Automobile prices skyrocketed during the pandemic as supply shortages and loosening lending standards worked in tandem to drive prices upward. Declining affordability and economic uncertainty are leading to a reversal of this wave.
Rising interest rates are increasing borrowing costs— an issue for companies that have relied on debt to fuel growth.
At the intersection of these two trends is Carvana, which has seen its stock price decline by 97% since its 25-billion-dollar valuation a year ago.
Carvana is famous for its car “vending machines,” where customers can take delivery of their purchased automobiles. In addition, there are 15 physical service centers nationwide to inspect and recondition used automobiles before they are resold. This report looks at the commercial real estate behind these iconic car vending machines, which are the physical interface for this online automobile dealership.
Carvana has car vending machines in nearly every major metropolitan region in the United States, often near freeways with high traffic counts. The first building was built in 2015 in Dallas, Texas, and the most recent one was built in 2022 in Escondido (San Diego). Most of the real estate is not owned by Carvana but is often sold shortly after construction in a sale-leaseback arrangement. This frees up much-needed capital for Carvana to focus on its core business.
These are fully leased assets with lengthy lease terms, which makes them ideal candidates for single-tenant real estate investors. Of the 31 properties identified in this analysis, 14 are owned by a single entity, STORE Capital (Single Tenant Operational Real Estate). It is a publicly traded real estate investment trust headquartered in Scottsdale, Arizona, near the Carvana Headquarters in Tempe. STORE Capital acquired many of these properties in sales-leaseback arrangements with Carvana and, in many cases, sold those investments off to other parties.
In September of 2022, Singaporean sovereign wealth fund GIC and Oak Street announced plans to acquire STORE Capital in an all-cash deal valued at $14 billion.
These car vending machines are immediately recognizable properties that millions of Americans drive past daily, many of which will soon be owned by foreign investors. If Carvana was to close its doors, these unique properties might prove challenging to lease up to alternative uses. The most likely buyer would be another automobile company. However, since Carvana’s current headwinds are industry-wide, future auto tenants would also be impacted.
Carvana is a brick-and-click hybrid company with iconic real estate. It promised to reinvent the car business but has never turned a profit, selling a significant portion of its real estate over the years to maximize working capital. Fully leased real estate acts as a bond-like instrument based on the tenant’s credit rating. Carvana’s long-term bonds are trading at distressed levels of 33 cents to the dollar, and STORE Capital has managed to gather all these assets and offload them to GIC, provided the take-private deal closes in early 2023.
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Thomas Galvin is the Director of Research for Stream Realty Partners’ Southwestern Region. He is a real estate economist with a focus on understanding and explaining macroeconomic trends through a commercial real estate lens.