The State of the MH Industry 🏘️ 💡
The Challenges of Rising Home Values 💰 📈
From a National Brokerage and Financing Firm
As the manager of a national team with 10 regional directors transacting MH communities and an active financing division arranging debt for MH communities, I have a bit of a birds-eye view of what is going on in the industry. The reality is I am writing this article in late March 2022, and the world is in complete disarray. On one deal I am closing, the interest rate on the buyer’s loan is up almost 70 basis points since the $30m package of communities went under contract. In addition, the buyer has just been notified of a reduction in loan proceeds of almost $2 million because they didn’t rate lock and the deal was delayed at no fault of their own. Movements like this have a material effect on their returns and if their deposit wasn’t non-refundable, this could have triggered a discussion about the need for a price reduction. This is a great buyer, and they are able to close in cash, but I am sure they will be more cautious on their next acquisition, which will bleed into the market.
On a micro level, some of the challenges facing the industry have been created by inflation and higher costs for everything. For example, we are seeing insurance premiums go up by 200%+ in many cases. We used to budget $75 per pad/year for a non-coastal community with simple amenities. Today, we are seeing insurance run 5-10 times that figure in many cases. For the longtime owner with no partners and no debt, they may not notice it; however, most buyers are required by their partners and lenders to carry much more insurance, and these policies are getting very expensive as the cost of replacing anything has gone up 100%-250% or more. Another example is labor costs. We used to see a clean, 100-site community with all resident owned homes ran for $1k/month plus free lot rent. Today, that same community will cost $40k-60k to properly manage and maintain in most places. Lastly, tax assessors are starting to attack our property type and chasing sales. If you’re an existing community owner and a community sells for a record setting price in your area, you may face pressure from the tax authority, but buyers are seeing taxes reassess by 5-10 times the sellers current budget. This has a profound impact on returns and causes further rent increases to make up for the loss in net cashflow/return for the buyer.
On a macro level, there are several challenges clouding my vision. We have the uncertainty of war hanging over the economy with the Russian invasion of Ukraine in its 5th week now and another mass migration crisis underway in Europe. This combined with major trade wars, high oil prices ($5+ a gallon), and potential of sanctions on the largest supplier in the world, China, makes the future unclear. At the time of this writing there are a 100 million Chinese citizens under lockdown. These all could make the supply chain even more broken. Then, you add the fact that the Fed has indicated there will be 7 more rate increases, to say the least, things are unsure.
As such, I would say the state of any industry is a bit hard to precisely predict. Looking back from today, we have seen an ever-increasing stack of buyers competing to win institutional quality MHC’s. We are now seeing regular pricing on parks of quality and size in the $70k-$110k per pad in “normal markets”, with better located and higher quality deals reaching $200k per pad in the prime or coastal markets. There have also been sales in the $300k-$500k per pad for deals of unique size and quality. Demand from the investors’ standpoint is at all-time highs, therefore, values are as well. Frankly, most of those deals in the upper ranges are not financed but purchased by buyers seeking an alternative to bond yields. Essentially, they are looking for a coupon that yields slightly more than the treasury and goes up with inflation. Rates for the 10-year treasury have been bumping around 1.5% to 1.85% since July 2019, but as of March 14th, 2022, they broke the 2% ceiling and are currently at 2.3%. If properties had a direct reciprocal loss of value, then, for example, a property with a net income of $1 million should see a loss in value of over $3m. There are many more factors that affect financing specifically, and we do expect loan spreads to come down as the market settles into higher treasury rates. To give some historical context, rates today range from 150 to 220 basis points over the 10-year treasury, on average; however, prior to the great financial crisis of 2008, commercial mortgage-backed securities had just an 80 to 100 basis point spread over the 10-year treasury. Where all-in rates today are around 4%, if the market stabilizes, and spreads come in, we could see borrowing in the mid 3%’s to low 4%’s, even if the Fed increases their funds’ rates a few more times.
Major factors driving optimism have been the severe lack of affordable housing, combined with the rush back to the suburbs. As single-family homes prices have quickly risen, manufactured housing has looked extremely affordable, driving up demand from consumers, and the prices of homes in our communities. In many cases, community owners have raised rents aggressively and are still seeing a 10-to-1 demand of folks looking for houses versus residents trying to sell their homes. This is a demand play, but also, an inflation play as the cost to build a single-family home in the US has gone from $120/sq ft. in secondary markets to more than $220/sq ft. If an investor can mortgage their purchase at 3.5-4% and raise the rents 5-10%, multiple years in a row, they quickly start making some really nice returns on their investment. So, investors have been betting on continued inflation and choosing to “park” their dollars in hard assets instead of cash to benefit from said inflation. We are seeing many “good actors” in the space make significant investments in the communities they are purchasing to increase the value of residents’ homes and attract better tenants, which also allows for higher rates and a return on their investment. In these instances, everyone is benefiting. Unfortunately, we are also seeing some “bad actors” raise rents over 50% in one move while doing very little to improve the community. I believe this behavior is going to continue to attract the ire of power-hungry politicians and result in more regulation that will hurt the entire industry. Things like rent control are being pushed in more states than ever and will continue to if we don’t avoid these greedy groups.
The good news for consumers and the entire industry is the progress being made with development of new communities. Due to strong demand for manufactured homes and record high values of these communities, it is once again viable to develop new communities. It has been almost 30 years since the market was this favorable for developers. On average, groups are building communities for $40k-65k a site, so with the aforementioned prices per pad on sale, there is a nice arbitrage present. Manufactured homes around the country are highly backordered, and in many regions, it takes over a year to receive your order with developers seeing regular cost increases passed-on to them by the manufacturer. By the time they are delivered, homes today are running $70k-150k including setup, but they are still selling faster than you can get them. Developers are having to take the risk of guessing whether the market will be strong in 18-36 months when their sites will be coming online and are dealing with constant labor and supply shortages, as well as delays. Even so, many are still making this bet and will finally add some new supply to an industry that is severely supply constrained.