In this article, we analyse the private market for parking in the City of Copenhagen. We argue in favour of more widespread use of differentiated pricing structures to restore the supply and demand balance. Although parking may be expected to remain a lucrative business for the next decade if not longer, new technologies such as shared parking and self-driving taxi fleets are believed to pose a severe challenge in the future.
Shortage of parking facilities
Since the surge in private motoring in the 1950s, Copenhagen has tried to adjust its infrastructure to an increasing number of cars on the city’s roads. Like in so many other European cities, it has generally been difficult to secure sufficient parking facilities.
In Copenhagen, the number of cars increased by some 31% between 2008 and 2019. According to Donald Shoup’s The High Cost of Free Parking, an average car may expect to stand still about 95% of the time, with parking demand all other things being equal increasing substantially with the higher car count.
The surge in the number of cars in use has been driven not only by population growth but also by a more pronounced preference for car availability among Copenhageners. As illustrated in Figure 1, the proportion of Copenhagen families with access to a car is higher today than in 2008.
In a dynamic metropolis like Copenhagen, parking demand will to a great extent be driven also by factors like tourism, number of visitors and workplaces as well as net commuting flows. It is therefore fair to expect substantial fluctuations in the city’s parking demand, determined both by time of day and by geographical location. For instance, a parking garage in close proximity of the Copenhagen high street, Strøget, will likely experience virtually limitless demand on a Saturday afternoon in December but hardly be fully booked on a Tuesday evening in February.
The fact that the Copenhagen parking demand manifests itself in many forms and variations is no doubt instrumental in exacerbating the natural mismatch between average parking demand and peak time demand. Since the introduction of paid street parking in central Copenhagen in the 1990s, this mismatch has constituted the financial basis for private parking providers. For those that manage to secure sufficient parking facilities at the right time of day at the right price, the next decade is expected to support a lucrative business case.
How to optimise the value of a parking garage?
To optimise the value of a parking garage, it is first and foremost important to get the “right” pricing structure in place. At first sight, this may well appear to be stating the obvious, but the optimal pricing structure of a parking garage is a surprisingly complex affair: Is it to include differentiated hourly fees? What about monthly subscriptions? And should there be special fees for business users?
The answer to questions like these must be based on the price elasticity of parking. In brief, price elasticity in this context is a measure of how sensitive motorists are to parking fees. This sensitivity is affected by numerous factors such as location, hour of day, duration and purpose of parking (e.g. business or shopping).
Before trying to determine the optimal pricing structure, it is therefore essential that you get a clear idea of what “type” of parking garage you are dealing with. Some examples are listed below:
- Underground parking garage of non-CBD residential property. Here demand for hourly parking tickets is likely to be minimal. Instead, parking spaces can be let on a monthly basis or be sold off to local residents. Price elasticity is determined mainly by parking availability in the area and the general financial standing of residents.
- Easily accessible parking garage in the CBD. Here it is fair to expect substantial demand for hourly tickets. Price elasticity will be determined mainly by the specific time of day, week or year, and it will generally tend to be low. If full occupancy is a rare phenomenon, it could be an idea to introduce business and resident subscriptions as a supplement.
- Parking garage at shopping centre. Here demand will be driven mainly by visitors to the shopping centre and therefore by hourly tickets. As the shopping centre wants to attract more customers, there may be a financial incentive to keep parking fees artificially low. Such a strategy is found e.g. at Fisketorvet Copenhagen Mall, where the first two hours of parking are free.
- Underground parking garage of office property. Here it will often be easy to sell relatively expensive business subscriptions (e.g. through lease agreements). Price elasticity is typically low as businesses are forced to make sufficient parking facilities available to their employees.
If you review the current offering of parking in Copenhagen, you find a broad range of different pricing structures. However, one general trend stands out: The degree of price differentiation is relatively modest.
From a theoretical point of view, a dynamic pricing structure (i.e. full-scale differentiation) will always be the optimal solution. Such strategy is adopted by e.g. transport business Uber to adjust supply and demand. However, several studies have shown that for a pricing structure to have the intended effect on motorist behaviour (adjust demand, that is), it must be both easily understandable and acceptable to motorists. However, dynamic parking fees are generally perceived to be non-transparent and ethically problematic.
On the other hand, an overly simplified pricing structure – e.g. a flat hourly fee – will render it impossible to bridge the supply and demand imbalance over time. For most parking garages, a simplified pricing structure will therefore hardly be the ideal solution. We believe that efficient parking garage operations in a vast majority of cases require the proactive application of price differentiation, with the optimal pricing structure therefore presumably varying from facility to facility.
Uncertain what the future will bring
Although the demand for parking in Copenhagen is hardly likely to slow significantly over the next decade, the outlook is more than a bit uncertain in the longer run.
Firstly, parking demand is likely to be affected by the expansion of the public transport system (the new metro system in particular). Similar trends have been seen in cities like Hong Kong and Paris, where public transport systems rank in the world elite and the number of cars is relatively modest.
New technologies may also be expected to influence the future market for parking. Although a concept like shared parking is already quite commonplace in Copenhagen, we believe there is further potential for revolutionising the market for parking. In brief, shared parking is a kind of Airbnb for parking spaces. For instance, most parking spaces next to an office building will be vacant at weekends, making them available for letting to third parties. Several businesses, and with them a host of apps, are these days trying to conquer this market.
However, the most transformative technology is expected to be self-driving cars. Self-driving cars may well have been a long time coming, but judging by all indications, we will see self-driving taxi fleets on Danish roads within the next 10 to 20 years. Both financial and practical considerations suggest that the car fleet of the future will be made up of self-driving taxi fleets. Swiss investment bank and finance provider UBS predicts that in the long term 80% of all citizens in large cities will use self-driving taxi fleets, making car ownership ratios plunge by 70%.
As self-driving cars can drop people off and drive on to pick up the next passenger, or drive around in search of less expensive parking, parking garages in the most central locations are likely to become hard pressed on earnings. Parking fees risk being driven down to a financially unsustainable level where it is no longer profitable to operate a parking garage.
As for parking garages which may at some point be converted for residential or alternative commercial use, this may potentially make it possible to realise financial gains. If the City of Copenhagen decides to abolish minimum parking coverage requirements due to a sharp decline in demand, a massive volume of lucrative building rights may well be freed up. As for parking garages where this is not an option (e.g. certain underground parking garages), they face what we believe to be a real risk of substantial value loss.
Regardless of which outlook you subscribe to, it is hard to ignore the disruptive trends that will undoubtedly shape the market in near future. Against this backdrop, it is worth pondering if it still makes sense to determine the market value of parking garages based on current market conditions.