Apartment landlord Camden Property Trust (NYSE: CPT) has seen the future, and it believes that people will be living in garages.
That's a bit of hyperbole, of course, but not as much as you might think. That's because Camden prepared in advance so that converting a parking garage in Denver to living space would be easy. Here's why it has taken this step and why other property owners are doing the same thing -- despite the higher costs involved.
A higher price tag
There's a big difference between an apartment building and a garage. Real estate investment trust (REIT) Camden knows that both are important today, since having adequate parking is one of those amenities that makes renting an apartment from the company more desirable. With over 160 communities containing more than 55,000 apartments across eight states, it has some experience with what customers like. What's interesting here, however, is that Camden doesn't just buy apartments, it also builds them, with around a half-dozen development projects in the works this year alone.
Image source: Getty Images
That means it can build in the amenities that make the most sense, like fancy kitchens, two sinks in the bathroom, walk-in closets -- and plenty of parking. Sure, a swimming pool and gym might have a wow factor, but if you can't find a place for your car, you aren't likely to be a happy tenant.
But when Camden built its Lincoln Station apartment building in Denver, it did something that was, at the time, a complete waste of money. It made the garage ceilings taller than they needed to be; put in extra space for wiring and utilities that weren't installed; and built the structure to withstand more weight than a parking garage would ever bear. It also designed the layout differently, so that there was more flat space inside the structure, minimizing the impact of the ramps that automobiles need to get from floor to floor. Changes like these are estimated to add around 5% to the cost of a parking structure. That sounds small, but these are multimillion-dollar projects, so a few percentage points can be a big deal.
These are all necessary changes, however, so that Camden can more easily convert the garage to apartments at some point in the future. Importantly, the extra costs paid today will save the need for demolishing the structure down the road. And since expanding existing assets often results in higher returns than buying assets or building from the ground up, Camden is doing all of this with an eye toward the future and, notably, its returns. But it isn't alone in these moves: Peers like Hudson Pacific Properties (NYSE: HPP) and AvalonBay (NYSE: AVB) are doing the same thing in Los Angeles at an office and apartment building, respectively.
What do these REITs see ahead?
The driving force (pardon the pun) behind these garages is driverless cars. Companies like auto industry maverick Tesla and technology giant Alphabet, among others, are increasingly advancing the ability of cars to drive themselves. Even entrenched auto giants like General Motors (NYSE: GM) are working on the technology.
Image source: Getty Images
In fact, GM recently got a $2.25 billion investment from SoftBank's Vision Fund to help it commercialize its GM Cruise autonomous-vehicle division. That investment values the GM Cruise unit at roughly $11.5 billion. Honda (NYSE: HMC) has also partnered in the division, having invested in it in late 2018 (at a higher valuation). To provide a reference point to how far things have come, GM paid around $1 billion to create the division via the acquisition of Cruise Automation in 2016 -- just three years ago. While driverless cars were once a science-fiction fantasy, they are getting closer and closer to the real world.
And that will have a major impact on REITs like Camden, Hudson Pacific, and AvalonBay. The logic pushing their garage rethink is that tenants will eventually own fewer cars because they simply won't need them. Autonomous vehicles will take care of driving people around on an as-needed basis. But that future isn't here just yet, so garages are still a necessity, at least for a little while longer.
When driverless technology does finally go mainstream, however, Camden and its future-thinking peers will be able to easily convert unused garage assets to other purposes (like apartments and office space) -- and, cost-effectively, turn dead space into revenue-generating properties. The worst-case scenario is that the big conversion never happens and the REITs simply overpay a little for these garages today. That seems like a decent risk/reward trade-off, particularly in metropolitan areas with space constraints.
No dystopian future needed
The idea of living in a parking garage might conjure up images of a bleak, postapocalyptic future. But that's not what apartment owners Camden and AvalonBay see in their crystal balls. They are working to prepare today for a better future, when owning a car isn't the necessity it is now. And preparing now for that outcome could easily set them up for higher returns in the future as they cost-effectively convert assets to new uses.
This alone isn't a reason to buy Camden, AvalonBay, or Hudson Pacific, per se, but it is a statement about how the REITs view their businesses. They could just sit back and keep doing things the same old way, but they aren't -- they are working to future-proof their assets. You might want to do a little digging to see if the REITs you own possess that kind of vision, too.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (C shares) and Tesla. The Motley Fool has a disclosure policy.