Author : Faizan Athar
As per Census Bureau's Construction Spending Survey, over the 12 months ended Jun-20, the value of private construction put in place for Parking increased +131%, with Drug store being the 2nd best sector @ +46.7%. Given this staggering growth over recent months, in this article we will present probable reasons for this dramatic growth, along with an overview of the Parking industry.
According to data made available by the U.S. Census Bureau, parking-related construction has been growing at an unparalleled pace, which belies its reputation as a mere adjunct to construction activities in other sectors such as offices and multifamily housing units. The rate of new infrastructure investment being undertaken in the sector can be visualized with the help of the graphic below:
The figure for Jun-2020 (318 million) represents year-over-year growth of +143% (vs previous year's 131 million). What could be causing this?
In its ‘Value of Construction Put in Place’ survey, the U.S. Census Bureau “...covers construction work done each month on new structures or improvements to existing structures for private and public sectors”. As for what is included, “data estimates include the cost of labor and materials, cost of architectural and engineering work, overhead costs, interest and taxes paid during construction, and contractor's profits”. There are a number of possible reasons for the near-exponential construction growth in the industry since mid-2019.
One potential reason could be the rapid-growth in Plug-In Electric Vehicle (PEV) sales, which may induce facility operators to provide charging stations as an amenity.
There has also been an increasing trend towards the adoption of technology, with the use of IoT (internet-of-things) sensors to provide facility managers and customers with real-time information about parking availability. These improvements may be reflected in the ‘Value of Construction Put in Place’ figure.
Another possible reason could be the use of parking lots in a Covered Land Play strategy. In a covered land play, an investor would buy real-estate (in this case, a parking lot) which is built on land that they believe will appreciate in value in the future. In the short to medium term, the land will generate revenue based on its current use (parking fees). According to Forbes, "because parking is often the least valuable zoning in a central business district, these assets (and their associated air rights) become prime candidates for redevelopment in a future real estate bull market". Although land costs are not included in the Value of Construction Put in Place survey, the increased construction expenditure may include expenditure on parking lots as covered land plays, enabling the lots to produce revenue in the near-term while offering the potential of high returns in the future through redevelopment.
It seems like an afterthought; a necessary, albeit inconvenient, part of getting where you need to go. Whether you’re going to the hospital, the mall, the theater, the airport, or any other destination at a reasonable distance from home, if you’re someone who owns a vehicle there is one last thing you must do once you get to your destination: find a parking space.
Various estimates conclude that the average vehicle is parked 95% of the time. According to INRIX, Americans spend an average of 17 hours per year looking for parking, costing a cumulative 73 billion dollars annually. This translates to approximately $345 per driver in wasted time, fuel, and emissions. To avoid getting a ticket for overshooting the time on the parking meter, Americans overfeed meters by a cumulative $20 billion dollars a year, which comes out to approximately $97 per driver. The annual search cost per driver shoots up in more densely populated cities, with drivers in New York City spending 107 hours (~4.5 days) per year looking for parking, costing them $2,243 annually.
Although many consider parking little more than a necessary evil, the industry itself is worth $131 billion and generates close to $30 billion in gross parking revenues, annually. It is difficult to come up with an exact figure for the number of parking spaces in the United States, however, estimates put the number at up to 8 parking spaces per vehicle. If we take the figure for the total number of registered vehicles in 2018 (273.6 million) and multiply that by the aforementioned 8 parking spots per vehicle, the estimated number of parking spots in the country comes out to be roughly 2 billion.
The parking industry may be further subdivided into two kinds of players: parking construction & design, and parking management.
Parking construction & design deals with the building of physical spaces that will serve as parking lots for vehicles. Parking may be built as part of another establishment such as an office building or an apartment complex, or it may be a stand-alone lot. When it is built as part of another project, it is usually constructed to satisfy minimum parking ratio requirements, which specify a set number of parking spaces per thousand square feet (or other relevant metric) of the original project. Parking ratios vary according to the intended use of a project, local regulations, and demand projections. According to WGI’s Parking Structure Cost Outlook for 2020, the median construction cost for a standard parking structure is $22,200 per space or $66.34 per square foot. The cost of construction for a parking structure varies with location and the number of enhanced features that a facility chooses to incorporate.
Parking management, as the name suggests, deals with the day-to-day operations of a parking facility. This primarily includes revenue collection, but parking management companies may also take on additional responsibilities such as the provision of valet service, baggage handling, etc. There are two main types of industry operating arrangements, namely Management Type Contracts and Lease Type Contracts. Under management type contracts, the parking management company receives a fee for services rendered, which may be fixed or variable. Primary responsibilities include hiring, training, and staffing of personnel, and providing revenue collection, accounting, record-keeping, insurance, and marketing services. These contracts usually have a one to three-year term. In the case of lease type contracts, the service provider pays the property owner a fixed rent or fee, a percentage of proceeds from the operation, or both. The service operator collects all revenue and is responsible for most operating expenses. These types of contracts tend to have a longer duration, ranging from three to ten years.
Furthermore, there are two main types of parking facilities to consider: on-street and off-street. Most on-street parking facilities are managed by municipalities, with off-street facilities in the form of surface parking lots and multi-level facilities being privately managed.
Although at first pass the industry may not seem like a prime candidate for disruption (after all, there are not a lot of complex moving parts involved in parking a vehicle), the industry has been going through an evolution of its own by embracing technology aimed at reducing the friction associated with the parking experience.
Parking revenues have fallen sharply in the wake of restrictions intended to curb the spread of the coronavirus pandemic; the National Parking Association estimates the reduction in parking volume to be as high as 80%. The only publicly-traded parking management company, SP Plus Corporation (NASDAQ: SP) has witnessed a 66% decline in its stock price from pre-pandemic levels. A sizable chunk of parking revenues is tied to economic activity in other sectors, particularly those that involve the congregation of a large number of people at a single venue. These sectors include airlines and airports, the hospitality industry, retail shoppers, and sports event attendees. As it happens, this sort of economic activity has been the worst-hit by the pandemic.
The current situation has forced facility owners to come up with novel ways to generate revenue. Some parking lots have been repurposed to function as COVID-19 screening centers, while others are bringing back the concept of drive-in cinemas to provide much-needed entertainment to customers deprived of the experience of going to the movies. The closure of dine-in facilities at restaurants has led to the adoption of other ways to deliver food to hungry customers, such as curbside pick-up, which functions by transforming on-street parking to free, short-term parking for restaurant take-out. Due to fears of disease transmission, the pandemic has also accelerated the adoption of digital payments, providing customers with a contactless way of paying their parking dues.
As a result of the coronavirus pandemic and the associated shelter-in-place orders, public transit ridership has plummeted. However, as the economy reopens and people return to their workplaces (particularly for occupations where work-from-home does not represent a feasible option), the question is: what now? As health concerns continue to limit public transit ridership, many people could be turning towards vehicle ownership to get where they need to go. This may translate to a greater demand for parking facilities in some communities. Over the medium term, until mass inoculation is a reality, we believe that consumers’ transportation preferences will be altered in favor of vehicle ownership over public transit utilization. On the other hand, if workplaces continue to operate on a work-from-home or hybrid model, this would lead to a considerable decrease in the utilization of parking spaces.
Ride-hailing services such as Uber and Lyft have often been touted as threats to the parking industry. A survey conducted by the International Parking Institute in 2018 found that 62% of respondents considered increasing usage of ride-hailing services as one of the societal changes that are influencing parking. As more people avail the services of TNCs (transportation network companies), demand for off-street parking will indeed fall. A study carried out by researchers at the University of Colorado found that stress related to the uncertainty of being able to find a suitable parking spot was the second most common reason cited for using ride-hailing services. This shift in consumer preferences from driving to ride-hailing highlights two important points: mismanagement of parking spots leading to overcrowding and congestion, and a potential downward trend in the utilization of parking spaces. While off-street parking may see a decline as a result of growing TNC usage, short-term on-street parking may see an increase as Uber and Lyft drivers temporarily park their vehicles while waiting for their next customer
Many consider the looming possibility of autonomous vehicles to be a significant long-term threat to the future of parking. Assuming that such vehicles, when deployed, operate under a shared-use system, it is true that the need for parking will dramatically reduce, especially close to traditionally high parking volume areas such as malls and airports. However, as long as we agree that it is unlikely that such vehicles will be on the road 24 hours a day, 7 days a week, they will need to park now and then. This could transform parking from the current situation of parking lots scattered throughout a metropolitan area to a single central parking hub where vehicles go in times of low demand. The use of autonomous vehicles will also greatly reduce the amount of space required per parking lot, as excess space needed for getting into the vehicle will no longer be needed. This will allow more vehicles to be parked in the same facility for a certain amount of covered area.
The global smart parking industry has been projected to grow by $7.4 billion over the years spanning 2019 to 2025. Smart parking is a catch-all term that encapsulates how recent advancements in technology are being employed to make the parking experience more efficient. One way in which the parking experience is being improved is by the use of IoT (internet-of-things) sensors that can communicate space availability in real-time, allowing potential customers and parking facility managers to see how many spaces are available, and where. A pilot project in San Francisco that utilized this technology found that areas where the pilot was carried out experienced a 30% reduction in vehicle miles traveled (meaning less congestion and fuel wastage) and a 43% decrease in the time taken to find a parking spot. Several firms are providing solutions such as license-plate recognition, which will enable a smoother billing and enforcement process, and parking reservation systems, among others. The adoption of technology also extends to the provision of value-added services, such as charging stations for electric vehicles on the premises.
The use of electric vehicles changes the dynamics of refueling. With a Plug-in Electric Vehicle (PEV), you're technically not filling a tank, but recharging a battery. Although battery and charging technology continues to develop at a rapid pace, refueling an EV takes considerably more time than refueling a vehicle that runs on gasoline. Even the best technology currently available (DC Fast Charge) requires 20 minutes of charging to deliver 60-80 miles of range. The second-best option, Level 2 charging, deliver 10-20 miles of range per hour of charging, while Level 1 charging delivers 2-5 miles of range per hour of charging. The time taken to refuel makes EV charging stations a natural fit for parking facilities, and represents an opportunity for facility owners/managers to increase their revenue.
This article sought to highlight an often overlooked real estate sector — Parking. Although the industry itself is fragmented, with a few players at the national level (such as SP Plus and LAZ Parking) and many small-time local parking providers, it provides an opportunity for consolidation. Present circumstances notwithstanding, parking facilities can offer a consistent revenue stream if managed efficiently. Recently, there has been much talk about parking and competing land uses, with many calling for a reduction in parking spaces that take up valuable real estate that could potentially have better uses. In his book ‘The High Cost of Free Parking’, UCLA professor Donald Shoup laments the tendency of cities to over provide parking to the detriment of their citizens. In the book, Shoup talks about how the provision of free parking leads to congestion, as vehicle-owners prefer to drive around in hopes of finding a free parking spot rather than paying for the privilege of parking. Additionally, off-street parking requirements result in larger areas devoted to parking, increasing the distance between establishments, and contributing to less-walkable cities. Shoup recommends charging fair market prices for on-street parking and removing off-street parking requirements. If ‘Shoup-ism’ catches on, existing parking facilities would stand to benefit, as they would no longer have to compete with government-subsidized parking spots, and would be operating in a market with lower supply. Charging the fair market rate would require dynamic pricing, which would price spots according to location and time. Dynamic pricing has been made easier due to the proliferation of technology and the increase in data-processing ability (which would enable parking management companies to predict demand). For real estate investors looking to ‘park’ their cash, this industry may just be their diamond in the rough.