MHN Asks: How Is Investment in MHCs Holding Up?
Tanner Byers of Capstone discusses the sector’s fundamentals and its resiliency.
Demand for affordable housing has never been stronger and manufactured housing has been deemed by the White House to be a critical tool for easing that crisis. The Biden-Harris administration’s announced intentions to expand the supply of manufactured homes is boosting investor interest in this niche.
But the sector hasn’t been immune to economic challenges. A tight lending environment has made the real estate investment landscape problematic. Transaction activity has been limited, mainly due to the bid-ask spread between buyers and sellers, while new construction has been even more impacted by the unfavorable financing conditions.
But savvy investors see an opportunity. Capstone’s manufactured housing brokerage division closed on 164 deals across 36 states between 2019 and 2023, with total transaction volume surpassing $2 billion. Over the past 60 days, Capstone’s new brokerage team led by Managing Director Tanner Byers secured seven listings in six different states, totaling 1,660 pads across 17 parks. Multi-Housing News asked Byers to reveal his expectations for this increasingly coveted niche.
READ ALSO: What Does 2024 Hold for Manufactured Housing?
Tell us about MHC sales activity this year.
Byers: MHC sales activity in 2024 has been characterized by resilience amidst challenging market conditions. While the real estate landscape has indeed been complex, with a tight lending environment posing obstacles, the MH sector has shown notable adaptability. Despite fluctuations in transaction volumes, the demand for affordable housing options has sustained activity within the market.
Key drivers include demographic trends favoring downsizing and cost-effective living, as well as a growing recognition of the value proposition offered by manufactured home communities. Overall, while navigating the intricacies of the broader real estate market, the MH sector has demonstrated relative stability and continued investment interest.
There’s a growing consensus we will see a mild recession before the year is over. How do you expect it to impact MHC deals and the industry overall?
Byers: The anticipated mild recession is expected to influence MHC deals and the industry in various ways. Historically, manufactured housing has shown resilience during economic downturns, as it provides affordable housing solutions for individuals and families facing financial strain. However, the recession may introduce challenges such as reduced consumer spending power, tightened lending conditions, and shifts in investor sentiment.
While transactional activity may experience fluctuations, the fundamental demand for affordable housing is expected to persist, mitigating the impact of the recession to some extent. Strategic adaptation, including innovative financing solutions and targeted marketing efforts, will be crucial for navigating the evolving economic landscape and sustaining growth within the industry.
When do you expect interest rates to go down? Are any of your clients postponing deals until lending conditions improve?
Byers: The timing of interest rate adjustments is influenced by various economic factors and central bank policies, making precise predictions challenging. While expectations for interest rates to decrease may exist, the exact timing remains uncertain. In the interim, some clients may choose to postpone deals until lending conditions improve, particularly if they anticipate more favorable terms in the future.
However, it’s essential to weigh the opportunity costs of delaying transactions against the benefits of potentially securing better financing terms. Proactive engagement with lenders and exploring alternative financing options can help mitigate the impact of current lending conditions on deal timelines and facilitate strategic decision-making.
How difficult is it for buyers and sellers to reach an agreement today?
Byers: The bid-ask spread between buyers and sellers remains a significant factor influencing transaction activity within the MH market. While negotiations may be challenging amidst differing valuation perspectives, there are indications that parties have become more realistic about valuations over time. Market dynamics, including supply and demand factors, asset performance metrics, and macroeconomic trends, play crucial roles in shaping perceptions of value.
Educated dialogue facilitated by industry professionals can help bridge the valuation gap and facilitate mutually beneficial agreements. Additionally, flexibility in deal structuring and creative financing solutions can enhance the feasibility of transactions in the current market environment.
Which areas of the country are MHC investors most interested in and why?
Byers: MHC investors are increasingly interested in areas with strong demographic fundamentals, favorable regulatory environments, and robust economic prospects. Regions experiencing population growth, urbanization trends, and housing affordability challenges are particularly appealing.
Additionally, factors such as job growth, infrastructure development, and proximity to urban centers influence investment preferences. Coastal regions, metropolitan areas, and emerging secondary markets are among the areas garnering attention from investors due to their potential for long-term appreciation and demand stability. However, localized market dynamics and site-specific considerations also play significant roles in investment decision-making, underscoring the importance of thorough due diligence and market analysis.
How can deals still be closed in this unfriendly economic environment?
Byers: In challenging economic environments, successful transactions often involve strategic planning, creative problem-solving, and effective communication between parties. For example, recent deals may have incorporated innovative financing structures, such as seller financing or joint ventures to overcome lending constraints and facilitate transactions. Additionally, thorough market analysis and valuation assessments may have been conducted to ensure alignment between buyer and seller expectations.
Overall, navigating unfriendly economic environments requires adaptability, expertise and a collaborative approach to achieving mutually beneficial outcomes.
Despite the ongoing consolidation in the industry over the past years, manufactured housing remains highly fragmented one. What is your take on this?
Byers: The emergence of institutionally managed MHCs reflects a broader trend of professionalization and institutionalization within the industry. Institutional investors are drawn to the stable cash flows, predictable returns, and diversification benefits offered by manufactured housing assets.
While consolidation has been underway, the industry’s inherent fragmentation presents both opportunities and challenges. On one hand, consolidation can enhance operational efficiencies, standardize management practices, and attract additional capital investment. On the other hand, the diversity of market participants and property types underscores the unique characteristics and localized nature of the manufactured home community sector. Balancing consolidation efforts with preserving the sector’s accessibility and affordability is essential for fostering sustainable growth and addressing housing needs across diverse communities.
How do you expect this niche sector to perform going forward?
Byers: Looking ahead, the manufactured housing niche is poised to continue its positive trajectory, albeit with some challenges to address. The persistent demand for affordable housing, coupled with demographic trends favoring downsizing and cost-effective living, provides a strong foundation for growth. While external factors such as economic uncertainty and regulatory changes may pose challenges, the industry’s resilience and adaptability bode well for its performance.
Strategic investment in infrastructure improvements, community amenities, and tenant services can enhance property value and tenant satisfaction, driving long-term success. Additionally, ongoing innovation in housing design, technology integration, and sustainability initiatives will shape the evolution of manufactured home communities, ensuring their relevance and competitiveness in the broader housing market landscape.
