What is happening to auto parts net lease properties and gas stations with increase in electric car sales?

According to current industry reports, although U.S. auto sales declined nearly 30% from 2019, yet auto repair and parts retailers are thriving.  Auto part and auto service retailers both are greatly benefitting from the fact that car owners are spending more to extend their vehicle’s useful life versus a new purchase.  However, the business model for NNN net lease auto parts is being shaken up by increasing sales of alternative fuel vehicles. As government policies continue to weaken conventional fuel demand, auto parts retailers will consolidate within the industry. It is conceivable that there will be always a market for conventional fuel vehicles their service, but a thinning one.

Currently, Auto part retailers setup in tertiary markets with below-average income, foot traffic, and population and are popular with DIY and DIFM customers.  With the advent of AI and electric cars, auto service retailers are experiencing a spike in business at the expense of auto parts retailers.  Auto parts retails occupy very conventional buildings, a huge boon for current and medium-term NNN triple net lease landlords, for vacancy and transitions. On the other hand, auto service retail uses upto 10,000 s.f. buildings which are highly specialized for their hvac, electrical and build out.

Alternative fuel vehicle sales are on the increase as consumers and businesses continue to crave greater fuel efficiency fueled by environmental concerns and vehicles operating costs.  However, a complete transition to alternative fuel vehicles is decades away to say the least.  Of the approximately 168,000 gas stations in the United States less than 40 percent, or 66,000 gas stations, also have convenience store businesses. Fuel sales account for more than 60 percent of total sales, which means that consumers are primarily purchasing gas for their cars and not convenience goods such as coffee, cigarettes and food. Real estate is all about location. Repurposing gas stations will depend on so many factors, such as urban versus suburban; primary/secondary streets versus highway locations etc. What are the current uses of the adjacent properties? Most importantly, the success of gas station repositioning will depend on the creativity of the developer.

By 2030, it is estimated that there will be over 50 million electric vehicles sold by carmakers, and by 2035 there will be about 35 million electric vehicles on U.S. roads. Amazon recently ordered 200,000 electric delivery vans, and today, about 20% of the world’s buses are alternative fuel. California has even mandated that by 2032 all buses purchased by its mass transit agencies be zero-emission. Gas stations have been declining for decades — in the mid-90s there were more than 250,000 gas stations and by 2019 over 60,000 had closed, a 25% reduction. This decline is attributed to other factors that have nothing to do with the economic vitality of operating a gas station. However, as demand for fuel continues to decline as electric vehicles are sold to the masses, one can reasonably expect than 65% of gas stations will close by 2030, and by 2050 the gas station concept will only be found in phonebooks lining erstwhile payphone booths.

Presently, Auto service retailers rely on nearby stores for foot traffic but are typically found near big-boxes without a storefront, however auto part retailers exist in secondary markets where the rents are more affordable.  For NNN net lease triple net investors, both types of auto retailers currently offer corporate guarantees and are well known for upto 20 year leases. Most auto part leases stay flat for the first 7-10 years but auto service lease terms see rent escalations every 3-5 years, from 2.0% to 5.5%.  Car part retailers tenants such as Advance, AutoZone or O’Reilly often trade between the 5.00% to 5.65% cap whilst 10-17 -year auto service retailers like Jiffy Lube or Valvoline, Midas Muffler, etc, will trade for cap rates ranging from 5.50% to 5.75%.  However, lease terms, rent escalations, cap rates are bound to change negatively, as auto parts business models morph.  The NNN net lease auto service business looks to be more robust than auto parts for the long term, though.