Originally published August 2021.
Why the retail real estate world should take note.
In The Sun Also Rises, Ernest Hemingway famously writes, “‘How did you go bankrupt?’ ‘Two ways. Gradually, then suddenly.’” The quote expertly captures the idea that humans in business and life can be exceedingly inept at responding to slow-moving changes which pose an existential risk. The retail real estate world faces massive transformational forces today. As the advent of the electrical vehicle era nears, how market participants prepare will have substantial consequences in the decades ahead.
For the past century, the retail world has evolved enormously in different places and spaces. However, perhaps the one constant has been how reliant and defined the retail world has been on the internal combustion automobile. So much so that many investors struggle to even conceptualise what an alternative configuration of retail real estate might look like if it weren’t gas-centric.
It’s no surprise that almost every major intersection in America features at least one well-positioned gas station – and some intersections have multiple. The automobile’s strongest features centre around its ability to be refuelled and easily transport its occupants to various retail shopping destinations. This has been central to how commercial properties have been developed, situated and tenanted. While the future of retail will be impacted in a multitude of ways by the EV revolution, today I’m focusing on one aspect of that change: How will the differences between refuelling a gas car and recharging an EV shape and impact the retail world?
“The state of California (the land of interstates and freeways) recently announced the phasing out of all gas vehicles by 2035”
Before analysing these impacts in further detail, some context is in order: 2020 was the best year for new electric car sales worldwide, with sales tripling over the past three years alone. By 2030, some estimates project that 10% of the vehicles on the road will be electric (and 30% of all sales in 2030) and 90% of vehicles on the road by 2050.
The State of California (the land of Interstates and freeways) recently announced the phasing out of all gas vehicles by 2035. These stats tell the story of a world where the shift to EVs is accelerating. Yet, by some measures, investors aren’t accounting for that change just yet. The largest REIT focused on gas stations, Getty Realty, which has roughly 1,000 properties across the US, continues to trade near its all-time highs of $31 per share and actively purchase.
To fully appreciate the impacts of different refuelling methods, a good starting place is breaking down the differences between gas vehicles and electric vehicles:
Home charging share
• Unlike gas vehicles, which must be refuelled at stations, EVs achieve roughly 80% of their charging needs while idle at home or work.
• With the current range of most EV models, in tandem with the daily distance driven by these drivers, typically a stop for recharging is not required.
• Compared with the average gas vehicle, which stops for gas once every six days, this is a major shift in drivers for customers frequenting stations.
• This suggests that there exists a commonly held misconception by net lease investors that stations can simply add charging stations to pivot away from this risk.
“Refuelling at a gas station is usually completed within five minutes”
Long-distance charging
• This segues to the next major observation about EV charging: the vast majority of non-home/non-work charging which will be required will be as part of long-distance travel by drivers, which will (typically be) intercity destinations.
• This suggests that the need for charging stations will be overwhelmingly concentrated around freeway destinations with convenient access to on/off the freeway.
Destination charging
• Whereas refuelling at a gas station is usually completed within five minutes, depending on the model of vehicle and charger capabilities, an EV can take between 30-100 minutes to charge.
• While consumers can stay inside their vehicle during this time, research is showing most prefer to get out, stretch their legs and utilise this time for dining or shopping.
• With these dynamics being recognised, we can start to formulate what the impact the differences in charging models will be on both directly impacted and incidentally impacted segments:
Direct impact: gas stations & convenience stores
• Directly in the eye of the storm are, of course, gas stations, including their associated convenience stores. Today there are roughly 110,000 gas stations in the US and it seems quite evident that this number is going to decrease drastically in the decades ahead.
• However, that change is likely to be disproportionately skewed towards locations which are:
• Smaller-format convenience stores, where the gas business is their primary staple, with a more limited in-store selection of products.
• Situated in markets which are early adopters of EV ownership, such as affluent suburban locations, whereas more urban middle-income locations will likely see EV ownership lag substantially due to the higher cost of ownership and limited charging capability.
Direct impact: premier redevelopment opportunities
• The next couple of decades are likely to be the greatest generator of hard corner redevelopment opportunities since these sites were first developed as gas stations.
• Gas stations that find themselves less competitive due to downward pressure on revenues will be left with little choice but to shutter their operations and sell, in most instances to developers looking to reposition the locations.
• While most gas stations face substantial environmental concerns, the high-quality nature of their location positioning will ensure they preserve a good portion of their underlying value, especially when considering that gross traffic counts are unlikely to materially change by the EV shift.
Direct impact: convenience store arms race
• Already well underway is the development of a new era of convenience stores that are far less focused on gas as their central driver and value proposition to customers.
• In recent years some of the major US gas station convenience-store brands, such as 7-Eleven, Wawa, Sheetz and QuikTrip, have been developing a new generation of outlets designed to get customers into their stores with a much broader range of offerings. Food seems to be the main driver; for instance, 7-Eleven is testing out their Laredo Taco concept in Texas and Colorado.
• These stores stand to benefit much more favourably than traditional convenience stores, by continuing to draw customers even as the shift to EV becomes more pronounced. One can imagine a future in which these stores can add charging stations as a complimentary service offering to some (but likely not all) EV drivers, and still focus on the draw of the store-to=drive sales.
Analysing and predicting the impact of a revolutionary change in technology is without question a tall task, as the reach and breadth of the impact will be extensive. However, with these shifts already in motion, the retail real estate world would be wise to take note and plan accordingly.
