The manufactured housing sector has proven to be one of the most stable asset types since the onset of the pandemic. As the housing affordability crisis continues to deepen, manufactured homes are seen more and more as a practical alternative. Despite record-high unemployment nationwide, the sector recorded occupancy rates of 93.3 percent in the third quarter of 2020, according to a NorthMarq report. This stability, coupled with a severe lack of new supply, has garnered the attention of individual investors and REITs alike.
While negative perceptions of mobile homes being rundown and unsafe have softened substantially since the introduction of the HUD code in 1976, most communities previously managed by a mom-and-pop operation do require improvements for the tenants’ safety. Luke DeGrossi, Co-Founder & CAO at Pioneer Communities, and Matthew Davies, Founder of Harmony Communities, talked to Multi-Housing News about their experiences of acquiring and operating manufacturing housing communities. The pair share best practices for implementing much-needed improvements at value-add properties without financially overburdening the residents.
When looking for a potential acquisition, what criteria do you use to evaluate a manufactured housing community?
Davies: We look for communities we think will have long-term stability in areas where there’s a strong need for affordable housing and where we believe the local jurisdictions will be supportive of our efforts.
DeGrossi: The single most pivotal indicator in analyzing any manufactured housing community acquisition is the long-term growth of the greater MSA. A broken property can be fixed, but a lack of demand cannot. For this reason, Pioneer Communities only invest in larger MSAs with both historical and forecasted population growth. Deal-specific criteria will vary depending on the type of acquisition (i.e., stabilized, value-add, opportunistic), but as a general rule of thumb, we are interested in acquiring properties with a value-add component that provide enough scale to warrant on-site management personnel.
Since the majority of mobile home parks are a couple of decades old, more often than not they require upgrades to ensure the residents’ safety and comfort. How do you prioritize the importance of improvements?
Davies: Upgrades fall into two categories: infrastructure and aesthetics. All improvements go on a cap expenditure schedule. Typically, when we take over a property, the infrastructure has been maintained to some degree. For those areas that are lacking, we prioritize health and safety items like gas and electric systems, underground pipes as well as lighting. Roads tend to be the most neglected and when they are, we replace them right off the bat. An aesthetics plan is put into place during the acquisition process and it’s one of the first things we like to do, as it increases the sense of pride residents have in their community.
DeGrossi: The most critical upgrades are those that promote the safety and well-being of residents. The exact nature of these improvements varies deal-by-deal, but typically encompass a combination of security systems to protect and provide comfort to the residents, street signs to better control traffic patterns within the community and removal of vacant or dilapidated homes that can create hazards or create a space for unwanted trespassers or squatters. Tree trimming can also create much more safety for residents by protecting their homes from falling trees or branches during severe weather.
With most manufactured home residents on fixed incomes, how do you raise rents without it being a substantial burden for them and without causing high community turnover?
Davies: When housing costs are an issue, we offer a rent subsidy program for those in need. We typically target those for assistance with an unstable housing cost-to-income ratio above 40 percent. Sometimes the rents can be far below market. We don’t necessarily bring the tenants up to market; we will wait for natural turnover and raise those rents on turnover.
DeGrossi: At Pioneer, we view rent increases as a privilege that must be earned by a community owner. Even in a scenario where rents are severely below the local market average, improvements to the property, amenities or services offered to the residents should be improved or expanded before any discussion around a rent hike. Without proper reinvestment into the community, and proper services provided to its residents, the community’s reputation will be tarnished, turnover will be higher, and collection issues will mount.
REITs and other major investors have shown an increasing appetite for manufactured housing over the past few years. How will this impact the sector in the coming quarters?
Davies: I think this is a positive. Investors with deeper pockets are better able to take care of communities long-haul and set long-term plans to ensure the viability of the properties. Investors purchase with the intent to own and operate a manufactured housing community, whereas mom and pop owners are more apt to look at redevelopment when it comes time to sell.
While investors tend to be more aggressive with rent increases, we find those increases are not exceeding the market but merely keeping up with it. By contrast, mom and pops don’t seem to have a good feel for housing markets and let rents lag significantly below market, creating friction down the road. The long-term viability of a park is dependent on being able to maintain fair market rents. Otherwise, it is a guarantee that there is a higher and better use for the property.
DeGrossi: The uptick in manufactured housing investment interest has mainly been driven by record cap rate compression in other asset classes like multifamily and industrial properties, which has forced many investors to search elsewhere for yield, like manufactured housing communities. Given the fragmented nature of the manufactured housing landscape we believe that regional and mid-sized portfolio operators will benefit most in the coming years as larger investment firms and REITs fight to consolidate portfolios in order to gain scale and exposure to the asset class.
What’s your advice for new investors looking to make improvements to their value-add acquisitions?
Davies: Focus on aesthetics and then occupancy. Occupancy is the key to increasing cash flow and adding value. Aesthetics create an immediate sense of pride and are instrumental in turning a property around.
DeGrossi: Personally, I have learned the most by maintaining a hands-on approach to management and operations. While there are certainly a number of similarities between manufactured housing and traditional multifamily buildings, MHCs certainly have their quirks – most of which can only be learned by a boots-on-the-ground approach.
Pioneer’s first acquisition was a 173-pad value-add manufactured housing community in Savannah, Ga. Post-closing, we moved into the property for almost three months and lived in the back of the office to learn the business inside and out. While this certainly is not a requirement for new investors, we attribute most of our management and operational prowess to that experience.