Commercial Magazine

Cracking the Parking Conundrum

Vehicle-storage costs can make or break commercial development deals

By Paul Rahimian

Parking may not be the first problem you consider when brokering a construction loan for a commercial property, but it can be a deal breaker. The parking requirements imposed by governments can substantially raise the costs of development, as well as the risk for mortgage lenders. In recent years, however, developers are finding ways to lower parking costs. The demand for parking spaces also is decreasing in urban areas with strong public transportation options.

Mortgage brokers should pay attention to trends in parking. The question of whether a new construction deal will work financially frequently hangs on whether your client can solve the parking riddle.

As the cost of development increases due to rising land prices, labor costs and building-material costs, property owners, developers and commercial mortgage lenders are taking a fresh look at how to manage parking requirements to reduce expenses. Parking adds significantly to the cost of developments.

A UCLA researcher in 2014 pegged the average cost to build an above-ground parking spot at about $27,000, and an underground space at about $35,000. As construction costs have risen, the costs to build parking spaces have gone up as well.

Traditional parking takes up space vertically and horizontally, adding to the land-acquisition and development costs. A developer may need to reduce the number of planned units in the development at a time when housing is desperately needed in some cities. Parking also brings additional maintenance costs. Charging stations, for example, have become an additional cost with the growing popularity of electric vehicles. All of this adds up to a heavy expense that can’t be easily recouped via higher rents. These costs can make it more challenging for a project to pencil out and be financed.

Property owners, developers and commercial mortgage lenders are taking a fresh look at how to manage parking requirements to reduce expenses.

Easing regulations

Recent trends in parking, however, are lowering the associated development costs. Developers are using more affordable ways to build spaces that satisfy parking requirements while using space more efficiently.

Another change is happening at the state and local level. Several cities have eased their zoning regulations in a move to spur more affordable-housing projects, allowing developers to build fewer parking spots per unit. Some developers have managed to avoid rigid parking-ratio requirements altogether with cooperation from local governments. Traditional parking is overdue for this disruption.

In 2015, for example, California reduced the parking requirements on certain affordable-housing developments that are located near qualifying public transportation. Since 2015, the minimum parking requirements for some housing developments have been reduced or eliminated in several major cities, including San Francisco, New York, Seattle and Portland, Oregon, according to the National Apartment Association (NAA).

Miami waived minimum parking requirements in its downtown area in 2010 and more recently extended the waiver to buildings of less than 10,000 square feet outside of downtown. As a result of these changes, the average number of parking spaces in relation to a building’s square footage fell sharply in the Miami and Fort Lauderdale markets between 2006 and 2016, according to NAA.

City planners are showing more flexibility. A few years ago, for example, the city of Berkeley, California, waived the parking requirements on a planned six-story office building. Under the city’s zoning laws, the developer would have been required to build 30 parking spaces for the roughly 42,000-square-foot building. Berkeley, however, has a shortage of office space and wants to encourage increased use of mass transit. The city granted a special-use permit whereby the developer will pay a fee that the city uses to provide structured parking. More cities are expected to adopt flexible requirements for parking around transportation hubs.

Design alternatives

Ingenious parking designs have enabled developers to lower their costs and save space. One solution that uses space efficiently is stacked parking in vertical lots. This design is already widely used in San Francisco, New York and other big cities with high land prices. These systems stack cars like blocks or pieces of a puzzle.

Stacked parking has been around for a long time. The first automated vertical parking system was created in Paris in 1905, using an internal elevator that could lift cars to different levels and then be parked by attendants. Today, advancing technology allows for semi-automated or fully automated vertical parking systems.

Stacked parking in multilevel buildings can triple or quadruple the number of parked cars in a given area at a fraction of the cost of traditional parking. As technologies improve, this system is becoming more economically feasible. Stacked parking in an office development can eliminate an entire level of parking, freeing up rentable space. This, in turn, increases the net operating income of the development.

For commercial mortgage lenders, stacked parking uses less space and reduces the overall development costs for the project. This also lowers the perceived risk for lenders, given the reduced development costs for the parking spaces and the potential to increase the future income. Another alternative to traditional parking lots is remote parking, in which a building’s tenants use a lot a few blocks away. In some cases, the off-site parking is served by a valet or a shuttle.

What will happen to all the parking spaces that have been built for today that will no longer be needed tomorrow?

Demand conundrum

Although innovations to parking designs can help reduce the costs of maintaining existing buildings, there’s another riddle to ponder in projecting the future place of parking in commercial real estate development — the declining demand for parking spaces. Commercial properties of the future will likely have less need for parking spaces because fewer people are expected to rely on cars.

Most apartment renters still depend on cars to get around at least part of the time. Tenants, however, tend to be less reliant on cars than they were in the past, especially if they live near downtown areas where they can walk to shopping and entertainment destinations, or have easy access to public transportation. In many suburbs, commuters are close to light rail or buses. They can leave their cars at home for weekend transit use.

This presents a conundrum for developers of all types of commercial buildings. Although parking is viewed as a necessity today, that may not be the case in many cities of the near future. People will likely do less driving. Ride-sharing, motorized scooters and other transportation options have been gaining in popularity, especially among millennials and Generation Z. If that trend continues, there will naturally be less demand for parking at the typical office building or apartment complex. This begs a question: What will happen to all the parking spaces that have been built for today that will no longer be needed tomorrow?

In 2017, for example, research by Green Street Advisors concluded that parking spaces could be cut in half over the next 30 years. Future demand for parking should be part of the financial calculation in new developments. Developers need to create flexibility into their building designs, thinking ahead to a time when parking spaces will go unused. In the future, more developers will likely seek to omit parking altogether due to its high cost.

The need for parking is changing. Ultimately, developers will be able to reduce or eliminate their parking expenses and that will create new opportunities to produce greater income from these buildings, now and in the future. The benefits will accrue to everyone involved in commercial real estate development.


  • Paul Rahimian

    Paul Rahimian currently manages a debt fund that provides construction financing to ground up real estate development projects on a national basis. He founded Parkview Financial in early 2010 and has since originated hundreds of commercial and residential loans, always plying his trademark hands-on management style. Distinguished from its competitors by dedicated in-house finance and accounting professionals Parkview is widely recognized as a pioneer in the industry, among the first to offer complete integration of loan origination and servicing. Prior to becoming a lender, Paul was a third-generation real estate developer and general contractor. Between 1988 and 2009, he successfully completed over $350MM in commercial and residential projects. His vast expertise and knowledge in the construction and development industry has benefited both Parkview and its borrowers. Paul received his B.A. from UCLA in Business/Economics and his Juris Doctorate from the University of Southern California.

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