For convenience store real estate, value is related to earnings. Because they are income-producing properties, the market value of c-stores is directly proportional to their capacity to generate sales and profits -- stores that earn more are worth more.
Property prices for c-stores today are down about 20 percent as a result of the Great Recession. Commercial real estate prices across the nation dropped about 40 percent during that recession, which began in 2007, but are now recovering. Based on the past relationship between earnings and real estate prices, we can project real estate price levels at full recovery. To illustrate this relationship, we can use gross profit as a measure of earnings.
The table below shows various levels of gross profit alongside the corresponding current real estate value today and the projected recovery value. It can easily be seen that stores with higher gross profits typically have higher real estate values. For example, a store earning a stabilized gross profit of $400,000 per year would have real estate assets worth about $1,040,000 today, and an expected recovery value of $1,320,000.
The real estate values in this table include the site, store building, canopy, underground storage tanks and dispensers. They do not include foodservice equipment, personal property or business value. The reported real estate value assumes typical management and is not based on any specific branding.
Per-store gross profit has been steadily increasing over the last decade, rising by about 4 percent per year, unadjusted for inflation. So, the decline in c-store property prices during the recession most likely reflected general economic conditions outside the convenience industry.
According to CoStar’s latest CCRSI Commercial Property Sale Index, commercial real estate prices are recovering and pricing growth is accelerating across the nation. We expect convenience store real estate prices to follow this trend.
In my next column, I will examine the economic realities of business value -- or the blue sky associated with the business -- and show how it is often overstated by sellers.
Robert E. Bainbridge is an author, instructor and expert witness in the appraisal and valuation of convenience stores and gas stations. He can be reached at [email protected]  or (541) 823-0029. Find more valuation information at www.cstorevalue.com .
Editor's note: The opinions expressed in this column are the author's and do not necessarily reflect the views of Convenience Store News.