For real estate investors who want to escape Amazon’s reach, convenience stores represent a nice option.
“Many investors of single tenant retail properties are drawn to C-store properties due to the overall performance of the gas sector, being naturally ‘Amazon-proof’ as well as the financial strength backing the leases of these convenience store brands,” says William Wamble, first vice-president in SRS Real Estate Partners’ National Net Lease Group. “Typically located on or near major intersections in areas with high traffic counts, these investments provide excellent long-term viability in the underlying real estate.”
The Tax Cuts and Jobs Act in 2017 also gives investors tax benefits real estate investors a break by purchasing gas station properties. Regulatory changes have also made the sector more attractive.
“The old days of high environmental risks are long gone,” says Patrick Nutt, executive vice-president of SRS Real Estate Partners’ National Net Lease Group. “Due to updated regulations on both the state and federal level, and much improved equipment and standard indemnifications from the tenant, landlords have never been in a better position. Sprinkle in some tax savings due to accelerated depreciation, and you’ve got the perfect formula for a popular investment vehicle.”
With this as the background, some of the larger players in the convenience store space are in growth mode. “7-Eleven is aggressively expanding, splitting its efforts between new development and acquiring smaller and regional players,” Nutt says. “Sheets, Cumberland Farms, QuickTrip and Racetrac are all active at this point, pursuing new locations which bodes well for net lease owners and investors looking to acquire over the next 12 to 24 months.”
Some of these stores look more like restaurants than gas stations, which helps explain their popularity. “There seems to be a clear bifurcation on the C-store business model, one playing the volume game of low-cost fuel and more focus on a higher quality in store product, such as Wawa, QuickTrip, Sheetz and the like,” Nutt says. “They have changed the category of convenience food, offering high-quality sandwiches, coffee and prepared foods. Their competition looks more like Panera than an old gas station with hot dogs and microwave burritos.”
In the other model for convenience stores, the location differs. “High-volume gas stores need to be at the primary intersection with the greatest traffic count, while the smaller format stores are able to locate blocks away from that intersection or in more in-fill sites where gathering two or more acres is simply unrealistic,” Nutt says. “They are the most convenient for both fuel and traditional C-store merchandise. In doing so, they are able to drive better margins in the gas portion of the business versus focusing on the fresh made foods.”
Wamble says scale and efficiency is key for the large chains in the gasoline distribution business. The margins on gasoline sales are measured in cents per gallon, not a flat percentage. “There are weeks or months where operators may experience gas sales at a loss or break even, so having the ability to save a few cents per gallon up-stream in the supply chain is crucial,” he says. “The great retailers of the world, Walmart, McDonald’s and others, have been enjoying efficiencies of scale for decades so it’s no surprise the gas space has seen similar influences.”
Despite these efficiencies that come with large scale, there is still room for smaller players. “If you create a unique offering, customers will show up,” Nutt says. “This is emblematic at sites like Buc ee’s, which only has 36 locations. It offers massive fuel stations with 100 fuel pumps and claims to the title ‘cleanest bathrooms.’ If you ever visit a Buc ee’s, you’ll be quick to see how well they can thrive.”