It’s a natural time for marina owners to evaluate selling their marina assets as the national economy continues to recover. However, there are many considerations and complexities that come into play beyond the macro-economic perspective, because each property has a unique set of circumstances and market dynamics.
The market bottomed out in 2009 and has been slowly recovering since. Considering 2013 as a transitional year, the economy is now two years into the current up market. Based on a typical cycle lasting about five years, an argument can be made that there are two or three years left in this up trend, so it does appear to be a good time to at least consider selling a marina property.
Consider a marina’s market-specific position in any evaluation. During the Great Recession the worst marinas suffered first and conversely during the recent recovery the best marinas recovered first, so it’s critical to know the market position of a property. This is true not just in the immediate area, but in the broader region as well. How does the marina compare with the competition on a local and regional level? Is it well located?
Consider the marina’s development potential, including understanding pricing and development trends in the market and how that pricing compares to the marina value as a going concern. Is the property still competitive and is it in need of major repairs in the near future? If so, consider if these repairs can be made and whether doing so will provide the necessary financial returns. If the marina has a dry stack component do the racks accommodate the latest boating trends? For instance, center consoles are getting bigger and while the most popular boat sizes used to be less than 30 feet, the average size has increased and boats of 30 to 45 feet with greater height requirements have become most popular.
South Florida as National Bellwether
South Florida is an interesting case study to consider given its position as a leading marine sector market. The recent sale of Lauderdale Marine Center, the nation’s largest such transaction at a reported $145 million, has many in the national marine business taking notice. In Miami Dade County the recovery was first noticed in 2012 with the resurgence of the Miami residential condo market and influx of foreign national money. Those same foreign nationals either brought their own boats from South America or bought new boats domestically. Those boats started filling up marinas and slowly but surely Miami Dade County marina occupancies started increasing and rental rates began to rise. The trend continued northward into the Fort Lauderdale market and along the coast, where it leveled out a bit in Palm Beach, and to Martin County where it’s still relatively flat but slowly improving.
In 2014, fuel prices continued to drop and boat sales increased as recreational boaters headed back to the water and new boat orders increased. Record numbers of attendees were being reported at South Florida boat shows and many boatyards started hiring new employees and rehiring others as orders for new equipment and boat repairs increased. Most boatyards are currently full and the values for marine-oriented land have appreciated to near pre-recession levels. While storage rents are still off peak 2005 pricing, rents are increasing and occupancies are improving.
After nearly five years with no sales of marinas or boatyards in the region, transactions are finally starting to occur and capitalization rates are falling. A capitalization rate is the metric that refers to the net annual operating income in relation to the price paid for the asset. It’s a way of pricing risk. There are many variables involved in the formulation of overall capitalization rates, but the lower the capitalization rate the higher the value. Prior to the recession, capitalization rates were in the 5 to 6 percent range. During the recession capitalization rates often exceeded 10 percent, if properties could even be sold. In many cases the marina was encumbered by debt which exceeded the value of the marina. These properties are known as a risky class of real estate to traditional real estate investors and lenders. Unlike retail stores, warehouses and apartment buildings, marinas rely on disposable income, similar to fixed based operations for airplanes or self-storage warehouses. As such, marinas are typically the first property sector to decline and last to recover.
After nearly five years with very little marina sales activity, marina investors appear to be diving back in. Two recent Class “A” wet slip marinas that recently sold in Miami Dade reflected capitalization rates of 6.5 percent and just over 8 percent. The difference in the two was that the higher cap rate was reflected by the risk associated with a lesser remaining underlying lease term. Also, a well located wet slip marina in Fort Lauderdale recently sold at a capitalization rate approximating 6.5 percent. The buyer plans on renovating the overall property and increasing the rents. Further north, a large wet and dry slip marina also recently traded at a capitalization rate just over 7 percent. Suffice to say, marina capitalization rates in the region are dropping and values are rising.
Marinas and Bank Financing
A good sign that the national marina market is recovering is broader availability of bank financing. From 2009 to 2013, banks provided little or no financing, which mainly shifted financing to expensive private sources. Banks are more actively providing marine related loan opportunities now that conditions are more favorable. Developers generally seek marine development opportunities only when the potential rents exceed the costs of construction and the project is feasible. This happens when the prices of existing marinas get priced high enough that it makes sense to deliver new inventory.
Making an Evaluation
Given that the current recovery may last two or three more years, it’s an important window of time to apply the market specific considerations noted above in evaluating the sale of any marina. Make all assessments in a frank manner and consider retaining an experienced third party to verify data and conclusions. It’s also essential to evaluate the risk of facing another potential down cycle given each person’s unique financial situation, health/age, and personal/professional goals.
Walter B. Duke, III is president of Walter Duke + Partners, a 40-year old Fort Lauderdale based commercial real estate valuation firm, and he is a two-term elected official in Dania Beach, including the current position of city commissioner and a past term as its mayor. Visit www.walterdukeandpartners.com for more information.