The Economy and Marinas
The economy is moving into a lower gear, following a historic post-pandemic recovery and expansion. The return of consumer and business demand was uneven, contributing to elevated inflation in 2022 that lingers into 2023. Marina owners are having to adjust to higher prices across nearly every category, such as: wages, fuel costs, parts, ship’s store items, insurance, and more. A potential pullback in personal spending and corporate investment would dampen GDP growth in 2023, which seems inevitable. With credit card limits at an all-time high, that could hinder discretionary spending on luxuries like boating (and, therefore, impact marina income). Regarding marina investment, a narrowing spread between debt costs and marina cap rates could lead to a greater disconnect than already exists between buyers and sellers. Yet, fundamentals are strong and support the operation, even amidst a few macroeconomic shifts that sellers and investors should factor in when deciding to buy and sell.
In March 2022, the Fed started Quantitate Tightening with their first 25 basis point increase to the Fed funds rate. Shortly thereafter, four consecutive 75 basis points increases were introduced, aggressively shocking the market, and quickly changing the investment landscape. Even as marina revenues and net operating income (NOI) across the country were higher year-over-year (which should have supported higher valuations), the 400+ bps increase in interest rates throughout 2022 had a cooling effect on values due to eroding cash flows.
This ultimately slowed investment activity as buyers evaluated their financial positions, which impacted marina price points as the “bid-ask” spread widened. In short, we are no longer in the 2020/2021 “era” of pricing, as the cost of debt is more expensive, and less cash flow remains on existing NOI after the debt is paid.
For comparison, as it relates to lending:
In January of 2021, the prime rate was 3.25% and with a 2.5% margin, marina investors could expect an interest rate around 5-6%. Fast forward to Q1 2023, the prime rate is around 7.75-8%, making a resulting rate with a 2.5% margin around 10.25% (negative leverage for marinas priced at cap rates less than 10.25%).
While certain loan programs are in the 10-12% range, an investor in Q1 2023 could expect to find interest rates around 6.5-7.5%. This is a material shift compared to the rates that could be obtained in 2020 and 2021, and it is a shift that will continue to be reflected in offer prices as more EBITDA/NOI is required to service debt. Not only does higher debt service erode cash flow (i.e. investor return), but it reduces the Loan-to-Value (LTV) and overall purchase price the market can bear. There are numerous cash buyers still in the market, but they are sensitive to interest rate pressures as well and how the Fed’s policy impacts their capital stack.
The Demand Side
Marinas recorded the highest occupancies ever in 2020 and 2021, and this was a continued point of strength for marinas in 2022. The primary drivers were: 1) limited supply of marinas; 2) increased demand for those slips/racks; 3) the excitement of owning a boat driven by impulsive buys at boat shows; and 4) inability to store the boat elsewhere. Boat sales have slowed to a pre-pandemic level since the second half of 2022. Yet, there is a significantly higher number of boaters today than pre-pandemic, and the overall age of boaters has shifted towards younger generations.
Rate growth has benefited from full occupancies and extensive wait lists – demand indicators that are still strong through Q1 2023, and which we expect to remain strong through the year. Some locations have vacancies due to property-specific issues (dredging, deferred maintenance, lack of amenities), while others are organically vacant because of a tertiary market.
We continue to see marinas in suburban and rural markets benefit from net migration out of major metropolitan areas to the Southeast, a shift that was initially driven by the COVID-19 pandemic and the ability to work remotely (a trend we noted in earlier reports). This is largely a shift of new second-home and lifestyle-change buyers, as most of the sought after locations are on or near lakes and attractive coastal markets. Other trends include redevelopment and re-purposing opportunities, which are either new to the property or complementary to the existing business.
The Supply Side
According to IBISWorld, there are approximately 10,445 marinas in use in the United States. This inventory is not materially increasing like we see with self-storage facilities and car washes, but there are new projects coming online with decent consistency. The permitting/approval process can be lengthy and costly, but when planned correctly, these developments can make for an excellent investment and become an economic driver for the area.
Expansions are a common value-add component we see, as mentioned above. These can be opportunities that create additional capacity for a marina, introduce new amenities or services, or create a mixed-use component that has synergies with the existing marina. Different from curing deferred maintenance (repairing bulkhead, fixing parking lot, fixing boat ramp), these opportunities provide an economic return and typically increase the storage capacity of the marina – the core profit center of the asset class.
Ultimately, the “supply” takeaway is that marinas are not like other commercial real estate which can be easily developed with the right site, proper zoning and capital. There are expansions opportunities, but there are still barriers to entry for new marinas. This can be an advantage or disadvantage depending on who you ask (marina owner, boat owner, investor, government, etc.), but marina valuations are positively impacted by limited supply (and a low probability of new supply), since demand and rate growth for existing storage space is high. On the other hand, low-demand locations with ample supply are more prone to vacancies – not necessarily due to property-specific causes, but a factor of the location and boating market. We carefully assess those factors with each asset our team works on because there are always opportunities to improve operations, if not completely re-purpose the site for another new, or complementary, use.
Marina sales data is dynamic as new sales become public, are recorded, or identified with a price. Based on the most current, available data recorded for 2022 sales, transaction volume and average sale price have declined from 2021. The median price is virtually unchanged (~$3.1M), while total recorded sales between $1-20M declined from 142 in 2021, to 129 in 2022. The median price is considered a better statistical measure of trending value because the average is easily influenced when a large quantity of small or large sales exists in the data set. Further analysis of the Intermediate Subset ($1-10M range) provides insights into where marinas traded in 2022, and the result points to the higher range with fewer overall sales.
Natural disasters, whether a hurricane, tornado, microburst, or fire, have devastating effects on the marina industry. Florida’s West coast, specifically Ft. Myers, Cape Coral and surrounding areas suffered catastrophic damage due to Hurricane Ian in September 2022. Property damages are estimated around $70B+ , thousands of boats were destroyed or damaged, and a few dozen marinas took on varying degrees of damage throughout this region and the rest of the storm’s path.
What does this mean for marina owners? Aside from immediate cap-ex needs for repairs, insurance costs are going up (and have already taken effect). We have seen this shift have a negative effect on pricing, as the insurance expense will cut into NOI, similar to the effects of more expensive debt. The Florida marina market is exceptionally strong, and well-positioned to continue increasing storage rates which helps off-set this expense, but even marinas outside of Florida will feel the trickle-down effect as their own premiums begin to rise.
The main takeaways for marina owners are:
- Partner with an insurance agent that specializes in marinas. Connect with us to learn more about who we recommend.
- Make sure you are properly insured, including your docks – not just upland structures. This reduces the likelihood of a lower valuation when a buyer “adjusts” your NOI for this added expense.
- Stay ahead of deferred maintenance. The marinas that came out in the best shape post-storm had stronger infrastructure and were well-maintained.
- Make sure you have a plan in place. This includes hurricane preparedness for boaters, boats, employees, and property.
Our Market Forecast 2023
After looking at all the demand drivers, marina inventory levels, macroeconomic factors, transaction data and impact from natural disasters, we have a cautious, yet optimistic, outlook for 2023. We believe transactions will continue at a healthy pace as fundamentals remain strong. Sellers and buyers must be cognizant of the changing environment so appropriate expectations can be set:
- With financially healthy marinas, increasing occupancy, and strong support for increasing slip/rack rates, we believe the asset class remains a great alternative investment for both private clients and larger, institutional investment companies.
- We expect to see more owners continue holding their asset(s) when physically able (and desiring) to continue operating. Cash flows may stagnate in some areas, but the fundamentals are very strong around the country and lead to excellent income for owners.
- Prices are expected to cool as cap rates expand amidst further interest rate hikes and a tighter debt market.
- Consolidation is expected to continue by institutional investment companies, with excellent opportunities for stabilized and value-add marinas around the country.
- Boat sales are normalizing to pre-pandemics levels. 95% of boats sold in the U.S. are less than 26’ – a demographic more likely to finance the purchase, and therefore more sensitive to rising interest rates.
- Marina owners should focus on boater retention and introduce amenities and events that foster a stronger community. The goal should be to keep current boaters active at the marina. A few ideas are: boat rentals, boat club, education seminars, boat driving courses, paddleboard/kayak rentals, fishing trips, holiday events.
- Insurance rates are rising, and it is best to stay on top of how this expense may impact a marina’s value.