Introduction
Investors are consistently looking for the perfect investments, those that yield particularly both safety and substantial returns. To obtain both of these factors in today’s market is very possible, but how does one hedge the risk involved with obtaining such an investment. To find such growth and generous yield, we must settle for investment vehicles that are extremely risky such as indeterminate emerging markets or foreign bonds. At the same time, do these investments guarantee the safety that we as investors are comfortable having? In times of uncertainty like today’s market has bred, we must look towards alternative investments that are capable of hedging risk while yielding a more than reasonable return. One alternative real estate investment that has attracted investors for many years in the United States is the commercial parking industry.
Commercial parking as an investment is virtually a recession proof investment due to the nature of its industry. Although the industry demand is driven by the occupancy rates of commercial real estate, the need for parking will always exist as long as there are cities that breed jobs and suburbs that house workers. From the perspective of a conservative investor, investments that are safe from risk and show promise for moderate financial growth are generally very appealing. In terms of growth, the output of US parking lot and garage management is forecasted to grow at an annual compounded rate of 2 percent per year between 2012 and 2015 after a surprising growth of 5% in 2011. (First Research, 2012) Although these numbers sound relatively general compared to other industries, the growth rate of the commercial parking industry shows promise for the future. We now will look further into the details of the commercial parking industry and explore many of the essentials that prove the commercial parking industry to be one of America’s safest investments.
Overview of the Commercial Parking Industry
According to the International Parking Institute, the parking industry generates more than $25-30 billion dollars a year in gross revenues. (Institute, 2012) According to the U.S. Census Bureau, there are more than 105 million commercial parking spaces in the United States. (Institute, 2012) The commercial parking industry is greatly driven by the growth of new economic development. The construction of new hotels, commercial businesses, retail stores, condominiums, and other forms of construction significantly increase the demand for parking in major metropolitan areas. The positive and negative changes in the overall level of commercial and residential construction spending also greatly affects the demand of the commercial parking industry. (First Research, 2012) The value of US nonresidential construction spending, an indicator for parking facility demand, rose 10.0 percent year-to-date in June 2012 compared to the same period in 2011. (First Research, 2012) As the population increases and the economy continues to grow, the demand for parking is constantly increasing due to the need for parking to access these new additions to our nation’s housing and commercial real estate market.
Another factor that drives the demand of the commercial parking industry is the lack of public transportation in many of our major U.S. cities. The unwillingness to pay high prices for public transportation and the lack of public transportation causes more people to use their automobiles for personal transportation. This increase causes a shortage for parking in major metropolitan areas. Records show that there were almost 59,000 autos tire-booted in Chicago in 2007, and the number has probably doubled that by now. With the amount of illegal parking that is going on in Chicago and other major U.S. metropolitan areas, it’s clear that the demand for parking is growing. (Cherrist, 2008) This shortage in public parking causes the demand for parking to rapidly outpace the supply available. In 2007, there were 136,000,000 passenger cars in the United States. About 96% of the time, these vehicles were parked. (Institute, 2012) While the use of passenger cars in the United States is constantly growing, the demand for parking in metropolitan cities is growing at an alarming profligate rate.
Public transportation services and municipal parking are also a driving factor when determining the growth of the commercial parking industry. While more and more people become less dependent on public transportation, the need for municipals to meet this demand of parking becomes greater. In order to do so, cities must tear down existing facilities to make room for new construction of parking facilities. While most cities don’t have the funds available to meet the fast growing demand for parking, the demand is still left unmet. The lack of municipal funds causes the commercial parking industry to step in and meet this great demand, thus leaving a wide avenue for opportunity. According to John Roy, co-author of The Ultimate Parking Business Buyer’s Guide, “With the recession pummeling the price of almost all real estate assets, this is the best time to get into the parking market.” (Reuteman, 2011)
Ways to Invest in Commercial Parking
It’s clear that the demand for the commercial parking business is booming in America, but how do investors find exactly the right approach when it comes to diving into the commercial parking industry. There are many different ways an investor can diversify his or her real estate portfolio with commercial parking investments. Whether it’s parking garages, parking spaces, surface lots, or REITs, the opportunities that investors have to invest in such investment instruments are endless. Each has their own advantages and disadvantages that can be tailored to the right investor. Finding the correct method that fits your personal investment goals is crucial for ongoing success when it comes to investing in the commercial parking industry
Urban Parking Garages

Privately owned urban garages are a fantastic way for investors to jump into the commercial parking market head first. Although the start-up costs are very expensive in terms of constructing the parking garage and meeting federal and state safety standards, the future cash flows derived from the revenue of parking are very appealing. Well-located, privately owned urban parking garages are the most attractive parking investments, especially if they serve multiple daytime and weekend demand generators. (Bawolek, 2012) Privately owned urban centralized parking garages also offer the ability to mix daytime revenue with monthly revenue from leased spaces and contracts with local businesses. With today’s parking lot technology that allows payments to be made through machines that accept credit cards and cash, the operating expenses of parking garages are virtually becoming obsolete.
One disadvantage of privately owned parking garages are their exceptionally high insurance costs. Parking facility management companies buy comprehensive liability insurance to cover claims at their lots and garages. Property insurance covers damage or loss to owned or leased properties. Workers compensation and umbrella liability insurance are a normal cost of doing business. Due to the high cost of coverage, companies are typically responsible for a large deductible amount, such as the first $250,000 of any loss. (First Research, 2012)

Acquiring municipally owned parking structures is another way that investors can invest in commercial parking while avoiding the large construction costs associated with building a new facility. Municipal garages' cash flows often fail to support the debt service associated with the bonds issued to build the facilities. In fact, many municipal garages are loss leaders built to support expanding convention centers and other publicly funded projects. (Bawolek, 2012) This results in having the ability to acquire already established parking structures at a discount rate. Although possible, these facilities are very challenging for investors to purchase. In addition to the difficult acquisition hurdles, municipal parking facilities' outstanding bond debt typically exceeds the garages' value, even when using an aggressive single-digit cap rate. Also, municipal garages' parking rates intentionally are set below private garages' rates, lowering revenues. In addition, municipal facility purchases may include future rate increases and restrictions on staff reductions. Finally, buying a municipal asset puts a previously tax-exempt property back on the tax roll. (Bawolek, 2012)

Urban Surface Lots
Another great way for investors to gain a competitive advantage in the commercial parking industry is through the acquisition of commercial surface lots. Surface lots offer virtually no maintence fees and the operating costs are obsolete if the lots are serviced with today’s parking meter technologies. Surface lots are not necessarily valued by their daily profit, but more so there future opportunity for cash flows. These lots typically are bought as land plays in which the income covers all or a majority of the ownership costs until the parcel is ready for a change of use. (Bawolek, 2012)The land itself is worth more to the investor than the profits gained from parking on the surface lot. If the land appreciates, then your investment is making money both on its own and if you choose to operate it as a parking lot. Surface lots can also be used as a temporary profit driven investment by only allowing parking at certain times a year. Many lots in Detroit are only open for parking on game days such as Sundays for the Detroit Lions.
Purchasing Single Spaces
Leasing single spaces is another avenue for an investor who is looking to invest into the commercial parking market. Purchasing individual spaces is great for investors who do not have the capital necessary to purchase large structures or surface lots. Buying single spaces allows for the same “value” appreciation as surface lots and monthly/daily profits that urban garages offer. By owning a single space, you gain the real estate value if the area appreciates and you also are able to make money while owning the space through leasing. In New York City, prime parking spots are sold for as much as $175,000. In Chicago, deeded parking spaces run anywhere from $20,000 to $65,000. (Cherrist, 2008)
The best single spaces to own are those that are in areas where there are lots of apartments and condominium projects going up or already constructed. In major cities, people who want to use a car will pay a good amount of money to lease a space monthly that is located centrally to their living arrangement. This gives the owner a great competitive advantage because maintenance on the space has virtually zero expenses. With monthly lease rates for parking spots being anywhere from $300 to $500 on average in major metropolitan areas, purchasing single spaces and leasing them is a great alternative investment for an investor looking to diversify their real estate portfolio.
Investing in REITs
Another great way for investors to dive into the commercial parking market is through real estate investment trusts (REITs). Real estate investment trusts are securities that sell like a stock on the major exchanges and invest in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. (Investopedia, 2012) To qualify as a REIT, a company must have most of its assets and income tied to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. (REIT.com, 2012) REIT’s offer a low startup cost for investors who are looking to get into the commercial parking market because they can buy shares of a particular REIT like you would a stock in a particular company. There are many real estate investment trusts that focus particularly on commercial properties and some that even focus mainly on commercial parking investments.
Profits at a Glance
To understand how profitable of an investment commercial parking can be, let’s analyze an investment scenario using actual data. According to ParkingSearch.com (a real estate site for buying and leasing parking spots), the average parking space for the city of Chicago was $28,000 in 2005, $30,000 in 2006, and $33,000 in 2007. (Yanos, 2007) Say you decided to purchase a parking space in 2005 for $28,000 financing it with a loan at an 80% loan to value ratio. Your down payment would be $5,600 with a remaining loan balance of $22,400. For a fixed rate loan with 6% interest over a term of 15 years, your monthly payment would be exactly $189.02 per month. Now that we have calculated the payment for the parking space, we move into the realm of calculating our juicy returns off this spectacular investment.
According to Stephen Sinclair, founder of Parkingsearch.com, average lease rates for parking spaces in 2005 were $260 per month, $272 per month in 2006, and $285 per month in 2007. (Yanos, 2007) After the first year of leasing your space that you purchased in 2005, your revenue of $70.98 per month would have amounted to $851.76 in revenue for your first year. In 2006, your monthly revenue would increase to $82.98 per month which would amount to $995.76 for your second year. If you were to hold the space through 2007, your monthly revenue would increase to $95.98 per month which would amount to $1151.76 per year. If we sum all of the yearly returns from 2005-2007, your investment in the parking space that you purchased in 2005 would have generated roughly $3,000 in profit alone. Compared to $28,000 initial cost you invested disregarding taxes and fees, your investment would have yielded 10.71% over the first 3 years of owning the parking space.
The best part of this investment is not the figures computed above, but the value that the space has appreciated over the three years. The table below shows how the investment of the space has appreciated from 2005-2007. | 2005 | | 2006 | | 2007 | Value of Space | $28,000 | | $30,000 | | $33,000 | Appreciation | | +7.14% | | +10.00% | |

So say you were to hold on to the parking space for 2 years, reap its profits, and then sell it once the 2nd year is finished. You would have gained $5,000 on your capital investment while earning roughly $3,000 in monthly profit for a grand total of $8,000 in pure revenue. After selling the space and collecting your monthly revenues from lease payments, your investment would yield 28.57% over the 3 years. Now although these numbers do not include taxes and fees, they appear to be extremely accurate seeing that the parking space needs little to know maintenance. With this in mind, think again when you consider picking an alternative investment like commercial parking for your portfolio.
Why Commercial Parking? The Answer is Simple
Ownership of an investment in commercial parking can bring wonders to an investor’s portfolio for a variety of reasons. The demand for commercial parking in major metropolitan areas is extremely high and always will be until the personal automobile becomes obsolete. As more and more fuel efficient cars roll off the assembly line, the demand for parking spaces in major cities is growing by the day. As long as suburb commuters exist in our economy, there will always be an urgent need for parking in our nation’s major metropolitan cities. So in terms of demand, investors should never have to worry if their parking investment is being utilized properly as long as it is geographically placed strategically.

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