Investing in Manufactured Home Communities

What are Manufactured Home Communities?

“Manufactured homes” can be simply defined as the name implies: dwellings designed and built offsite, in a facility, and transported to the site where inhabited. Manufactured homes are often placed in a “park” or “community”, where a parcel is leased to the mobile home dweller (commonly referred to as a “pad), who may own or rent the house itself.

Manufactured home communities (“MHCs”) may be situated in suburbs, exurbs, or even at the outskirts of larger cities. As more institutional investors and scaled operators have entered the space, MHCs increasingly deliver high curb appeal and amenities such as waterfront views, community clubhouses, and pools. While other core CRE asset classes use letters to differentiate properties by age and construction quality – Class A, B, or C – manufactured home communities typically use a star system, like restaurants or hotels, with five being the highest and one the lowest. In MHCs where occupants own their homes, managers usually charge a recurring fee for use of utilities, maintenance, and access to common facilities – similar to HOA fees for a condo occupant.

MHCs are different from mobile homes, RV parks, or trailer parks (terms that have acquired a stigma in the past). Manufactured home communities are now widely considered a lower-cost alternative to single-family housing. Developers of manufactured home units are able to achieve economies of scale and offer attractive, sturdily-built dwellings at relatively low cost. Several recent public-private partnerships have advanced technology to improve the safety, comfort, durability, and maintenance efficiency of manufactured housing units^[1]. Owing to these advances, and the fact that land is not part of the purchase price, first-time homebuyers and renters who would otherwise be priced out of single-family housing can now more feasibly inhabit a higher-quality, standalone dwelling.

Other Features of Quality MHCs

Institutional MHC operators are increasingly focused on providing affordable full time housing, and tailoring the amenities and features of communities to target occupant demographics:

MHC sites are typically located near employment centers, school districts, and/or transit hubs to best accommodate working families.
MHC units stand alone and do not share walls with other units.
Each unit typically features a small yard for children to play, and a dedicated parking spot.
Modern MHCs are often much more appealing to working families than comparably-priced affordable housing, such as multifamily units in aging buildings that may be significantly more expensive to rent on a per-square-foot basis.

Home prices are now rising faster than wages in 86% of local markets^[2]. Development of new affordable housing has lagged behind demand in many primary and secondary markets over the past several decades, creating a severe shortfall of housing that is affordable to even middle-income renters^[3]. Housing advocacy groups are looking to real estate investors to supply non-traditional scaled housing models – like co-living, transit-proximate “micro-units”, and manufactured home communities – to provide solutions to alleviate the housing affordability crisis in supply-constrained MSAs.

A Waterfront MHC in Washington State

Why Invest in Manufactured Home Communities?

MHCs present a compelling investment opportunity as a recession-resistant asset class that has exhibited robust growth and stable cash flow.

Here are three primary reasons for the growing appeal of the MHC asset class:

1) Rising demand and limited supply has created a substantial demand/supply imbalance

The need for affordable housing remains at an all-time high amid rapidly rising housing costs and stagnating wages. Housing prices have risen beyond the pre-financial crisis peak, forcing many households to seek alternative living arrangements. According to Jones Lang LaSalle, traditional home prices have increased by more than 20% in the last three years. Harvard’s Joint Center for Housing Study^[4] estimates a third of households in 2016 were cost-burdened, meaning they spend 30% or more of their income on housing costs. Of that number, nearly half are severely burdened, paying more than 50% of their incomes to housing costs. With 44% of households earning $50,000 per year or less, inexpensive housing is now a necessity for many American families.

MHCs represent a mere 5.5% of the nation’s housing stock. Rising construction costs and negative perceptions surrounding mobile home parks have drastically limited supply. More broadly speaking, several persistent and interrelated factors have kept developers of traditional single-family and multifamily units from keeping pace with household formation:

High construction costs, including rising materials and land costs;
Labor shortages: both skilled, licensed workers and low-cost labor;
Restrictive zoning, particularly in desirable urban cores;
Economic incentives to replace aging housing stock with new, Class A housing without adding density.

On average, a new mobile home – purchased directly from the manufacturer – costs $70,600, as compared to a build price of $375,500 for a single-family site-built home. Additionally, due to the negative stigma associated with these communities, there has been strong local resistance against new development^[5]. Zoning challenges, difficulty in obtaining city approval, and rising construction costs have created barriers to entry that have constricted supply of a property type that is in great demand.

2) Recession-resistant asset class

Traditionally, MHCs perform well during both recessions and economic upswings. Since 2000, the MHC asset class has out-performed other commercial real estate sectors, including multifamily^[6]. This trend has held over the past several decades, and has been even more pronounced in recent years: in 2016, MHC REITs posted a total return of 28.5%, as compared with total returns of 18.2% for apartment REITs and 12.8% for single-family home REITs^[7].

The asset is well-positioned to outperform other CRE sectors in downturns as well. In fact, the asset class is the top two for the lowest default rates within the commercial real estate sector. Manufactured homes typically offer substantially lower rents than comparable units within the same market. Thus, an economic downturn that heightens the cost-sensitivity of renters will boost demand for MHC units. Similarly, an economic downturn may put a first home out of reach for aspiring single-family homeowners. A manufactured home may still be viable, however, due to lower construction cost and the fact that the underlying land (and sometimes the home itself) is owned by the MHC operator.

3) Extremely fragmented and non-institutional ownership

MHCs are a fragmented real estate niche, with the largest players representing less than 3% of the overall market. This leaves the vast majority of these communities owned and operated by non-professional operators and investors, which in turn creates a unique opportunity to purchase undervalued properties, implement efficient management, and realize returns from improved operations and incremental rent increases. The manufactured and mobile housing sector is the only remaining real estate asset class still ripe for consolidation.

Institutional investors and operators can add value and potentially generate substantial yield by introducing operating efficiencies and providing a greater suite of on-site amenities than “mom and pop” operators can.

These factors translate to several tangible benefits for MHC investors:

Strong occupancy at 93% and rents consistently pushing higher since 2002, with gains averaging approximately 3.5% per year. In the past five years, rent growth averaged more than 3% per year.
The potential for long-term, stable cash flow.
Increased institutional interest in the asset class has led to significant cap rate compression and more diverse financing options, driving up pricing valuations for MHCs. This trend is likely to continue as the industry further consolidates.

The end result is an asset class that consistently demonstrates high cash yields and exhibits long-term stability when run by institutional-quality management.

The Institutionalization of Manufactured Home Communities

For the reasons enumerated above, the MHC asset class has become increasingly appealing for institutional investors and, consequently, has drawn more experienced operators. As professionalism has grown in the sector, the MHC asset class has benefitted from knowledge-sharing and better-defined management standards; the Manufactured Housing Institute now offers the Accredited Community Manager (ACM) educational program. These factors, along with the de-stigmatization of the property type, has prompted an easing of underwriting standards on the part of lenders. MHC investors and operators are now more readily able to secure debt financing.

With more institutional capital entering the space, investors may face heightened competition. However, supply of MHCs remains constrained, especially in the broader context of affordable housing stock as noted above. With better conventions in management, a larger geographic footprint for feasible new projects, and lingering supply constraints, the market remains favorable for new entrants to the manufactured housing sector that are able to surmount the prevailing barriers to entry.

Investing Strategies – Manufactured Home Communities

Many MHC investors and operators will generate income by leasing the land on which the manufactured home sits without providing the home itself – leaving it to the owner to purchase the unit and pay rent on the land. Some MHC investors have rightly drawn scrutiny by acquiring land leases and rapidly increasing rents. This practice can become predatory, as occupants – who own the property but not the land on which it sits – cannot easily move in response to rising rents. Even in a best-case scenario of reasonable, gradual rent increases, this land-lease model leaves the occupant responsible for financing the purchase of their unit. Many lower-income residents struggle to secure home financing, and thus this model may undermine the goal of offering quality housing to middle and lower-income families.

Sophisticated operators and institutional players are increasingly adopting an alternative model. The investor purchases units (often obtaining a volume discount if done at scale from a single manufacturer) and leases the unit to the occupant. We believe that this model provides both a more sustainable, blended income stream and a more equitable payment scenario for occupants, as they are not burdened to find a downpayment and will not be vulnerable to runaway rent increases on a land lease. The sponsor, meanwhile, has better control over occupancy. We intend to pursue this strategy in sourcing potential MHC investments.

EquityMultiple’s Approach to MHC Investing

EquityMultiple’s approach to sourcing MHC investment opportunities is fundamentally the same as with any other CRE asset class. We seek to partner with institutional real estate firms with to offer individual investors access to high-quality management and asset class-specific expertise, across markets, and at relatively low minimums.

Scale and institutional-quality management: MHC investors can benefit from attractive acquisition economics and low overhead. However, doing so requires skill and know-how. Like any other asset class, the MHC sector carries specific nuances in financing, marketing, and maintenance. In sourcing MHC investment opportunities, we seek to partner with firms who have specific domain expertise and a track record of success in MHC investing and management. As noted above, we intend to pursue MHC investments that entail both a sound business plan and a sustainable, affordable housing offering for residents.

Nationwide reach, pinpoint targeting: While the U.S. is experiencing a dearth in affordable housing overall, the demographics of potential MHC inhabitants varies considerably across markets, along with their desired amenities. In sourcing potential MHC investments, we consider the specific location alongside the sponsor’s investment thesis.

Diversification: As noted above, the Manufactured Home Communities asset class has the potential to yield recession-resistant or even counter-cyclical performance. Our position is that investors should diversify across real estate asset classes to achieve the minimum possible cross-asset correlation.