Investors are seeking triple net properties that can generate robust returns, even during market downturns. Another requirement is selecting brick-and-mortar retail properties with the ability to compete with e-commerce as consumers purchase more and more items online. One category of retail property fits these prerequisites to a ‘T’—an auto parts store or business for sale, which may be one of the industry’s best-kept secrets.
In the past few years, a main driver of the sector’s consistent growth is the aging of U.S. vehicles on the road, now more than 11 years old on average. Experts have written that cars’ and trucks’ average repair costs are the highest in years eight to 12 of their lives.
Automotive Parts Stores Perform Well During Economic Downturns
Most retail categories are negatively impacted to some extent by market downturns, with the possible exception of dollar stores or gas stations. However, a company that sells automotive repair parts is relatively unaffected by economic fluctuations because there is always a need for vehicle repair.
The total U.S. automotive aftermarket for parts stores and auto repair centers was valued at $75.31 billion in 2018 and should grow at a 1.8% compound annual growth rate (CAGR) from 2019 to 2025, according to Grand View Research. The sector, which includes auto parts, tires and oil change stores, often performs even better during more challenging times, as consumers try to repair their vehicles by themselves to save money. In fact, The NPD Group found that during the COVID-19 pandemic, 12% of auto parts shoppers reported trying a new project or attempting work on their vehicle for the first time.
Also, analysts have written that most of the major auto repair chains—Advance Auto Parts Inc., AutoZone Inc., Genuine Parts Co. and O’Reilly Automotive Inc.—maintained sales during the pandemic because they generally cater to lower-income customers. These clients had far fewer telework options and continued to commute to work during the pandemic, and many had to maintain their older cars by themselves.
Overall, many consumers are also keeping their cars longer, which requires more frequent replacement of car parts. The average age of U.S. vehicles on the road was 11.9 years as of Jan. 1, 2020, according to data compiled by the Auto Care Association. That represented the ninth consecutive year that the average age of U.S. vehicles was 11 years or higher.
In AutoZone’s fiscal year 2020 report, management wrote they expect that the trend of aging cars will continue as consumers hold on to their cars and trucks longer to save money. As the number of vehicles on the road that are seven years old or older grows, AutoZone expects an increase in demand for the products they sell in their stores and via their website.
These trends have created additional opportunities for brick-and-mortar businesses that cater to the “Do it Yourself” (DIY) market and offer “Do it For Me” (DFIM professional providers) services. Discount DIY automotive part stores tend to outperform in more challenging economic times as consumers try to save money by repairing their cars instead of going to a dealer or an independent mechanic.
As a new investor or someone who wants to diversify their portfolio, you may be curious about “where can I find auto parts businesses for sale close to me?”
Finding an excellent investment can be complex. It’s important to learn about triple net leases and how they affect the acquisition of auto repair stores. Here is information about triple net properties and purchasing auto parts retailers.
Purchasing an Auto Parts Retailer: The Basics
Auto parts stores for sale can be great NNN investments, but buyers must pay close attention to location, the type of business and lease length. The industry has low barriers of entry, few restrictive regulations and an easily trainable workforce. Despite low barriers, there are high levels of competition that can make it challenging for new operators to succeed.
Selecting a Location
Choosing the ideal location for your automotive parts store is important for your business’s viability. A critical metric for the location’s quality is the saturation of auto parts stores in and around your prospective area of business. Therefore, it’s advisable to research the nature of your potential buyers and their purchasing power. Your town’s zoning commission can provide information on the latest mapping of your store location and the surrounding region.
Of course, the ideal location should be on a main road so that people driving by can see the store’s sign when they need an auto part or require diagnostic services. However, if the location is on a side street close to a main road or intersection, the next best option is to use signage to direct people from those main areas to your front door.
For automotive businesses, choosing a location involves more than finding a property that is easily accessible to customers. Your store will also have to receive shipments of parts and other materials from large delivery trucks. As a result, your location needs to have enough space around the building to allow trucks to enter and unload parts.
Purchasing an Existing Store
One of the best ways to enter the business is to purchase an existing store because many independent store owners want to retire or are interested in selling and doing something else. This type of purchase enables you to buy a well-known store and often obtain the inventory at a discount. Sometimes, the seller will include the fixtures without an additional charge, and the store may also have a computer system.
The seller may be willing to finance the sale at low interest if you are a buyer with an excellent credit history. The owner may also be willing to work with you during a transition period or even manage the store for you. Your supplier can help you transform a rough inventory into a current stock with parts and accessories for the newest vehicles. With a fresh stock and an established inventory, a new, diligent owner may be able to increase revenues by 50% or more in a few months.
Auto Parts NNN Leases
Another option is to purchase a building that has a triple net commercial lease with a franchisee of a major retail auto parts retail chain. In these deals, owners prefer tenants who will not default on a long-term lease during economic downturns. With NNN deals, the tenant is responsible for paying most of the costs, usually rent utilities, property taxes, building insurance and most structural and common area maintenance expenses.
Typical NNN leases for auto parts stores generally range from 10 to 20 years and are either double or triple net with renewal options beginning at five years. Escalation clauses are commonplace with a bump of 1-3% annually.
In general, triple net lease leases have financial benefits for both the landlord and the tenant. Every lease is unique to the property’s situation, but these leases have a favorable cost structure, and tenants know their annual rent for the lease’s entire term.
For tenants, a NNN lease is also beneficial because it enables them to pay a lower base rental amount, but they bear the risk of rising operating costs. Tenants can include these costs into their business expenses. Then, they can plan maintenance and repairs around their schedule, working with contractors to complete necessary work. Tenants can also create a presence and customer base with the assurance that they will be in one location for many years. This knowledge enables the business to become settled into a community.
Triple net leases are also beneficial to investors because it gives them the chance to focus energies elsewhere and on other properties or projects. There are fewer unexpected expenses for investors with NNN leases, as most costs are passed to the tenant. They can also expect consistent cash flow from their triple net properties.
How to Select the Best NNN Lease Auto Parts Store for Sale
Auto parts stores are an excellent investment opportunity for those interested in NNN real estate for purchase. Once you have decided to invest in an auto parts store, you can start by researching online to see the current, available properties.
The U.S. automobile parts retail industry is very well established and includes about 37,500 properties, including single-location shops and units of multi-location companies.
An important consideration is purchasing an independent store or a property with a leased to a franchisee of a major, national auto parts retailer. An independent store may be a viable opportunity in smaller towns. Many smaller communities can support an owner-operator yet are too small for the O’Reilly or AutoZone stores. For example, Aberdeen’s Cut Rate Auto Parts in Aberdeen, WA, has been in business for 66 years and has four western Washington state locations. Aberdeen is located in a county with just 75,000 people. The store emphasizes customer service and recently launched a website.
Equity experts at Morningstar predict that the auto parts chains will gain market as they capture sales from smaller competitors that may be forced to close or lack the sourcing capability to cope with the difficult supply conditions caused by the pandemic. When searching for suitable NNN investments, it is preferable to choose a corporate-backed retail outlet versus a franchise-backed lease.
The top auto parts retailers include AutoZone, Advance Auto Parts, O’Reilly Auto Parts and Genuine Parts. AutoZone has 5,885 U.S. stores and opened 49 new domestic locations late in 2020. Early in 2021, the company reported better-than-expected results for its fiscal fourth quarter as demand rose for auto parts. Same-store sales rose 22% compared to the same period in 2019, which was boosted by a jump in retail DIY business. Advance Auto and O’Reilly also reported strong fourth quarter of 2020 results. Advance predicted that demand for parts should increase in 2021 as people drive more than they did in 2020 during the pandemic.
A significant difference between the chains is that 90% of AutoZone’s sales is in the DIY sector, while Genuine Parts (NAPA is a subsidiary) favors DFIM, accounting for 75% of its sales. There are 6,000 NAPA auto parts stores and more than 16,000 NAPA AutoCare and AutoCare Collision Centers in the U.S. More than 80% of DFIM repairs for older cars (eight- to 12-years-old) were completed in the aftermarket, such as NAPA repair center, rather than dealerships in 2019.
What About Ecommerce?
As with many retail businesses, e-commerce competition is a concern for auto parts stores as well. To stay competitive, the major auto parts stores have made several changes to their brick-and-mortar properties and online properties. They have built several mega-hubs, which enable them to stock popular products and deliver them quickly to customers at one of their stores. Now, they can also bring a part to a customer stranded on the road within 30 minutes.
Many of these stores also generate a significant portion of their sales from commercial clients, such as independent mechanics that are well established. Traditional auto part retailers have an advantage over pure-play e-commerce companies because orders by mechanics have to be filled quickly, often within two hours.
Also, the physical stores have benefited from the relative popularity of buy online/pick up in-store options versus home delivery because customers can access advice from store employees and services offered in the stores. These services include battery testing and installation, essential diagnostic support such as check engine light scanning, free tool loans, oil and battery recycling and several others.
The triple net real estate experts at Sands Investment Group have helped investors close on many auto parts stores and auto repair business negotiations, including at various locations such as:
- Service King in Houston, Texas
- Mavis Tires & Brakes in Tallahassee, Florida
- Valvoline Instant Oil Change in Glendale, California
The trusted advisors at Sands Investment Group can bring more to the table than merely identifying properties for you. We can help with existing real estate assets, acquiring new operators or business and working to restructure leases to reduce your costs. We have handled one-off deals and acquisitions of multiple auto parts and repair centers to you obtain the right property for your portfolio. If you have a different net lease property in mind that you’re confident would make a successful business, we can help. We have handled deals on some of the most popular NNN business types. For more information or to begin finding your next auto parts business for sale investment, get in touch with Sands Investment Group experts. These advisors can help identify and secure a great investment opportunity for buying or selling. Call 844.4.SIG.NNN or send us an email to get started.