Regulations Constantly Re-examined, with Future Changes Predicted
Is parking the new asset class? Is it an asset class at all? As with many key questions in CRE, the answer often depends on who you ask. For example, on its web page, “Biscred’s Commercial Real Estate Asset Classes”, parking is formally included under the following definition: “This class of CRE refers to public and private for-profit or fee-based parking lots, garages and structures.” This inclusion is drawn from Biscred’s definition of CRE as “any developed or undeveloped property that is zoned and intended to be used for commercial or business purposes, including governmental properties.”
But the answer to the question as to whether parking is an entirely new asset class becomes a little more complex as you speak with SIORs, whose general response appears to be: “It depends on the type of real estate involved.” For example, in the industrial market, the answer appears to be “yes,” according to SIORs. However, when it comes to office projects the picture is quite a bit murkier.
“My initial response would be, for office, no; it’s an opportunity, not a class,” says Bob Gibbons, SIOR, real estate advisor and tenant advocate at REATA Commercial Realty, Inc., in Plano, Texas. “In industrial, however, I do — not for parking passenger vehicles but for truck equipment, and things like that.” He shares that he’s been working with a client, trying to find outdoor storage, and “it’s been a challenge finding it at any reasonable price; they’ve gone up ridiculously.” This particular client was not convinced those values were realistic and were about a week too slow to respond — and lost the deal because it. “Since then, I’ve not found anything remotely close and had to drive 50 miles or more out of town,” Gibbons reports. For now, they’ve done a two-year lease on outdoor property to give them more time to look for a place to buy.
You’ve got to build to code, but the impact of Uber, etc., changed things.
When it comes to offices, Gibbons says the demand for parking in many office buildings has really been reduced after COVID-19. “Prior to COVID, when I was on the planning & zoning commission a developer who had developed an office park had done a survey and analysis of parking through an entire portfolio nationwide, and found he did not need three (spaces) per 1,000 sq. ft.; there was only 1 in use for every 505 sq. ft. – two per thousand,” he reports. “He came to the city and asked for a permanent variance to reduce required parking, and they gave it to him.” Gibbons asserts that this did not create parking as an asset class, but rather freed up property that could be related to other uses – such as another building, a restaurant, or a day care facility. “It was basically a multi-million-dollar gift,” he declares.
But Gibbons points to other more problematic office scenarios. “With office condo projects, we’ve seen real challenges as there’s often not enough parking,” he observes. Owners tend to park in the good spaces and there’s no space for guests, he explains. “It took two years to sell one property because of the shortage; we had to wait until we finally found a buyer who did not have that much parking need,” he shares. The prior office example, he emphasizes, was a high-rise office building.
For Braxton Anthony, SIOR, principal in Rich Commercial Realty, Raleigh, N. C.., the situation with offices has been a roller coaster. “In the Research Triangle, and before COVID, I would say yes [office is an asset class],” he shares. “Parking was in demand and a challenge to secure in certain submarkets/CBDs. However, given hybrid work and the current landscape, many office buildings have empty parking spaces -- so today, no.”
In fact, he notes that he has seen some landlords get creative (to obtain alternative cash flow) and lease out parking spaces to adjacent businesses, etc. “Tesla is leasing parking spaces for extra inventory at an empty office building a mile or so from their dealership,” he notes. “A private school is leasing spaces from an adjacent office building that is currently 74% leased. This tells me that office tenants are not utilizing parking like they once were.”
But Anthony Bergeman, SIOR, executive vice president/principal with DAUM Commercial Real Estate Services in Costa Mesa, Calif., sees a different picture in industrial – specifically in the industrial outdoor storage asset class. “This was previously considered a niche market that was dominated by owner-occupiers,” says Bergeman. “But now institutional investors are actively pursuing IOS (Industrial Outdoor Storage) properties.. With the rise of e-commerce as well as complexities in the supply chain related to next/same day deliveries, there has been a significant increased demand for strategically located and improved outdoor storage space.” Due to potential high yields from credit-worthy tenants, low operational costs, and limited competition. Bergeman also adds that investors have been drawn to IOS in the last few years, giving it an estimated market valuation of $200 billion + and around $1.7 billion of institutional capital raised in the past year or so.
Bergeman notes that his team has been very active in the Port of LA/LB IOS market since 2008 and have seen dramatic shifts in this space since COVID, and drastic market swings in the past four years. “IOS, or parking, has become an asset class,” he re-emphasizes. “We have done several IOS deals in the past two years -- one of them of over $150 million.”
Impact of Regulations
How are parking regulations impacting development? Leasing? Sales? “In 2022, the Raleigh city council voted to scrap parking requirements for developers to promote more density (housing related) and walkability,” says Braxton. The council approved a text change that removed parking minimums for developments and put a cap on the amount of parking certain uses could include in projects. Prior to those actions, the city did not require parking for projects and properties downtown or in transit overlay districts, or within a quarter mile of frequent transit routes. There were no parking maximums for detached houses, townhomes, churches, industrial properties, and social services.
“It will be interesting to see if this continues,” says Braxton, “because at that time, the city council was pro development -- and now that has changed.”
He adds, however, that regulations governing parking ratios have not changed. “I’d say the standard parking ratio has remained consistent – four spaces per 1,000 SF for suburban office and 2-3 spaces per 1,000 SF for infill office,” says Braxton. “What has changed is the cost for deck parking in CBDs; once $100 a space per month, [they] can easily now be $150 a space per month.”
“In infill port-related submarkets such as Los Angeles,” adds Bergeman, “zoning and other local municipality regulations create a scarcity of improved, well-located IOS properties -- which makes the barriers to entry high.”
“Post-COVID there’s been a huge reduction in parking,” says Gibbons. “You go to buildings all the time that are just a ghost town, relatively speaking.” With new buildings, he continues, these buildings are still done for code, and very high-class projects do get filled, “and they are still building them to code -- or even a little bit more.”
In the downtown Dallas project Plaza of Americas, Gibbons reports, they arranged for a permanent lease for an adjacent parking garage. “They always had low parking ratios, and there’s a disadvantage to that,” he explains. “The Trammell Crow Center built a whole new parking garage to compete with the suburbs; the suburbs are finding they do not need as much parking as they used to. You’ve got to build to code, but the impact of Uber, etc., changed things.”
Gibbons adds that these changes have not really impacted his strategies when it comes to advising clients, because he does business on a client-by-client basis. “Many clients have a hybrid work schedule, but they like to have everyone in the office at once -- at least sales clients still have that culture -- and they bring in lunch for those days,” he observes. “They need their parking allocation for that day, but not every day.” In most suburban buildings he’s been to, Gibbons says, there are still far fewer overall cars in the garage or on the lot than prior to 2020.
Changes in The Future
Gibbons does not believe regulations will remain unchanged in the future. “I think there will be changes in the code,” he predicts. “I’m on the zoning rewrite committee, and we’re re-evaluating. We’re not into a specific discussion yet, but I know that’s coming.” He also notes that the coming increase of autonomous vehicles will also impact parking.
“We’ve already talked about giving developers more flexibility,” he continues. “My city recognizes we have some old inventory of office and retail that are kind of tired and not in use, and likely be redeveloped -- and zoning ordinances need to be more flexible, giving developers a bit more latitude in how they develop things.” He points out that a development in Allen, Texas, called The Farm, has already received flexible zoning.
Things may be a little different in North Carolina, however. “In Raleigh, I wouldn’t be surprised to see a return of parking requirements for developers in the near future,” predicts Anthony.
Whether communities elect to return to parking requirements or give developers more flexibility, SIORS are clear on one thing: Parking regulations are not carved in stone; they can, and will, respond to market changes. And one of those recent changes seems likely to be sustained -- at least for the short term: IOS will continue to hold the upper hand as a CRE asset class.
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