As the lure of urban living pulls more residents from the suburbs, developers are scooping up prime real estate in downtowns across the United States. Soaring property values have created opportunities for owners of an overlooked, underdeveloped asset: the surface parking lot.
Sales of such lots have risen nationwide over the past five years, surging to more than 200 transactions in 2016, according to data from CoStar, a commercial real estate agency. That number is more than double the amount in 2006 through 2014, when fewer than 100 surface lots a year were sold. The majority of these sales have been in urban areas, according to CoStar.
Analysts say the trend is fueled by lot owners looking to cash in on a booming real estate market and developers seeking to build on what are often the choicest sites in town.
“From a landowner’s standpoint, values have increased tremendously over the last several years, and it’s a great time to capitalize on that,” said James D. Letchinger, founder and chief executive of JDL Development, which is building a pair of skyscrapers on a parking lot in Chicago across from the Holy Name Cathedral that the company bought in 2017 from the Chicago archdiocese for $110 million.
“The reason they’re valuable is because many are sandwiched in the middle of really strong locations,” Mr. Letchinger said.
Sales of parking lots may rise further, research shows. The parking industry is still generally strong nationwide, with revenue up 1 percent annually since 2014, according to a report released in May by the research firm IBISWorld. But the same report forecast a bumpy road ahead, with annual revenue growth shrinking to 0.2 percent through 2024 and a wave of consolidation hitting the industry.
The report cited factors for the change, including an increase in traffic congestion, which dissuades drivers; greater interest in car-pooling and cycling, as well as a rise in bike infrastructure like new lanes; and a surge in the use of public transportation and ride-hailing services like Uber and Lyft.
“Ultimately, these trends are anticipated to gradually reduce the need for parking facilities moving forward,” the report said.
This includes the surface lots that are peppered throughout cities, a vestige of a time decades ago when car ownership had surged and mass transit use had declined. Surface lots bloomed throughout the country, in big and small markets. Now, these lots are becoming more valuable.
“It’s like when you’re playing Monopoly, and you get your ticket for Boardwalk — that’s how rare it is,” said Gina Farruggio, a broker with Fox & Roach Realtors who recently listed a one-acre parking lot just off the boardwalk in Ocean City, N.J., for $4.5 million. The lot is ripe for development, possibly as a hotel or condos, Ms. Farruggio said.
In Atlanta, a parking lot roughly a 10-minute walk from the Jimmy Carter Presidential Museum and Library has given way to a 16-unit townhome development. At least a half-dozen surface lots have been reborn in Charlotte, N.C., including one at the former headquarters of The Charlotte Observer and another across from the Charlotte Transportation Center, which was bought by White Point Partners and Dart Interests for $10.9 million in June.
Such sales hint at the potential developers see in the lots — and the money it takes to wrest them from owners, said Jay Levell, a co-founder of White Point.
“There have been some parking lots in Charlotte that have been operating for decades,” Mr. Levell said. “If you think about what they paid for it back then and the income coming in now, it’s absurd. It’s hard for them to give it up.”
Because of the increase in demand, the owners of these lots can command high prices.
A lot on Newbury Street, the popular Boston shopping destination, that the same family had owned for more than a century sold for $40 million in July. L3 Capital, a Chicago firm that specializes in retail development, bought the site, the last surface lot along Newbury.
At least five other surface lots in the Boston area are either on the market or have recently been sold and are set for redevelopment, including one that Procter & Gamble sold to Related Beal, a developer based in Boston that is planning to turn the lot into a mixed-use project totaling 1.1 million square feet.
Denver, too, has benefited from the trend. In June, Pepsi sold two parking lots across from one of its bottling plants there for a combined $36.19 million. The buyer is reportedly looking at building an apartment complex on the site.
A couple of months later, Harbinger Development in Boston paid $17.5 million for a 25,000-square-foot surface lot in downtown Denver. At $700 a square foot, the sale was most likely a record for undeveloped land in Denver, according to the brokerage firm CBRE.
Harbinger plans to redevelop the property, but it can bide its time with the approximately 75 parking spots it now owns.
“If, for some reason, we can’t capitalize the deal, we have a nice cash-flowing asset that is always parked on,” said Eamon O’Marah, managing partner at Harbinger.
Other developers shared that sentiment.
“It takes time for the development process to play out,” Mr. Levell said. “During that time, you have income coming in that can pay for all or a portion of those costs and/or provide some modicum of a return.”
If the real estate cycle begins to slow, the developer can sit on the land and wait. “Whenever the market comes back or the demand returns, you will be ready to begin construction,” Mr. Levell said.
The other benefit is that surface lots are by definition empty.
“There’s no pre-existing building conditions, so you don’t have to worry about demolishing something and, say, you find asbestos and all of a sudden you’ve got to encapsulate and do all sorts of crazy stuff,” said William Shanahan, chairman of CBRE’s New York City Capital Markets group.
In fact, the only disadvantage might be the occasional pushback over loss of parking, which the Los Angeles developer Lowe Enterprises encountered when it and a partner, AECOM Capital, won the rights to build on a lot next to a light-rail stop in Culver City, about 10 miles west of downtown Los Angeles.
The 500,000-square-foot development, called Ivy Station, is expected to open next year with 200 apartments as well as 240,000 square feet of office space that WarnerMedia has leased for HBO, Cinemax and other operations. Despite initial resistance, Tom Wulf, a Lowe executive vice president, said the 5.2-acre site had proved ideal in the long term.
“You are starting with a clean slate, you have the opportunity to build out, you create the context yourself,” he said of surface lots.
Mr. Wulf and other developers are not predicting the death of parking lots. Rather, the nature of parking in relation to development is changing, especially in cities. The Culver City project, for instance, is expected to have 1,500 below-ground spots.
And Harbinger plans to include a 500-spot garage as part of the complex it plans to build on its surface lot in Denver, Mr. O’Marah said.
“Even though Uber and Lyft and ride-sharing is useful and used all day long, when it comes Friday, people want to have their cars,” he said.
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