Mobile or manufactured homes have been around for more than a century but stepped into a new era in the late 70s–early 80s once legislation that regulated this particular sector of residential real estate was approved. Today, it looks like the market is about to enter a new phase as this type of affordable housing attracts a growing number of private equity firms, which have come to realize the potential for yields above most property types. Last summer, for example, Blackstone acquired 14 manufactured housing communities in Arizona and California for $172 million from Canada-based Tricon Capital Group.
A report by NorthMarq, released in April, shows that mobile home park investment activity rose by nearly 20 percent in 2018, while the median price reached $33,900 per space last year, up nearly 12 percent for the year. One of the main reasons for the growth is the fact that this sector is often described as “recession-proof.” According to research and advisory firm Green Street Advisors, the manufactured homes sector is the only major real estate asset class that has not experienced a year-over-year decline in net operating income in any year since 2000. This is one of the mobile home park investment trends anticipated to continue into 2020.
“[We expect] NOI growth above most property types, and more cap rate compression relative to other property types,” John Pawlowski, head of the residential sector at Green Street Advisors, told Multi-Housing News.
Traditionally, MHCs have been owned by small family businesses, but high demand has led to expanding interest from REITs.
“We are firmly in the consolidation phase. Professional firms are coming in to take over operations from mom and pop owner-operators. This has already played out over the last twenty years for the largest parks (especially in coastal markets). Now private equity groups large and small are going down in market size and location,” said Brad Johnson, managing partner at Evergreen Capital, an investment firm focused on manufactured housing.
Johnson believes favorable mobile home park investment trends will lead to more large players going public in the next few years, joining the existing three MHC REITS—Equity LifeStyle Properties, Sun Communities and UMH Properties.
A winning formula
Occupancy in MHCs rose 110 basis points from 2017 to 2018, reaching 92.7 percent, the NorthMarq report shows. This marked the seventh straight year of occupancy improvements in the sector. Behind the string of positive growth in the mobile home investing sector is the nationwide affordable housing shortage and a series of demographic factors.
“The demographic story for affordable housing is compelling. Lower/middle class incomes (adjusting for inflation) are stagnate and Baby Boomers are retiring—with little savings—at an increasing rate,” Johnson added.
The average monthly rent in mobile home parks has reached $530 per space, according to NorthMarq, following a 3.9 percent rise in 2018. The rental rate has been moving up for the sector since 2002, which is another plus for those considering mobile home park investing. Coupled with limited supply, it definitely looks like the winning ticket in a late cycle economy. A 2019 report published by MHAction, Private Equity Stakeholder Project and Americans for Financial Reform Education Fund Local shows that new sites fail to open because of zoning restrictions and local governments reluctant to give new communities permits because of the stigma attached to them.
“The MHC industry is not thought of fondly by the average American consumer or government official. Frankly, I doubt it will ever be despite our county’s desperate need for affordable housing. This perception is not helped by a few short-sided operators that are overly aggressive with rent increases,” Johnson added.
The top mobile home park investment markets are highlighted in a 2019 report by Marcus & Millichap. Denver (vacancy of 0.8 percent), Salt Lake City (1.6 percent), Long Island (1.7 percent), Seattle (1.7 percent) and Dallas (3.2 percent) make up the top five. Denver also displays the highest average rent ($699). Western markets saw the most significant rent gains overall in 2018, led by a 6.8 percent rise in Salt Lake City. Outside California, Fort Myers, Fla., recorded the highest year-over-year gain—8.5 percent.
“Evergreen is currently focused on partnering with regional operators in strong markets where we’re content to hold forever. Not having to sell in 5-10 years frees us up to focus on the long-term merits of the market/asset in order to compound capital. We prefer this approach to chasing marginally higher yield in softer markets that have a higher probability of population decline over the next 10-20 years,” Johnson explained.
MHCs represent nearly 10 percent of all housing units in the country, translating into approximately 8.5 million homes, according to the Manufactured Housing Institute. Despite the attractive mobile home park investment trends, these ventures come with a set of challenges. One of the most significant seems to be the operational side of things.
The lack of skilled talent, while an issue across the industry, is particularly acute in this business. “There isn’t a deep bench of experienced professionals clamoring to travel the country and asset manage a sub-portfolio of mobile home parks. This is also true at the local level, where low unemployment rates make it challenging to find decent manager, maintenance and rehab personnel,” Johnson said.
In some cases, residents run day-to-day operations. In fact, in some states, residents managed to obtain the right of first refusal in case the mobile home park sells. This is a way for them to protect themselves against abusive rent increases following changes in ownership.
“The average MHC lot rent needs to meaningfully increase to prevent well located MH communities from converting to more profitable/higher density uses. However, those rents need to grow at reasonable rates. If not, regulators will step in with counter-productive rent controls that will curtail capital investments and force operators to convert to alternative uses,” the managing partner of Evergreen Capital concluded.