Looking into buying auto related commercial real estate
I am looking into buying auto related commercial real estate. Residential real estate just went nuts this past year so now looking to deploy money into commercial real estate for cashflow. On the surface, it seems like CRE zoned for auto (i.e. auto repair, body shop etc.) fetch a fairly reasonable return (8-10% cap rate in my area). I'm in upstate NY. I would love to get some feedback from this community on merits of this idea. 

Caveat:, while I like cars and been around the auto industry, I have never operated a body shop before and don't really know the auto repair business all that well. On the surface, it would seem like they are quite good value for money for a few reasons:

1. Auto repair is a mature business that is fairly recession proof. There's always going to be demand for it. Each American households have on average \~2 cars. They all need repair and service at some point. Vehicle age is also getting longer as well. The average age of vehicle on the road is now 12 years. 
2. Auto repair business will likely become supply constrained in the next 10 years. Technicians aren't growing at the same rate as overall fleet. Many auto tech are getting to retirement age as well and there aren't nearly enough new tech to replace them. 
3. If it's a reputable shop, they tend to be around for quite some time. I think I read somewhere that the average age of an auto repair shop is 30 years. They also tend to stay at the same location as well. This means stable cashflow for a real estate investor, much more so than your typical retail shop. 
4. Moreover, auto repair real estate is also supply constrained.  In most states your property need to be zoned appropriately and be given a special permit in order to operate. Specialized facilities and equipments are needed, and it's usually not economical to build new construction for this purpose.

Big risks I can think of are:

1. generally auto repair are mom and pop shops or big dealerships/chains. I don't have enough cash to buy a big dealership. But mom and pop shops have significant key man risk. If a good mechanic decided to leave, or the owner retires, there's often no good succession strategy and shop reputation will decrease.
2. If a shop does decide to move, that property can potentially be vacant for a VERY long time. 
3. Environmental cleanup may be a big risk as auto repair deals with lots of dirty fluids. 
4. EV adoption will likely significantly disrupt the auto repair/service business in the next 10 years. All of the regular service that draws in customers like oil change or brake pads/rotor changes will be non existent. 

If there's any commercial real estate operators that have experience with auto related properties, would love to get your thoughts. Any other reason why this might be a bad idea? 

Thanks,
[{"id": "hjdihf0", "text": "It will take a long time for the current fleet of cars to turn over to EV's. Conservatively, they have 20-30 years before needing to make major changes.\n\n&gt;Environmental cleanup may be a big risk as auto repair deals with lots of dirty fluids.\n\nThis parcel will be automatically flagged for a phase II if you ever want to sell. As long as you know this going into it, you should be fine. Be good to get a phase II done when you buy. Will cost $.", "replies": [{"id": "hjemeo6", "text": "Idk, I\u2019m an EV driver and I could easily see as many as 50% of cars being sold in 10 years being EV. The technology is just progressing so quickly. That said, I love auto shops. Especially in urban areas where they can be refitted for adaptive reuse. The returns are very nice and there are always business owners to lease shops. And, if you\u2019re willing to buy in cash, property with environmental issues from prior owners, you can get a real deal. I\u2019d just say, like any other property, you want to have a few exit options.", "replies": [{"id": "hjeupa3", "text": "Don\u2019t think about new sales, think about total fleet percentage.", "replies": [], "depth": 3}, {"id": "hjevc1o", "text": "Thanks. when you say few exit options, are you talking about redevelopment? What are other exit options should I consider?", "replies": [{"id": "hjf0kd5", "text": "Re-Dev yes.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hjdtn0x", "text": "If you\u2019re focused on mom and pop sized operations, I think your biggest risk is environmental contamination and associated liability and financing concerns. Best case, you\u2019re out $20k upfront on a combined clean Phase 1/Phase 2. Worst case is you don\u2019t find anything during your DD and instead find something during a refi with a new lender in 10 years. I shit you not, I have seen that happen and damn near end a 60 year old man\u2019s life. Mom and pop operations tend to be a little loose with the waste disposal processes and paperwork. If you\u2019re targeting smaller properties, just understand that your DD money is truly at risk - you need to be willing to walk for any funny business and might have some steep sunk costs. \n\nFrom a site/property selection standpoint, I\u2019d look for (1) some amount of office/waiting space - don\u2019t neglect it, (2) enough bays/lifts and appropriate sized bays, and (3) most importantly, a ton of surface parking or space to expand. Extra parking always seems to be needed, especially if there\u2019s only a 2 or 3 bays. \n\nDon\u2019t be scared if it\u2019s a winner, just go in with open eyes.", "replies": [{"id": "hjecb70", "text": "Holy crap your phase 1/2 are expensive down there. Here I'm around 7k for both phases in cad! So like 5k usd.", "replies": [{"id": "hjemvpa", "text": "Phase 1 &amp; 2 cost a combined $12-15K where I am. As a rule of thumb, without knowing what risks you\u2019re facing, you\u2019d want to go UC for 1/2 to 1/3 of the properties \u201cclean\u201d market value where environmental risks are unknown.", "replies": [{"id": "hjerktl", "text": "Must be quite different EPA standards etc stateside. Here in Quebec our decon costs aren't really that bad. It also doesn't hurt EVERY property here is somehow contaminated with either PCA, PCH or heavy metals. Backfill use to not be controlled back in the day so Pyrite is also SUPER present so these guys are kept super busy!\n\nJust did a 2700 square foot parking lot. Dug 2.2M meters down (7+ feet) and backfilled with clean dirt + membrane and 3/4 compacted. Cost was around 140K cad so around 110 usd all in. \n\nVery challenging financing however if you do find contamination and most banks want a clean report before issuing financing of any kind. \n\nId GLADLY pay 30% under market for a dirty property all day here. I have bought quite a few and generally only get 10-20% drop in value on roughly 2M assets.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hjf56gd", "text": "Thanks, this is super helpful. It sounds like probability is likely high that these mom and pop shops are contaminated to some extent. Is there ballpark for how much remediation cost is? Are we talking tens of thousands, hundreds of thousands, millions? \n\nSecondly, assume property is clean, anything I can do as landlord to incentivize these mom and pop shops from properly taking care of the disposal? It sounds like there's a strong monetary incentive for me to do so.", "replies": [{"id": "hjflt75", "text": "It\u2019s been about 10 years since I did environmental investigation and remediation work so it\u2019s tough to give you an estimate, but I still deal with these costs on the development side. Major variables are the size of the site and if contamination hit groundwater or is just in the soil. A mom and pop auto shop could be $50k - $200k as a SWAG, if you did have to remediate. We used to have an expression that you\u2019ll always find something given enough time and money. It\u2019s double edged sword - you want to know what\u2019s there but don\u2019t look too closely. \n\nI think you\u2019re on the right track trying to incentivize your tenant to handle waste appropriately. I\u2019m sure you could work in lease covenants for the tenant to provide waste manifests and disposal trip tickets, but I don\u2019t know how well it would practically help. Honestly your best bet is probably to have semi-regular site visits and pave the shit out of any exposed soils.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hjek7no", "text": "My client is a large franchise operator for auto body repair. They also own all their own real estate. I have found that most locations if \"they are smart or successful\" also own their own dirt. So you'll have to cold call them and get a sale leaseback. Definitely can be done, but expect a lot of pushback if you introduce a NNN lease to someone who isn't used to being told what to do.", "replies": [{"id": "hjemzsd", "text": "Well, lots of mom and pops will seller finance too because the land under the shop is so jacked up with environmental that they can\u2019t find real buyers.", "replies": [{"id": "hjf75ds", "text": "Yeah, also seems like most listed shops in open market are selling both the land and the business together as owner is retiring. I am however a bit worried about going too deep  as a business operator though. I'm no mechanic and certainly don't know anything about running a successful auto repair shop. \n\nAny idea on how difficult is it to find new operator/management to run the shop?", "replies": [{"id": "hjf84fd", "text": "I\u2019m in Charlotte, NC. Absolutely no shortage of operators. Finding one is easy. In fact, Meineke and a couple small chains down here have been blowing up my phone lately looking for new locations. One suggestion I would make, make sure if it\u2019s a smaller operator that they\u2019re keeping oil water separators operational, keeping excellent records on waste oil disposal. That will come up when you sell the property. No back door dumping, make sure hydraulics, waste tanks are good operational condition and being maintained. Any parts washers or equipment need to have records and need to have explanation for where waste water/detergents are going. Let operator know you\u2019ll drop in occasionally to look at tanks, pans, no grease/oil spills on concrete etc.", "replies": [{"id": "hjf9108", "text": "Thanks! this is incredibly helpful. Will definitely add these to my DD", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hjen6fh", "text": "Your thesis seems more about the business of an auto shop than the real estate. Unless the land and structure for operating a shop is highly specialized and scarce due to zoning or something else it seems like it would take a long time to replace the tenant or grow rents. As others have pointed out the environmental concerns may make your exit challenging.", "replies": [], "depth": 1}, {"id": "hjernsw", "text": "Don\u2019t have much to offer except this. \n\nI wouldn\u2019t be afraid of EV adoption. Population is increasing and more and more cars are being built. Both gassers and shockers. All it means is that once demand for gassers starts drying up, an EV shop can rent your space for repairing EVs. They still have plenty of fluids and tires and everything else that needs maintenance. Instead of rebuilding trannies and engines, there will be shops rebuilding electric motors and replacing big lithium packs and computer modules that die.", "replies": [{"id": "hjf8mp9", "text": "Yeah repair/service will def continue to exist, but frequency will likely be drastically lower. It also seems like the trend is going towards the big auto owning these work in the future, so the mom and pop shops might disappear in the very long run. \n\nHowever, as property owner you are somewhat insulated from that as long as you have a good site that people want to come in for service.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hjf3pgu", "text": "You\u2019re going to end up with a specialized building (not easy to convert to non auto use in future) with probable contamination. If it stays auto body, great.\nIm looking to buy light industrial/commercial right now and the auto body shops are on great parcels (good size and access) but the enviro and demo are less desirable. I agree that they have a good business with demand but like someone said they also tend to own their own real estate. Pros and cons.", "replies": [], "depth": 1}, {"id": "hjfc4da", "text": " **fetch a fairly reasonable return (8-10% cap rate in my area).**\n\nCap rates do not measure returns.  Cap rates come from an income approach to value called direct capitalization.  The formula is V=i/r\n\nYour 8% and 10% cap rates just mean that the NOI's has sold for about $10.00 to $12.50 for each possible dollar of NOI.  That is a pretty big range of purchase price if the properties are similar and the location is comparable.  More than likely big errors in calculating NOI.\n\nBeware if someone is trying to sell you a cap rate as a \"return\".", "replies": [{"id": "hjfht5n", "text": "Yes, thank you. I should have said valuation multiple", "replies": [], "depth": 2}], "depth": 1}, {"id": "hjhs7d4", "text": "Environmental impact costs are the obvious ones", "replies": [], "depth": 1}, {"id": "hjie72b", "text": "What part of upstate? I\u2019ll keep an eye out.", "replies": [{"id": "hjimktj", "text": "Buffalo/Rochester area, are you a broker?", "replies": [], "depth": 2}], "depth": 1}]