COVID-19 and Parking
In this edition we will look at the unprecedented and sudden downturn in volumes across carparks in Australia and how COVID 19 will fundamentally change the commercial landscape for parking operators and owners.
Authorities are trying to flatten the curve of infections to allow our medical system to cope. Isolation, quarantine and social distancing are important elements in containing the epidemic. We have already seen cancellation of all major sporting events and social gatherings limited to two people. Pubs, clubs, hotels, casinos and all convention and exhibition centres are closed. International travel is non-existent and domestic travel limited.
Qantas has laid of 20,000 workers, Virgin another 9,000 and the entire retail sector is on the verge of a complete shutdown as Myer prepares to close all its stores (with another 10,000 staff laid off) following Premier Investments and Kathmandu/Rip Curl. Corporate Australia is on a massive cost cutting exercise and parking is not immune.
You want free parking – you have now got it at Melbourne Airport! This follows on from Perth and Brisbane City Councils instigating free short-term parking in several areas. Perth City Council has also closed three carparks on the weekend. Brisbane Council has turned off 8,000 parking meters, will not issue fines and will offer $5 all day parking at its two main CBD car parks.
All of this has happened in less than a month – and we are only starting to see the impacts of rising unemployment.
COVID-19 will fundamentally change the parking industry in Australia.
Before we go into detail it is worthwhile stepping back and looking at some of the key structural elements of the industry – most of which ParkScience has covered in previous articles.
The three main operators have a portfolio of leased, managed and (very few) owned sites.
Due to intense competition and an unprecedented period of economic growth, margins on leased sites (at a site level excluding administrative overheads) will be averaging somewhere between 3 and 6%. For operators it has been increasingly difficult to make higher margins as the profit share percentages of gross revenue in the leases have moved from 70% to over 85% over the past twenty years.
Profits on leased sites are cross subsidising managed sites – where fees are in the $30-$40,000 per annum range.
With such fine margins, and rents increasing by 3% per annum it only takes a small adjustment in vehicle volumes to see leases quickly turn to loss makers. Parking operators have been very good at reducing costs over the past decade, primarily through the use of control rooms that allow sites to operate without labour. Rent and Parking Levy now represent the majority of carpark costs, so operators have no cost levers to pull that will offset the revenue losses we are seeing in the market.
The other impact of the highly competitive market has been the dilution of clauses within leases that protect operators from supervening events – such as light rail construction OR a pandemic.
And remember that the last major downturn was in 1990, so there are very few executives who have been through this turmoil. And this downturn is the same – BUT different in that it is both supply and demand driven.
The final piece of the puzzle – and most concerning – is the rise in overdue credit card debt and mortgage payments we are seeing. This is most likely the result of the bush fire crisis, so the default rates will only increase as unemployment rises. As we saw in 1990 when households are debt stressed parkers become commuters very quickly as the majority of licences are month to month. And the level of cancellations of monthly licences is already at record levels and we are yet to see the impact of debt distress.
Let us now move to what is happening or likely to happen in the market. The following generators of trade have already been hard hit.
- Airports and consequently off airport carparks
- Restaurants, bars and nightclubs – night and weekend trade is almost non existent
- Sporting events – AFL/NRL will play without patrons and more to come
- Convention and Exhibition centres
- CBD Hotels
- CBD offices
We are now seeing large corporates shift to home-based work. Telstra require ALL staff to work from home for the next two weeks. Parts of CBA are splitting their workforce – 50% work from home each week. This trend is now widespread amongst corporates following the Government recommending a 1.5 metre self-spacing exclusion zone. Driving down Bridge Street in the morning peak yesterday I saw only three other cars on the road ahead. The Sydney CBD is a ghost town.
Oil and gas prices have fallen over 30% - and will have an impact on all major Australian producers such as Chevron and BHP.
Weekday volumes are down over 50% and weekend volumes even lower with further decreases across all parker categories occuring. With April being a month long school holiday and the Easter effect, the only carparks in Australia that will be profitable are those that are owned with no debt. Every other leased site will be a loss maker – and those with multi-million dollar rents placed in a precarious position.
Tech group Smarking, who monitor the real time dynamics of over 2,000 carparks across North America has analysed data from 541 off street sites that show a 50 to 70% drop in volumes since the National Emergency was declared on March 13th. This data is not inconsistent with Australia.
In 33 years in the parking industry I have never seen a downturn of this magnitude, or seen volumes fall of a cliff in a three week period – and it will get worse. The industry is in uncharted waters.
Any operator that entered a lease impacted by any or all these generators in the past few months will be kicking themselves.
Any agreement that is in a HOA stage and non-binding on the lessee will be re-negotiated or simply let go if this has not happened already.
Leases that are on month to month holdover and exposed to the above generators will be re-negotiated or terminated if this has not happened already.
Owners and operators with off airport carparks will have little if any income in the coming months.
There are a number of portfolio tenders in the wings from large corporates or REITS. These present a conundrum for owners – proceed and face substantial rent reversions or negotiate short term extensions with rebates or rent reversions - or both - and hope the market improves. We are likely to see the introduction of incentives to parking leases in the same way office leases are structured.
As no one knows how long this will last or the extent of the impact on each of the trade generators described (or others that are yet to appear) operators will be extremely cautious in forecasting revenues in the short to medium term. Remembering that parking is a habit formed business and it will take time for trade to return – and it is likely that it may not do so to previous levels at a significant number of sites. This will not be a V shaped recovery.
The average lease term is between three and five years, and with over 400 leases between the major operators, between 80 and 130 will be expiring this year alone. Expiring leases will see substantial rent reversions.
For managed site owners, including the large shopping centres, the situation becomes more complex as they will feel the full impact of the revenue losses immediately. And the REITS must have a lease due to taxation issues.
This will stretch the resources of all parties in dealing with a substantial number of agreements in a short period of time.
With volume and consequential revenue drops of this magnitude creating substantial loss-making leases, something will have to give between operators and owners. And it is hard to make a case for revenues to recover to 2019 levels in the next five years and probably longer.
The whole issue of leases is so problematic the National Cabinet on 29th March agreed to a moratorium on evictions over the next six months for commercial and residential tenancies in financial distress who are unable to meet their commitments due to the impact of coronavirus.
Commercial tenants, landlords and financial institutions have also been encouraged to sit down together to find a way through to ensure that businesses can survive and be there on the other side. A common set of principles set by National Cabinet agreed and endorsed by Treasurers, to underpin and govern intervention to aid commercial tenancies is as follows:
- a short term, temporary moratorium on eviction for non-payment of rent to be applied across commercial tenancies impacted by severe rental distress due to coronavirus;
- tenants and landlords are encouraged to agree on rent relief or temporary amendments to the lease;
- the reduction or waiver of rental payment for a defined period for impacted tenants;
- the ability for tenants to terminate leases and/or seek mediation or conciliation on the grounds of financial distress;
- commercial property owners should ensure that any benefits received in respect of their properties should also benefit their tenants in proportion to the economic impact caused by coronavirus;
- landlords and tenants not significantly affected by coronavirus are expected to honour their lease and rental agreements; and
- cost-sharing or deferral of losses between landlords and tenants, with Commonwealth, state and territory governments, local government and financial institutions to consider mechanisms to provide assistance.
These wil provide a practical framework to assist operators (and all lessees) through the downturn. They are a portent of the fundamental change in the commercial relationship between operators and owners which will require both parties working closer together at a site and portfolio level.
For owners of carparks the issue will be a substantial reduction in base rents that will flow directly to valuations. A $1,000,000 drop in annual rent equates to a $20,000,000 drop in valuation at a 5% capitalisation rate. And ParkScience knows of a significant number of sites that will see rent reductions of at least this level and a few that will push towards $2,000,000 in the next two years.
The likely impact post COVID-19 will be:
- Substantially lower base rents with higher profit share percentages.
- Greater transparency on revenues and expenses within leases.
- Mandatory Force Majeure style clauses.
- Rental payments moving to the 15th of the month from the 1st of the month.
- Maximum 3 year terms.