of the industry and government bail-out finally allowed them to eliminate many unwanted dealerships. The industry-wide collapse put many more into bankruptcy. When too many GM dealers (or any other brand) are in the same market they undercut each other on price and reduce margins. The big three have enough trouble competing against other brands let alone competing against themselves through too many of their own dealerships undercutting each other.
In 1987 there were 25,150 dealerships in the United States. At the end of 2008 there were 20,700 and by January 1, 2010 there were 18,458. In Illinois the number of dealerships went from 934 on January 1, 2008 to 826 on January 1, 2010 (a 13% decline). Now from a business perspective, it is a good thing for the auto industry to have fewer dealerships. It can increase the profitability of each dealership if they have less competition. From a real estate perspective, however, at least in the near term, it is disastrous. Automobile dealerships are special use properties that are not easily adaptable to alternate uses. If they aren't going to be used as a dealership there is a good chance they would be torn down or sold at a very steep discount.
The following data was derived from CoStar and reflects the automobile dealership market in Illinois from 2006 through January 1, 2011. It includes sales, current listings and automobile dealerships that are under contract. Their coverage includes Boone, Cook, Dupage, Kane, Kendall, Lake – IL, McHenry, Will and Winnebago County's. The one exception, due to some outliers and anomalies in the data is the average sale price per square foot data which only covers Cook County in Illinois.
Costar
The average price per square foot of automobile dealerships in Cook County were a little better than $230 per square foot at the beginning of 2005. Prices held pretty steady until 2008 when the market virtually collapsed. In 2009 they had dropped to around $113.03 per square foot and recovered slightly in 2010 to about $134.92. In other words from 2005 to year end 2010 automobile dealership prices have dropped about 42% in Cook County.
Automobile Dealership occupancy levels have also fallen. In the second quarter of 2006 Occupancy levels were around 96 percent. By the first quarter of 2011 occupancy levels fell to only 87% according to Costar Analytics. We believe this number considerably understates the actual vacancy levels. Based upon costar comps where the data is more current on properties that have been physically been listed through them or sold, the vacancy rate is closer to 33%.
Costar
The number of automobile dealerships for sale in the second quarter of 2006 was about 10 but has increased in virtually every quarter since then. By the first quarter of 2011 there was a EIGHT FOLD INCREASE in automobile dealerships available for sale in Illinois from 2006 (10 versus 80). In terms of square footage on the market during the same period it went from about 200,000 square feet available for sale in 2006 to 1,400,000 square feet by January 1, 2011.
Costar
Costar
It is difficult to grasp the severity of the decline in pricing for the auto dealership market. The potential for over-assessment is very easy. If the assessor relies on a lease signed just a few years ago he could easily put a value on a dealership that is massively over what fee simple market conditions could support on January 1, 2011. Anyone who thinks the uptick in more recent auto sales means a recovery is commencing for the dealership market would be sadly mistaken. Absorption rates continue to be strongly negative and prices could ultimately collapse to underlying land value (less demolition) before they stop dropping.
Costar
These buildings are very difficult to adapt to alternate uses. Even with more auto sales, automobile manufacturers will be very reluctant to franchise new dealerships. One of the historic advantages the foreign auto manufacturers have had over US brands is a more efficient dealership network with far fewer dealerships that weren't undercutting their own brand on prices. Auto producers have spent the past 20 years trying to get rid of excess dealerships and would be unlikely to allow any meaningful increase in their numbers.