Commercial real estate is feeling the impact of rising interest rates, and that includes marinas. Transaction activity declined in 2022 from the record-breaking levels set in 2021, creating an inflection point for marina valuations. At the forefront of this market shift is the new interest rate environment which is here to stay, and likely continue to grow through 2023. The debt market shift started impacting transactions in Q3 and Q4 2022, with many deals stalling and investors hitting the “pause” button until the situation was better understood (See Intermediate Subset ($1-10M Tranche)).
Interest Remains High
Adjustments are still being made by sellers and buyers alike, but interest in the asset class is still high. There may be more diligence and caution applied on the front end (deal-specific), but we expect to see continued demand for marina assets given that fundamentals remain strong going into the 2023 season (for instance, many owners are planning to raise rates this year). Ultimately this bodes well for property cash flow and lessens the odds of widescale distress among marina assets. We also expect pricing to continue adjusting as the debt market shifts and investor acquisition criteria responds. Debt is almost always involved at some level in the $1-10M range, dictating buyer leverage, cost of debt and ultimately the expected earnings from the investment.
While the Intermediate Subset of transactions ($1-10M range) is the primary indicator of investor sentiment based on the proportionate level of total annual sales in the price range, institutional capital has continued consolidating the marina space with dealership and marina acquisitions around the country. A few headline transactions at the institutional level in 2022 include:
- Suntex-Westrec Merger ($400M)
- MarineMax Acquisition of IGY Marinas ($480M+)
- Brunswick Acquisition of Four Marinas & Freedom Boat Club Franchise in the Southeast
- Freedom Boat Club Acquisition of Tampa Bay Franchise (30 Locations)
Many of the new consolidator companies have continued expanding their portfolios throughout 2022 as well, and we believe they will continue to find excellent opportunities in the marina space.
Based on analysis from reported sales data and anecdotes from transaction experience, lower transaction volume in 2022 can be attributed to two primary macroeconomic factors: inflation and interest rates. We see this throughout the commercial real estate industry, with core asset classes like multifamily and retail recording declines in transaction volume. While capital and interest in the asset class remain healthy, the challenge to successful transactions will be achieving a meeting of the minds between seller and buyer.
One of the biggest challenges to real estate transactions across the board is the “bid-ask” spread. Adjustments have been made over the last few months as the rising cost of debt has taken effect, but pricing in 2023 is expected to continue adjusting downwards from 2020/2021 sentiment and metrics. Most marinas sell to individuals and partnerships, rather than institutions with large balance sheets. Based on 2022 data, 8 out of 10 marinas trade in the range where the acquisition is more likely to be financed. These buying decisions are also more likely to be influenced by household finances, which includes additional inflationary pressures and higher interest rate effects.
Adjusting to a New Market
As with any market, timing it is incredibly tough, and rather a feat of luck than knowledge. On the other hand, recognizing when we are in a new market is much more achievable by evaluating real-time data and staying active in the market. The new interest rate environment is here to stay, and investors have (and will continue to) adjust their strategy and investment approach so new lending requirements and cash flow expectations are met. This impacts pricing (discussed earlier regarding the “bid-ask” spread), and the cost of debt is now going to feel like a true cost. Transaction volume can be expected to decline as strategic selling decisions are scrutinized and buyers become more selective with their investment capital.
Investment Trends Outlook
Looking forward, we believe 2023 will be a pivotal year as the Fed continues fighting inflation, which is expected to bring further interest rate increases by year’s end. On one side of the buyer-seller adjustment equation, we can expect buyers to adjust offer prices as debt markets tighten – a good rule of thumb that we like to use is for every 1% rise in interest rates, there is a corresponding ~7-9% loss in value.
As it pertains to sellers on the other side of the equation, adjustments to marina values should be expected. Fundamentals are strong, but cap rates are rising from significantly compressed levels witnessed over the last two to three years.
As with all markets, there are ups and there are downs. Currently, we are in the adjustment period where 2020 and 2021 pricing is no longer achievable in most cases, as negative leverage will result, or very little cash flow is left after the debt is paid at that price point.