By Jake Marthens, Matthews Real Estate Investment Services

Accidents happen, and no matter how strong e-commerce becomes or if a recession hits the economy, consumers will need their cars fixed. The automobile service and repair industry proved to be one of the most resilient and productive asset classes in commercial real estate throughout the pandemic. This realization encouraged multiple-store owners (MSOs) to start expanding their portfolio, acquiring mom-and-pop auto shops across the nation.

Oftentimes, small shop owners do not realize the value in their real estate, or take full advantage of the market, losing out on profit. Commercial real estate brokers have noticed and are now helping owners and operators maximize the value of the property, by understanding the underlying potential of the real estate and the demand for collision centers.

Untapped Potential

Collison centers are growing in rank among net lease investments. Investor demand is up, creating a competitive environment that is driving pricing up. But many shop owners are unaware of how much the value of their property increases once they have sold their body shop operations to a large consolidator and signed a new long-term lease with them.  Auto body repair shops require special permitting and have high construction costs due to the specialty services. This inflated cost has caused MSOs to seek established facilities instead of developing shops from the ground up. Local owners can take advantage of the rapidly rising rent prices by negotiating a new lease with the buyer, producing higher yields.

Private Equity Enters the Race

How did auto body repair shops become trophy assets for private equity firms and institutional commercial real estate investors? The sector offers high growth and stability, two characteristics that large investors crave. Consumers need their vehicles, and the safety and condition of their vehicles are critical. While some retail industries are combating the growing strength of e-commerce, collision centers are unaffected, as consumers will continue to need in-person and specialized expertise after a breakdown or car wreck. Auto repair shops are one of the only sectors that are recession-resistant since consumers, no matter how hard hit by the economy, will pay to have their car fixed. It is not a discretionary spend but a requirement.

Collision centers also benefit from the ongoing shortage of new vehicles and dealership’s rising sales prices. Consumers will use their cars as long as possible, avoiding high sticker prices and a limited selection of new or used vehicles.

This resiliency is the main reason multiple-shop owners are scooping up shops at an accelerated rate. After the past few years of acquisitions, multiple-shop owners now represent a large piece of the collision repair market.

MSOs are scaling auto shop businesses to better their position for future investments. As the future of car production progresses, the technology and tools needed for technical and body repairs will be much more complex and expensive compared to traditional auto shop tools, causing a strain on mom-and-pop operators. With the influx of electric vehicles, small shop owners will be challenged to train their staff in a new field. Large operators backed by private equity capital will be better positioned to invest in the required resources and education as repair shop technology evolves. MSOs also have the ability to offer better benefits and job security to employees, helping them retain skilled workers amid a tight labor market.

Top Buyers

There are several investors entering the growing market, but four notable MSOs dominate the sector in acquisitions and expansions. The most mature collision center consolidators, Caliber Collision and Gerber are buying, converting, and developing relentlessly; new construction Caliber Collision properties are trading in the low five and even sub-five cap rate range. Taking a look at the overall market, Caliber has been achieving an average cap rate of 5.8% for deals with 10 or more years left on the lease. The market is also experiencing an influx of up-and-coming consolidators including Crash Champions and Classic Collision. Illinois-based Crash Champions dramatically expanded throughout 2021, tripling its shop count to 175. The companies also began launching new initiatives to diversify their services, such as glass and retail services.

Reaching the Finish Line

The collision repair industry has turned into a top-level net lease asset, offering security, scalability, and high-profit margins. Private equity activity has accelerated the growth of this market and new players have continued to emerge. The industry is predicted to continue its growth in major and secondary markets throughout the U.S.

Jake Marthens is a senior associate at Matthews Real Estate Investment Services, with a specialty in the distribution and acquisition of single-tenant net lease properties.