Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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INVESTMENTANALYSIS Out of Gas Many factors drive fueling station owners to default. by Stephen J. Donell, CCIM, CPM, ARM g 16 September | October | 2012 Gas prices increased 20 percent during the fi rst half of 2012. Lower oil prices decreased the pump price earlier this summer, but in late July, prices started climbing once again. Paradoxically, one of the businesses most negatively impacted by higher gas prices is the gas station. When consumers pay more at the pump, they might think that gas sta- tion owners are fl ush with profi t. Yet many unexpected variables can aff ect the profi t margins of gas stations. Coming off the recession, lenders are faced with an increased number of defaulted or distressed loans on gas stations. Com- mercial real estate and other professionals who encounter these troubled assets should understand how various factors, includ- ing current ownership trends and valua- tion practices, aff ect the profi tability of gas stations. Profi t Points A common misperception is that the major oil companies own and operate the major- ity of American gas stations. In fact, of the more than 100,000 U.S. fueling stations, less than 1 percent is owned by the oil com- panies. T e vast majority belong to inde- pendent operators who are subject to the whims of an extremely volatile marketplace and are in no position to share in the record profi ts enjoyed by their suppliers. Most gas station owners fi nd that higher prices mean less profit for them. As gas prices rise, owners must purchase increas- ingly expensive fuel, and, depending on their fuel supply contracts, they are oſt en forced to sell it at a loss in order to stay competitive. Unlike other types of income-producing commercial real estate, gas stations are val- ued using the gross profi t multiplier, which is the sale price of a going concern (or value of a proven property operation) divided by gross profi t. A going-concern value takes more into account than the value of the real estate; it also includes the intangible enhancement that an operating business enterprise provides, according to Stephen J. Morse, president of Retail Petroleum Consultants. Why are so many independently owned gas stations suff ering now more than ever? T e answer is complex. First, there are mac- roeconomic factors at work. Global politics impacts fuel prices and operators have no control over the actions taken by OPEC and foreign countries. In the U.S., higher unemployment rates mean less disposable income in consumers' pockets, which leads to decreasing levels of fuel consumption. Microeconomic trends also come into play. There may be an increase in competition from new gas stations opening nearby. Sur- rounding businesses may have laid off work- ers, decreasing the potential customer base. Infrastructure changes, such as commercial Commercial Investment Real Estate Martin Diebel/Corbis