They often go unnoticed and unwanted, the gray, oil-stained parking properties that sit in the shadow of shining skyscrapers.

But Daniel Michaels believes he sees something that many investors miss – surface lots ripe for development and garages that just need a makeover to fulfill revenue potential.

His company, Stockdale Capital Partners, is getting ready to throw about $200 million into that strategy, aiming to acquire parking lots and garages in urban areas across the Southwest.

“Parking is often overlooked as an asset,” said Michaels, Stockdale’s managing director. “It’s kind of the secondary stepchild, but it can be a great and profitable business in its own right.”

Private investment in such properties has been growing for years as investors shrink away from the high prices and tough competition for trophy office towers and apartment complexes.

Stockdale is taking that focus to a new level, however, with its plan to tackle an entire region by partnering with an established national parking facility operator, San Diego-based Ace Parking Management Inc. London-based real estate investor Grosvenor Group is also a partner.

Stockdale was expecting to close last week on its first parking acquisition, a 500-car garage in San Francisco’s trendy South of Market district. Michaels said the price tag is between $15 million and $25 million, but declined to provide further details ahead of the close.

L.A. acquisitions are on the agenda as well, Michaels said, although identifying the off-market properties might require extensive pavement pounding.

Prime pricing

Stockdale is making a smart move to partner with Ace, said Keith Bawolek, managing principal at Vermillion Realty Advisors near Chicago, who began buying parking lots for real estate mogul Sam Zell in the early 1990s. Since then, he has seen investor interest in the parking niche increase dramatically.

“It’s definitely highly sought after,” said Bawolek. “Pricing is at the highest peak that I’ve seen in my career.”

Some prime parking structures around the country can sell at $60,000 to $90,000 a parking space, he said – far above their construction price of $20,000 to $40,000 a space.

“It’s no longer something that’s kind of put to the side. People now realize it’s an important revenue stream,” he said, listing municipalities, airports, and private investors as potential buyers.

Stockdale began its parking venture late last year and recently closed its first round of funding with Grosvenor. The firm said it is in discussions with several other investors and plans to raise the rest in tranches as assets are acquired, without a formal cut-off date.

The new assets would get tacked on to Stockdale’s $1 billion portfolio of commercial properties across the Southwest.

Parking cash

Founded in 2012, the firm is based in Westwood and has offices in Houston and Scottsdale, Ariz., with a staff of 60 people. L.A.-based principals Steven and Shawn Yari, brothers whose father was a real estate investor in the 1960s in New York, co-founded the venture to expand their family office, Triyar Cos. Inc. Working off initial capital from Triyar, Stockdale has various global and institutional investors, and aims to be a large institutional manager of funds, Michaels said.

The firm has raised $250 million across separate accounts toward acquiring medical office buildings and last year formed a $75 million partnership with New York private equity fund Siguler Guff & Co. for value-add investments across the Southwest, he said. Stockdale is also targeting apartments intended for seniors.

The parking focus came about as Stockdale was trying to find a niche that didn’t feel too crowded and would be able to withstand a recession. The sector also seems less costly than others within commercial real estate. While average capitalization rates are 5.6 percent for offices and 4.3 percent for apartments, according to CBRE data for the L.A. area, parking structure cap rates in metropolitan areas nationwide range from 5.5 percent to 6.5 percent, according to Adam Tischer, a senior vice president at Colliers. That higher cap rate, a way to calculate potential return on investment, means pricing is essentially lower. Much like bonds, lower cap rates indicate more secure investments while higher cap rates imply greater risk.

Stockdale became acquainted with Ace, which manages 450 facilities across the country and employs more than 4,500 people, over years of buying properties that happened to be attached to parking lots.

Michaels said he also noticed developers heading to urban neighborhoods to build apartments, hotels, and retail – making surface lots shoot up in value as potential redevelopment sites.

Finding focus

That’s proved to be the case in development-heavy downtown L.A., said Mark Tarczynski, Colliers International executive vice president.

“Your big pot is on the sale down the line to a developer who’s looking to turn the lot into a building,” he said.

According to data provided by L&R Group, a downtown operator of Wally Park and Joe’s Auto Parks, L.A.’s urban core lost at least 8,000 parking spaces just in the past couple of years. As lots are snatched up, existing parking structures become good investments, too. They can substantially raise rates while sucking up the vehicles that still need a place to park.

“You’re seeing huge increases in parking rates,” Tarcyznski said. “It’s a decline in supply, it’s an increase in demand.”

These factors that make parking lots and structures attractive to own make them more expensive to buy and harder to find, however.

“I don’t know if they’re late to the game, but they’re definitely on the backside,” said Kevin Litwin, chief operating officer at L&R, which manages roughly 100 parking facilities in Los Angeles and owns about half of those.

In addition, while surface lots can yield profits when they become development sites, garages might face uncertainty in changing markets such as downtown Los Angeles, he said, where people are not yet flocking to buildings still under construction.

“There’s a lot of speculation,” Litwin said. “It could mature to the point where it’s a great ROI, a hell of a win, but nobody knows right now.”

Unless a property is seriously distressed or mismanaged, there might be few ways to improve operations and boost revenue, said Bawolek, the long-time parking investor.

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