State of the Net Lease Car Wash Market: Year-End Optimism Following Slow Start to 2024

The net lease car wash market experienced slow transaction activity in the first half of 2024. On-market inventory remains elevated, but transaction volume is picking up as the debt landscape improves and demand from bonus depreciation-motivated buyers increases going into year end.

The net lease car wash market experienced one of the slowest six months in recent memory for transaction volume in the first half of 2024. According to Northmarq research, only 23 net lease car wash transactions closed in the first quarter of 2024, with just eight closing in the second quarter. This represents more than a 55% decline in transaction volume when compared to the first half of 2023 – more than 70 net lease car wash transactions closed during that period.

The stark decline in transaction volume is not unique to the net lease car wash sector. Overall net lease transaction volume was down 7.7% in the first half of 2024 versus 2023. A principal factor in reduced transaction volume has been persistently high interest rates and the reluctance of sellers to accept higher cap rates despite the challenging debt landscape. The U.S. 10-Year Treasury hovered well above 4.25% for much of the first half of the year resulting in available debt mostly above 7.00% for prospective net lease car wash buyers. Yet, the average asking cap rate for net lease car washes still held at 6.54% as of July 1, 2024.

Fortunately, we see positive trends emerging that should result in more robust net lease car wash transaction activity in the second half of 2024. Recent macroeconomic and geopolitical events have sparked a rally in the bond market pushing the U.S. 10-Year Treasury below 4.00% for the first time since February – around 3.85% midway through the third quarter. In addition, we have seen increased demand from tax-motivated buyers seeking bonus depreciation benefits. Tax-motivated buyers have been the most active buyer pool for this asset class since the passing of the Tax Cuts and Jobs Act of 2017 (TCJA).

The combination of lower interest rates and the emergence of bonus depreciation-motivated buyers should help spark transaction activity going into the end of 2024. That said, it will still take time for the persistently high inventory of net lease car washes to be fully absorbed before we expect to see material decreases in average sale cap rates. The average sale cap rate for net lease car washes in the first half of 2024 was 6.92%, and we expect most deals to close at or around that level in the last few months of the year.

Market Stats: First Half of 2024

Publicly marketed net lease car wash inventory has remained high throughout 2024, averaging approximately 150 on-market properties in the first half 2024. At the start of third quarter, 159 net lease car washes were publicly marketed. Average asking cap rates have risen almost 30 basis points, from around 6.25% at the start of the year to 6.54% as of July 1. The average asking price for a net lease car wash on July 1 was $5,007,445.

Notable M&A Activity

Two notable mergers and acquisitions occurred this summer. Both transactions demonstrate mega-cap private equity’s continued interest in the car wash space and the trend toward consolidation in the industry.

• June 2024: KKR took an $850 million stake in Quick Quack Car Wash. Quick Quack operates more than 230 units in the western U.S. This was the largest car wash M&A transaction since Oaktree Capital Management's investment in Whistle Express Car Wash last summer.
• July 2024: Whistle Express Car Wash acquired Fins Car Wash, which operated 15 locations in the Carolinas. The acquisition boosted Whistle Express’ total unit count to more than 150.

Status of Bonus Depreciation Legislation

Earlier this year, there was excitement when the House of Representatives passed legislation that included a retroactive reinstatement of 100% bonus depreciation for 2023 and an extension of 100% bonus depreciation through 2025. However, that bill stalled in the Senate. Currently, bonus depreciation will stay at 60% for 2024 before dropping to 40% in 2025.

While an eventual modification to the bonus depreciation sunset schedule seems likely, given bonus depreciation’s general popularity in Congress, any changes on this front remain unknown and meaningful legislation addressing this issue is unlikely to pass ahead of the November election. If bonus depreciation is eventually extended by Congress - whether this year or some other time in the future - it will significantly boost demand for net lease car washes from the tax-motivated buyer pool.

Final Thoughts

The lack of traction on modifications to the bonus depreciation legislation has frustrated many in the car wash operator and investor community, but we still expect to see strong demand from tax-motivated buyers in the coming months. The bonus depreciation advantage decreasing further to 40% next year should inspire some to act before year end. In addition, recent decreases in interest rates and a widely held expectation that the Federal Reserve will begin lowering its benchmark interest rate in the coming months have inspired a more optimistic tone in the market overall.

That said, high inventory is still an issue, and until a majority of outstanding net lease car wash product is absorbed, it is unlikely that we will see meaningful decreases in average sale cap rates. Regardless, the landscape has undoubtedly improved in just the last few weeks. Assuming we do see a meaningful absorption of inventory in the next few months and achieve progress on the bonus depreciation legislation front, we could be set up for a much more liquid and active marketplace through the end of this year and into 2025.