The Resilience of Parking

December, 2008

Survival When the ‘Bubble’ Bursts

I n the past three decades, I have seen three parking “bubbles” in the United States.
The 1980s: In 1980, most parking businesses had the majority of their locations in just a few regional markets. Allright, Meyers, Kinney, Square, Standard, Apcoa, Schwartz, Central, Ampco, System, Diplomat and General were all stand-alone companies.
In 1980, inflation was 13.5% and averaged 5.8% from 1980 to 1987. Parking rates continually escalated, boosting profits at leased locations, while downtown office development expanded the number of locations to be managed. By the end of 1987, the stock market stumbled, and the parking industry followed the real estate and banking industries into a contraction.
The 1990s: Two trends were especially notable in the 1990s.
First was the consolidation of many of the largest regional parking companies, led by Central Parking, Ampco and Apcoa.
Second, private equity arrived in force, backing new companies to acquire and operate their own urban and airport parking properties. These investments were not about land banking until a higher and better use came along, but about recognizing parking as the highest and best use.
Each trend introduced scale to the parking industry in the form of larger operating companies and the increased use of debt for acquisitions. Higher valuation multiples also emerged as an increased number of buyers chased a limited number of transactions, while the underlying value and low-risk profile of parking also became better understood.
The bursting of the dot.com bubble followed by a recession marked the end of the second parking bubble as acquisitions slowed … but only briefly.
The 2000s: Public and private equity was joined by international equity, and debt became even more available to acquire parking properties using commercial mortgage-backed securities (CMBS).
On the equity side, ImPark was taken public in 2000, only to be taken private again in 2004; Standard Parking went public in 2004, and Central Parking went private in 2007.
Funds managed by Australian bank Macquarie purchased multiple airport parking companies beginning in 2002, a New York parking company in 2005 and the largest parking company in Great Britain in 2007. Vinci Park, a French parking company, increased its presence in Canada and purchased a 50% ownership in Laz Parking in the U.S.
The debt markets also stayed strong supporting private equity with debt to acquire operating companies, and the popularity of CMBS to finance parking properties continued to escalate.
Parking will follow today’s economic cycle. Increased unemployment along with slower consumer spending will temporarily curb demand. However, history also has taught us that parking, as a dependent service, is one of the first industries to benefit in a recovering economy.
Why is parking resilient?
Parking is a dependent service. No one goes to the airport, city or hospital to park. They go to begin a trip, to work, for entertainment or to see the doctor. The airline, restaurant and businesses are the traffic generators.
For example, if a tenant moves out of an office building, it is the responsibility of the building owner to refill the space. The landlord will compete with other buildings for tenants and will live with the rent agreed to for the life of the office lease. While the landlord is seeking a tenant, the demand for parking will be lower. But once the office space is filled, the parking environment quickly returns to normal.
The same was true after 9/11. In 2002, fewer people were flying, so the airlines and the resorts lowered rates to stimulate travel. It worked. Travel recovered, and the airport parking market returned to normal.
As a dependent service, parking has historically and mistakenly been labeled a higher-risk business. One banker who understands the risk characteristics of parking described his view to me that parking loan risk is one of delay, and not default. He understood that if parking revenue is down, it’s only temporary – the loan will be repaid.
What’s next?
• Private equity – U.S. and international private equity is here to stay.
• CMBS debt – Unknown future; don’t count on its return.
• Other debt sources for operating companies – Private equity will continue to have access to debt, but smaller parking company transactions will see an increased use of seller financing and earn-outs.
• Other debt sources for parking property – Insurance companies and regional banks return to favor, but debt terms will be stricter.
• Parking valuations – Buyers are fewer and more equity is required, impacting returns, so current valuations are down. If you’re a seller and can wait, valuations will improve. Parking is still a scarce product, and more buyers emerge with each economic cycle.
• Higher Inflation – Inflation is generally good for the parking industry, helping rate growth and valuation levels.
What can you do?
I’ve often described the parking industry as being comprised of two types of professionals: parking people in business and business people in parking.
Parking people in business are generally skilled in daily operations and learned the business from the ground up. Most (not all) tend to view the economic cycles as “not in their control,” so in soft-demand periods, they just wait it out.
Business people in parking are generally more skilled at looking ahead, including creating a growth plan, but they need skilled parking people to execute the plan.
To be successful in the next two years, you need to cover both skill sets. (They are listed in the sidebar.)
Like all economic bubbles, this one too will pass. What you need to decide is whether you will emerge stronger from the actions you take or watch from the sidelines with a “hope for the best” business plan.
Rick West has been an operating executive at both urban and airport parking companies. Since 1996, he has directly participated in several of the parking industry’s largest private equity investments in the United States. West can be reached at rick.west@comcast.net.

Sidebar:
Four Skills Needed for Survival
Pricing – In a recession, lowering prices to fill a location is rarely a sustainable strategy as competitors will follow, compounding the problem. The goal is not occupancy but maximum revenue. If you lose 5% of your customer base in a recession, the question is what the 95% of the customers you still have will be willing to pay.
Overhead – Instead of identifying expense cuts based on how your business is organized today, set a goal to cut 10% to 15% of your overhead. This will require you to look at how to manage your business differently using third-party service providers in areas such as marketing and IT, processing improvements and identifying tasks historically deemed important but which can be eliminated.
Marketing – Parking is about revenue from existing locations and revenue from adding new management clients. Marketing is not overhead. If done well, it is an investment that generates a return. Increase your focus on marketing.
Financial – If you have debt maturing in the next two years, work on it now. Prepare for higher borrowing costs and ways to de-lever from your current debt level. Also, prepare for opportunities. Many parking companies sold in the past 10 years created a lot of their value by expanding in the economic downcycle of the early 1990s. Whether your goal is to de-lever or expand by acquisition, evaluate joint ventures with private equity funds to reduce your risk, improve access to debt, and expand the opportunities you can consider.