Hi All - Happy Thursday and Happy Halloween. Is it just me or is it getting a little spooky around here 👻

It’s the last day of the month, which means it’s time for the Last Cast Letter.

Before we dive into today’s newsletter, I want to preface this edition with a quick overview of some facts and figures surrounding airline travel. It’s relevant to the rest of the piece. 

Airline travel has finally surpassed 2019 levels, marking a comeback from a four-year pandemic-induced slump. This past summer brought record-breaking airline traffic levels in the US. Some 250+ million people traveled between Memorial Day and Labor Day. It was an average of about 2.7 million people per day. That’s roughly the entire city of Chicago traveling every day.

But that doesn’t mean airlines are raking in the profits… quite the contrary actually. This year, the industry’s profits are projected to be 40% lower than in 2019 as the business travel segment struggles to recover and costs continue to climb. Labor and jet fuel aren’t cheap.

Okay, so why are we discussing the travel industry in a real estate newsletter? Because I love niche real estate plays that you never think about until suddenly they hit the headlines and you’re like, “Duh”.

To that end, earlier this month, global investment firm KKR made an interesting play. To reap the benefits of renewed air travel and avoid the sector’s downsides, KKR acquired The Parking Spot, America’s largest operator of near-airport parking with 47 lots near 28 major airports. The Parking Spot is a Chicago-based company. See how I’m weaving this together? Okay, let’s continue.

Green Courte Partners acquired The Parking Spot in 2011 for $360M, and while KKR did not disclose the details of its latest purchase, some rumors were floating around that the purchase price was $1.4 billion.

Zooming out, the viability of parking real estate, in general, is a fascinating concept.

On the outside, it looks like a mind-numbingly boring business. However, “boring” businesses can generate remarkable cash flow if executed properly. While a lot of money can be made in the subsector, some headwinds on the horizon could impact the space moving forward.

A Bird’s-Eye View

Estimates on the number of parking spaces in the United States vary widely, but the figure is somewhere between 700 million and 2 billion. This is enough to cover the entire state of Connecticut. For context, there are approximately 288.5 million vehicles in operation in the United States. So basically there are a lot more spaces than there are cars.

These figures are commonly cited to argue that America has a surplus of real estate dedicated to parking. But, for anyone who’s tried to find parking in a major city, it certainly doesn’t feel like there’s an excess of spaces. New York residents spend an average of 107 hours annually searching for a parking spot. 

This is because only 10% of that total inventory is paid parking, and parking facilities make up less than a tenth of the paid parking segment. Moreover, cities have largely banned new parking facility construction, which has caused demand and pricing to surge. 

The paid parking industry is highly fragmented with plenty of smaller players. Due to the high demand for parking, relatively low maintenance of parking lots, and the potential for scalability, it can be a lucrative investment for those who play their cards right. However, many of those smaller players don’t “play their cards right” and that creates plenty of opportunities for seasoned investors. 

An Inside Look

Take Kevin Bupp for example. Bupp is a prominent Florida real estate investor who focuses on properties with high cash flow potential. 

He’s tallied up over $250 million in real estate transactions with a portfolio spanning apartment buildings, assisted living facilities, and self-storage units. Among these investments, parking lots reign supreme as a unique niche with high profitability. 

At its core, parking lot real estate is a cash-flowing land play. Bupp found success by identifying up-and-coming markets with restrictions on new parking facility construction and by building relationships with parking lot management companies. Generally, these companies don’t own any parking lots but take a cut of gross revenue to handle the logistics and improve parking cash flow. 

Bupp’s pitch to parking lot managers is simple: alert me to potentially lucrative parking lot investments. I'll raise money and acquire the lots. You can manage them and we can both expand our footprint.

So, these managers identify parking lots in prime areas that are often wildly inefficient, whether due to a lack of automatic pay systems, adaptive pricing strategies, or parking contracts with surrounding businesses for employee and customer use. 

Bupp never purchases an efficient parking lot because its success is baked into the acquisition price. He keeps his eyes on undervalued assets in great markets because you can fix the first, but you can’t fix the latter. 

Another one of the biggest benefits to owning parking lots is that it's also a covered land play. 

By their nature, parking lots take up plenty of space. As the surrounding market grows, so does the value of the parking lot. But, unlike other covered land plays, parking lots allow investors to generate income while they wait for the property to accrue value. When the time is right, investors sell the parking lots to residential and commercial building developers for a nice ROI.

Threats on the Horizon

The parking lots and garages industry grew by 5.3% in 2023 to a $13.1 billion market size, but there are serious concerns over its long-term viability. 

These concerns stem from three sources of competition:

• Ride-sharing

• Improved mass transit

• Driverless cars 

Services like Uber and Lyft are becoming increasingly popular and many large cities are implementing plans to improve and expand public transportation. However, the real existential threat comes from driverless cars (thanks Elon).

Parking lot bears think driverless cars will drop passengers off at their destination and then park themselves on the edges of urban areas. This will lower demand for centrally located parking garages, the argument goes. 

What seemed like a potential threat that could rear its head sometime in the far future has become more real after Tesa’s recent reveal of the Robotaxi and the company’s plans to put fully autonomous vehicles on the road by next year. 

We always love to hear what you think, so let us know below:

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— Brooks