The traditional retail model is in trouble.

And it’s not just due to the rise of online options.

There are simply too many stores selling the same exact items. It’s unsustainable.

One of the most recent examples of this overabundance is Big Lots, which filed for bankruptcy earlier this month. Not only was it competing with fellow discount stores like Marshalls, Ross (ROST), and Burlington Coat Factory (BURL)…

It had 1,389 locations throughout the United States – some within mere miles of each other. Which means they were also competing with themselves.

It’s just not an intelligent business model to run with. Yet that’s the game Big Lots and so many other retailers have played.

I saw that up close and personal from the ‘90s onward. Heck, I contributed to the problem, building for expanding companies like Dollar General (DG), Family Dollar, and Dollar Tree (DLTR). I even leased space to Big Lots.

They were expanding. With reckless abandon. An attitude that’s now biting them in the you-know-what.

Not to belabor the point, but I also developed a few movie theaters back in the day. And we all know how they’re doing thanks, it’s true, to the shutdowns and online streaming options. But once again, overbuilding contributed.

Perhaps the chains themselves didn’t do that, but the industry certainly did. Everyone wanted to capitalize on the concept since “everyone” loved going to the movies and always would.

Right?

You can see the common thread I’m spinning here, driving toward a single word. It rhymes with trouble and begins with B.

Today, I’m seeing the same story develop in the carwash business. Towns and cities across the country are becoming inundated with these facilities.

There’s a definite bubble growing here, and it’s bound to pop eventually. It’s only a matter of when.

The Beginning of the Great Carwash Bubble

In a world nearly obsessed with artificial intelligence, it might seem strange to be covering the humble carwash industry. But stay with me. If you’re a real estate investment trust (REIT) investor, there’s a chance you might have exposure to this industry without knowing it. And it’s worth understanding. 

I don’t know what the carwash landscape looks like near you. But I’m going to guess it looks a lot like my hometown.

Here in Spartanburg, South Carolina, I can count six within a three-mile radius of my office. And while we do have a growing population here, I’m going to go out on a limb and say that kind of saturation is way too many for 356,698 people (as of last year).

Since that figure includes children, it’s safe to say not all of them have cars. And most adults who own vehicles don’t wash them every single day.

Probably not even every single week.

Maybe not even once a month.

Yet this prevalence isn’t Spartanburg-specific. No matter where I go (and I do a good bit of traveling), I see carwashes everywhere.

To quote New Path Construction and Consulting founder and CEO Adam Garcia, “The carwash industry is entering a new phase of competitiveness as the density of washes seems poised to grow.”

Adding to that evaluation, Bloomberg’s Patrick Sisson sees a “cultural shift” that could potentially double the industry’s 60,000 locations by 2030. Back in 1996, you see, a good 50% of people would wash their own vehicles.

However, as he told NPR in March, about 80% are now done at carwashes. As a result, he says, the industry estimates that a single facility “can make about $1.5 million in annual revenue.”

That’s compelling data, so I completely understand why people are piling into the industry. In fact, it wasn’t long ago that I considered buying up one or two of these businesses myself to make some quick, clean cash.

But, unlike so many current entrepreneurs getting into the “biz,” I know firsthand that some businesses succeed, and others fail, no matter the industry or time.

And when there’s a bubble involved? Well, the failure rate ends up increasing.

A lot.

Consider the Carwash Resale Value (It Ain’t Good)

Yeah, some might say, but why not ride the carwash wave for a while, then sell at the peak?

Setting aside statistics that show how seldom market timing pays (a topic for another time), let’s examine the cons of straight-up owning a carwash. There’s the cost of the equipment, the water, and the electricity, of course. And possible salaries to pay and definite repairs to cover.

Even so, we already saw how the profit can be very pretty while the economic sun is shining.

Should darker times fall, however – and they always eventually do – you have to understand that these buildings aren’t always easy to sell. As Agree Realty (ADC), a net-lease REIT, points out in a white paper:

… landlords need to be discerning when determining which free-standing assets to acquire or develop. Not all free-standing buildings have the same qualities… and the differences can meaningfully impact long-term returns.

Owners should consider “the cost of tenant-specific improvements and resulting impact on rental rates, but most importantly, the size and configuration of the space.”

Let me explain exactly how that applies here.

Most carwashes are small, rectangular structures; and they’re always built with a very specific purpose that doesn’t lend well to any other use. If you can’t sell them to someone who also wants to run a carwash, the new owner will have to tear down the original structure and rebuild at their own cost.

Therefore, you’re going to have to mark the property down to make it more appealing.

The land itself, meanwhile, poses another problem. Again, most carwashes only take up so much space, begging the question of what other buildings can fit there.

The answer, it turns out, is a little limited.

These issues still apply if you merely rent the property to a carwash owner, as many net-lease REITs do. National Retail Properties (NNN), for one, owns 121 Mister Car Wash locations, representing 4.1% of its portfolio rent. And Essential Properties Realty (EPRT) owns 200 such assets, which generate around $63 million in rent per year.

The latter’s average industry-specific rent per square foot is $64.06. Which really isn’t bad.

But, again, the re-leasing problem is real. And the more this industry bubbles out, the bigger that problem becomes.

There will be winners when the bubble bursts, of course. As with other embattled areas of retail, I don’t expect the whole business concept to collapse.

However, as I see it, today’s carwash industry is like a game of musical chairs. And I don’t think it’s worth guessing which locations won’t get caught without a seat.

Regards,

Brad Thomas
Editor, Wide Moat Daily

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