Trends in Manufactured Housing: Unlocking Opportunities for Investors

As the broader real estate market cools, manufactured home communities remain a popular asset. The demand for this type of commercial real estate is increasing, as are rental prices. Additionally, occupancy and cap rates tend to be more stable than their traditional multifamily siblings. Here we explore the latest MHC developments, including regulatory and rent control issues, as well as investment and financing trends.

General MHC trends

The MHC market has become more institutional over the past cycle, offering potentially lucrative opportunities for savvy investors.

A focus on the primary MHC market

With a lack of five-star communities – which are equivalent to Class A in multifamily properties – available for sale on the market, many MHC investors have expanded or even broken their typical investment criteria in an effort to find deals. For example, those who once invested only in communities with public utilities are now considering private utilities. Financing is also the driving force behind many investment decisions. Some institutional owners are selling tertiary deals to free up capital so they can focus on the primary MHC market, where it is easier to fund. Investment brokers can help property owners move their investments to the safest options, while debt brokers can secure favorable commercial loan interest rates.

Seller financing that drives transactions

Seller financing, where sellers are willing to “carry papers” or act as a lender to potential buyers, also drives transactions in the MHC sector. Sellers willing to carry paper worth 100 to 150 basis points in market debt can deliver up to 20% higher values, creating a ‘win-win’ situation for both buyer and seller.

Nonprofits are filling the buyer gap

Elsewhere, nonprofit groups with access to cheaper capital have filled some of the gaps in MHC buyers – a trend that is likely to continue. Because of their low cost of capital, these groups tend to outbid typical investors for deals they like, but they require a much longer escrow or financing reserve, which can lead to declining property values ​​as market conditions fluctuate. However, additional options – such as HUD’s new grant program for MHC communities and state-specific property tax reductions – allow nonprofits to pay more aggressive prices.

Decrease in M&P ownership

A longer-term trend is for institutional owners to nearly eliminate mom-and-pop ownership, which has been going on for about fifteen years. Institutional groups have bought up much of the market’s M&P sector this past cycle, particularly larger trailer communities with 75 or more spaces.

Occupancy rate is increasing

Other trends to note can be found in Northmarq’s latest Manufactured Housing report, which reveals insights on market fundamentals in the fourth quarter of 2023. While new unit deliveries in the United States remained consistent in 2023, the demand for these types of homes is growing at above-average rates. Occupancy accelerated 10 basis points to 94.7%, with impressive gains in the Midwest and Southwest. In addition, occupancy rates across the country increased by 30 basis points year-over-year.

Rental options are growing

Industrial housing rents are also showing healthy signs of growth, rising 1.5% in the fourth quarter of 2023. Rents are up 7.3% year-over-year and now average $679 per month. In the South, rents have been high in recent years and are expected to rise 10.1% by 2023, with the average manufactured home costing $655 per month.

Sales and transaction volume increases, the total number of transactions decreases

In other news, sales of manufactured home communities rose in the second half of 2023, despite a slowdown at the start of that year. Sales volume grew 25% between the first half and second half of 2023. However, total transactions for the year fell 40% compared to 2022 levels.

If occupancy rates, rental rates, sales and transaction volumes continue to rise in 2024, investors could reap significant profits from these types of commercial real estate investments.

Cap rates

MHC cap rates have been less volatile than traditional multifamily assets over the past eighteen months. That said, interest rates averaged 6.5% at the end of 2023, which is higher than the year before. This could level off if interest rates fall. Cap rates for four- and five-star parks have increased by +/- 25 basis points from their lowest point, while rates for parks with three stars and less have increased by +/- 100 basis points. Meanwhile, ceiling rates for multifamily properties have increased by at least 100 basis points and in some scenarios even by 300 basis points.

A lack of inventory has certainly prevented rates from rising further. However, these numbers, along with fewer MHCs being sold for conversion to other residential uses, have caused manufactured home prices to decline through 2023.

With the help of experts who handle MHC transactions, investors can find the best cap rates for manufactured home communities based on the income these properties can generate in the coming years. Doing this can help reduce risk in a fluctuating market.

It is worth noting that investors have benefited from tax benefits when investing in MHCs, thanks to the recent rapid depreciation laws. The Tax Cuts and Jobs Act (TCJA) allowed investors to write off 100% of the cost of eligible real estate acquired and placed into service between September 27, 2017 and January 1, 2023. Previously they could only write off 50%. It’s no wonder that MHCs have been a highly sought-after CRE asset lately. Current investors obviously won’t have access to such generous provisions, with qualifying properties only receiving a 60% bonus deduction in 2024 and even less in future years.

Regulations, rent control issues and other challenges

Another obstacle facing current investors is potential new rent control laws, with long-term owners of manufactured homes believing it is only a matter of time before rent caps become a reality across the country. What ultimately happens depends on individual states. In Oregon, lawmakers are implementing regulations that could impact income generation for investors. Many long-term owners and potential buyers are in limbo until the government decides whether to impose new regulations.

Buying MHCs in neighboring states that are more business-friendly could provide a solution for Oregon investors for the time being. However, the continued uncertainty may prompt them to put their money into another commercial real estate investment or renegotiate a commercial real estate loan.

Elsewhere, other regulatory issues have made activities such as investing in mobile home parks more difficult. For example, in Colorado, mobile home park sellers must notify mobile home owners of a proposed sale. Tenants can also submit a competitive offer to purchase the park.

Other challenges for MHC investors are similar to those impacting the broader real estate market. Construction, insurance, labor and supplies costs have risen dramatically in recent years due to inflation and the cost of living crisis. Supply chain issues have also made it difficult to build or expand manufactured housing communities. While these problems are improving – CPI inflation fell 3.1 percentage points from 6.5% in December 2022 to 3.4% in December 2023 – high property taxes and insurance costs have caused some investors to avoid real estate assets entirely.

Financing trends

Government-sponsored enterprises (“GSEs” or “the Agencies”) are still the lender of choice for most MHC investors. The agencies’ mission is to finance workforce housing, and MHCs fully meet that goal. MHC deals often score very high on an affordability test, allowing both Fannie Mae and Freddie Mac to tighten their prices and make them the most aggressive lender available for the product type. If an investor is looking for maximum leverage and only interest at the most competitive prices, it is almost guaranteed that the deal will go to the agencies.

For long-term owners looking to put conservative debt on a property, we’re seeing life insurance companies being very aggressive when it comes to the right deals. For institutional quality parks, where owners only want to put +/- 50% LTV on the property, the life insurance companies can sometimes price more aggressively than the agencies. Life insurance companies tend to be very selective when it comes to the deals they like, but if they decide a deal fits within their credit box, they can typically push harder than anyone else to land a deal.

Banks and credit unions typically fill the lower end of the spectrum for MHCs. They are willing to lend money for the smaller parks and the cheaper parks. These lenders are typically not the cheapest and most are a trade, but there are a number of banks and credit unions that specialize in this area and understand the product type well.

A look at the future

Manufactured housing has emerged as a profitable CRE real estate type in 2023, and the MHC market will likely continue to thrive in 2024 and beyond. While other real estate segments face challenges, MHCs have experienced healthy occupancy rates, sales, rental rates and transaction volumes, making these assets highly sought after by investors.

While regulatory and rent control issues could hinder growth, MHC cap rates have been less volatile than multifamily over the past 18 months, and a lack of inventory has kept rates from rising – trends that are unlikely to materialize for now could continue. Investors might be disappointed that tax breaks are not as lucrative as they were before 2023. However, the wide range of financing options on the market makes it easier than ever to finance these types of investments.

Whatever the future holds, MHC transactions will increase as more investors look to this property type to add value to their portfolios.

The views expressed in this column are those of the author.