Automobile retailers are facing many of the same challenges other retail industries are struggling to overcome. While new car dealerships and used car dealerships face different constraints in some regards, both are being pressed to address a supply-and-demand land imbalance, changing consumer habits and municipality hiccups. The way forward for used car dealerships looks more nimble in the face of growing land costs and an active online market, while new car dealerships are placing a larger emphasis on the retail experience to retain and attract new customers.
“Real estate has become one of the bigger challenges and, in some cases, the top challenge, dealers have in opening a new store, getting an additional franchise or moving a store to grow with volume,” said Tim Jackson, Colorado Automobile Dealers Association president. The lack of available land has been an issue for the past 20 years, but it’s a much more pronounced problem today, he said.
The demand for automobile real estate is more brisk than ever, said James Mitchell, vice president of CBRE’s automobile properties group. This demand is largely driven by the active automotive industry, which is climbing to a maturity point well beyond the trough of 2008, and dealers are quickly finding that they need to expand current facilities to keep up, he said.
The ideal location for a dealership is paramount. “You want to be visible, you want to be accessible and, depending on your brand, you want to be surrounded by other brands that are the caliber that you’re trying to promote,” said Mitchell. “So if you’re a Mercedes-Benz dealership, you don’t want to be surrounded by a bunch of pawn shops. You want to be surrounded by other high-end brands.”
Most owners are looking for acreage in new properties that can support a lot of surface parking as well as a single-story or a two-story building, said Mike Hockett, W.E. O’Neil Construction Co. vice president of business development.
Dealerships tend to cluster near one another, offering consumers an easy route to stop by several dealerships in one trip. Many of these clusters are located outside of metro areas in unincorporated counties, such as unincorporated Weld, Adams and Arapahoe counties. The reason for this lies in tax revenue and challenges with municipalities, said Jackson.
“It’s been a problem for a while, and it’s getting to be a bigger problem,” Jackson said. “A lot of that has to do with zoning laws, where local communities want to get other types of retail instead of automotive retail.”
Some communities chase big-box stores, such as supercenters and grocers, because the city stands to reap the benefits of the sales tax revenue, he said. For auto dealerships, it’s different. The tax revenue collected from auto sales is distributed back to where the vehicle owner resides or, if it’s a business, where the company headquarters is located.
Fort Collins is an example of a city that is chasing other retail because the city recognizes that even if it doesn’t have any dealerships, as long as its residents buy the cars, the city will still get the tax revenue. “So it creates an incentive to chase a Walgreens or a Target, but not as lucrative to chase a dealership,” Jackson said.
Due to these all-too-common municipality headwinds, the price of automotive real estate that’s favorably zoned goes up, Mitchell said. “The demand for automotive real estate is probably the highest I’ve seen since 2008,” he said. “And that demand is accentuated by a lack of supply.”
In the past five or six years, auto retail sales increased dramatically. Today, the auto retail market is steady, but flattening, Jackson said. However, there still are a lot more buyers for new cars than there are sellers. “The number I hear is – for every seller in the marketplace, there’s 30 buyers,” he said.
New vs. Used Car Facilities
In Colorado, there are at least five new car dealerships with shovels in the ground as well as a couple of yet-to-be-announced plans underway, Jackson said. These dealerships will join the almost 300 new car dealerships throughout the state. Additionally, over the last five to seven years, there was a wave of remodeling to existing sites, mainly at the behest of automakers, he said.
“I think there’s a lot of pressure in the industry from dealership manufacturers pressing their dealers to upgrade their facilities to meet certain branding and sustainability concepts,” said Hockett. “Present day is probably as busy as we’ve ever seen it. Manufacturers kind of hold inventory over the dealer’s head – ‘If you don’t comply with what we’re asking, you don’t get first crack at some of the inventory,’ which is very important to the dealerships.”
In the face of changing consumer needs, offering an experience when purchasing a vehicle is a top priority for new car dealerships. Luxury brands are pouring more money into the showrooms to embrace the lux feel. Two new dealerships on Colorado Boulevard, selling Mercedes-Benz and BMW brands, are generating a lot of hype and, thanks to a backing from Sonic Automotive, a national, publicly traded company, can afford to invest a little more money than normal.
“There’s a lot of curiosity around how well that’s going to work, and once they open, will the increase in car sales based on what they’ve done really pay off,” Hockett said.
The money is intended to enhance the customer experience. New technologies speed up the buying process while new “delivery rooms” are designed as congratulatory areas for finalizing a vehicle purchase. And once the car is purchased, dealership are investing a lot in their service departments to retain those costumers over the lifetime of the vehicle.
From a new car perspective, don’t expect manufacturers to relax their thought process on how big and how glorious they want their facilities to be any time soon, said Jeff Dyke, Sonic Automotive executive vice president. “So real estate is going to play a big, big role in that just due to the expense and the location of the properties.”
The used car business is three times the size of the new car business. There are 45 million or 46 million used cars sold in the U.S. each year, compared with 15 million to 17 million new cars sold, Dyke said. Sonic Automotive owns new and used car dealerships, and piloted a unique used car concept, EchoPark Automotive, in Denver this past year.
Used car dealerships are diametrically different because the owner controls the brand, as opposed to having mandates handed down from a given manufacturer, said Mitchell. While having more control over the dealership’s real estate needs, these owners are finding more flexibility to address changing consumer habits.
“The list is a mile long on what consumers dislike,” said Dyke. “First of all, they don’t like the pressure when they go up to a dealership. They don’t trust the dealership. They know the salesman is paid a commission to sell them something today. They’re not 100 percent certain about the product they’re going to get. They are very concerned about the trade-in process and the amount of money they end up getting for their trade in.”
Consumers also dislike how long it takes to buy a car, having to haggle and having to deal with multiple staff members. “It’s all just horrific,” Dyke said of the process. “The industry is running as quickly as it can away from it.”
In addition to trying to offer solutions for each of these complaints, EchoPark offers customers perks, such as use of car washes for free at every location. EchoPark takes its cues from specialty retail and hospitality sectors and is trying to build customer loyalty. In addition to sponsoring a local high school football stadium, the dealership offers defensive driving classes and is trying to get accredited to offer educational driving school courses.
As more buyers migrate online to buy used cars, the demand for space most likely will change. “I do believe, sooner than later, you’re going to see the digital real estate world play as large or bigger a role than the physical real estate world,” Dyke said.
The cars still will need to be housed somewhere, but cheaper properties in not as high-traffic location will work because the vehicles would be delivered straight to the consumer at the individual’s home or place of business.
“I do see that happening,” he said. “I think the manufacturer will stand in the way of that happening on the new car side for much longer than what the preowned side will be able to accomplish.”
The digital marketplace will become a major pillar of the transaction process, said Mitchell. “But bricks and mortar won’t go away, especially for your really niche concepts, like an EchoPark, where the delivery of the car and, quite frankly, the purchase of the car is really experience based,” he said. “It’s not just about the car itself, but it’s about the people that you’re interacting with and the environment in which the transaction is occurring.”