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Prior to the Covid-19 pandemic, mobile home parks were on the rise as a senior living option. Offering similar amenities as active adult communities, manufactured housing was an increasingly popular choice for consumers and a red-hot target for real estate investors.
The pandemic did not temper investor interest in, or the performance of, age-restricted manufactured housing communities. The manufactured housing sector continued to post strong performance over the past 18 months, and the investor pool seeking opportunities in the space is bigger than ever.
In fact, Covid-19 arguably strengthened the case for manufactured housing as a more prominent part of the senior living landscape — and a type of asset that can both compete with and inspire innovations in other types of age-restricted housing.
The rise in investor interest raises concerns among affordable housing advocates about the future affordability of manufactured housing. But long-term investors and brokers in the space believe those concerns are unfounded.
If anything, as land, materials and construction labor costs have risen over the past five years, the affordability gap between constructing apartment buildings and single-family homes versus manufactured housing has grown, CBRE (NYSE: CBRE) Senior Vice President Norm Sangalang told Senior Housing News.
Based out of San Diego, he co-heads the real estate services firm’s manufactured housing and recreational vehicle resorts specialty practice.
“It’s created a scenario where it’s still more affordable to move into a manufactured housing community and buy a [mobile] home, than it is to rent or to buy [traditional housing],” he said.
Steady operation, performance
Veteran manufactured housing operators relied on their experience to navigate choppy pandemic waters. Some, such as Sun Communities (NYSE: SUI), are thriving, President and COO John McLaren told SHN.
The Southfield, Michigan-based real estate investment trust (REIT) on its Q2 2021 earnings call reported significant increases in net operating income (NOI), home sales, and applications to live in its parks. As of that call, the company’s total blended portfolio included 569 manufactured housing, marina, or recreational vehicle facilities across 39 states and Ontario, totaling 153,287 sites. Roughly a third of its manufactured housing is age-restricted.
Sun reported blended portfolio NOI growth of 21.6%, and same-community NOI growth across its manufactured housing segment of 5.4% in the quarter, compared to the same period in 2020. Total portfolio NOI improved 9.7%, compared to the second quarter of 2019.
Total blended occupancy, meanwhile, has remained consistently above 97% over the past 12 months, and ended the second quarter at 97.4%. Sun’s manufactured housing segment has tracked around 96.5% during that period, and ended Q2 2021 at 96.7%.
And Sun’s stock has risen over the last year, from around $140 per share in late Sept. 2020 to $201.08 as of the morning of Sept. 13, 2021.
McLaren attributes the company’s strong performance to Sun’s experience in the sector and its reputation as a good steward of properties, even during crises. Much of its active adult manufactured housing footprint is in Florida, a state that is no stranger to extreme weather events such as hurricanes. The company has refined emergency plans in place for these events, such as securing clubhouses and other common amenities, and these plans were easily adaptable when the first wave of Covid-19 cases swept the country in the spring of 2020.
Additionally, Sun led the charge on instituting social distancing guidelines in its communities’ indoor amenities, and its outdoor amenities allowed for smaller group gatherings throughout the pandemic. When vaccines became available, the REIT helped organize vaccination clinics in its communities. McLaren estimates Sun has held over 100 vaccination clinics across its portfolio.
“Our residents know that they’re well taken care of, because they’ve seen us perform in [extreme] events before. Culturally, it’s part of what we are,” he said.
Moreover, the horizontal building environment made it easier for residents to shelter in place, to socially distance themselves from neighbors, and to entertain in smaller groups – which vertically built communities struggled to do.
“The merits of manufactured housing were underscored during the pandemic. These secondary benefits have become the primary benefits of living in a community,” CBRE’s Sangalang said.
Senior living developers, investors and operators have also observed the merits of walkable communities with shared amenities and plenty of space for social distancing, while they are also avidly pursuing more affordable models to meet burgeoning middle-market demand.
Some new models under development — such as Cantina Communities and Kallimos Communities — also feature neighborhood-like collections of smaller units, similar in some ways to a mobile home park. And, like manufactured housing, active adult communities proved resilient during Covid-19.
Deeper investor pool
Manufactured housing remains a hot market for investors.
Individual community sales totaled $4.1 billion for the 12-month period ending in Q2 2021 – a 48% increase over the prior four quarters, according to analysis from Real Capital Analytics. Portfolio sales totaled $2.6 billion during that same period.
Demand is outstripping supply. Portfolio sales are rare, and interest in on-market deals are driven by REITs and institutional private equity. All appear to be interested in long-term holds on acquisitions.
Private equity is proving to be a quick study on the sector. Investors completing deals have a good feel for the type of resident manufactured housing attracts, and appreciate the camaraderie between neighbors that develops over time because, whether renting or buying a mobile home, these are long-term residents.
“Everybody is in that age bracket where they’re helping each other. They know where they’re going. Their income is fairly stable. There’s a pride of ownership, there’s more time to spend on their homes,” Sangalang said.
Capital Square 1031 launched a manufactured housing investment program in July 2020 and has quickly built scale with eight properties, founder and CEO Louis Rogers told SHN. The Richmond, Virginia-based real estate investor targets high quality age-restricted communities in the Sunshine State.
The company likes the sector because residents stay for longer periods of time, compared to traditional senior housing. Additionally, residents find that their retirement nest eggs last longer, living in manufactured housing.
And they have continued to pay rent during the pandemic: Rogers noted that Capital Square 1031 has collected 100% of rent due in its manufactured housing communities.
“Covid-19 was a yawn for manufactured housing,” he said.
Sun Communities has a deep acquisition pipeline due to the longstanding relationships that have been in place – some for nearly 30 years. As of June 30, the REIT has acquired 28 properties across its verticals in 2021, totaling $853 million in deal volume, McLaren told SHN.
“We’re seeing a lot of one- or two-property [deals]. There just aren’t a lot of larger portfolio opportunities out there that we find attractive,” he said.
Sun also expanded its development pipeline over the past five years to meet demand for manufactured housing, and is actively building new manufactured housing communities or expanding existing parks where it can. The company has built nine new communities over the past 3.5 years, and has another 8,500 sites across its portfolio in various stages of entitlement – the bulk of which is manufactured housing.
“One reason for the renewed development push is that the return on investment is more attractive, in certain markets. We like what we like, and are very deliberate about our growth process,” McLaren said.
Gradual rent increases
The rush of investors seeking out manufactured housing opportunities has some observers concerned about the long-term viability of the product as an affordable alternative to home ownership or as a retirement community alternative.
Mobile homes accounted for 6% of total U.S. housing stock, and 9% of new home construction starts, according to a 2018 study by the National Low-Income Housing Coalition. But even people who own their own manufactured homes have to rent the site – or pad – that the home sits on.
The NPR program Planet Money recently devoted an episode to the trend of institutional investors buying out retiring mom-and-pop mobile home park owners and raising rates on lots, highlighting some older residents who fear being priced out. The show also raised concerns with Fannie Mae and Freddie Mac policies enabling investors to obtain low-interest loans for acquisitions.
Newer investors do see boosting pad rents as a primary method to growing revenues in manufactured housing communities. However, they also emphasize that manufactured housing remains a more affordable option than essentially any other type of housing. And — as the Planet Money episode did point out — mom-and-pop operators have not necessarily been running with optimal efficiency, meaning that rental rates and collections may have lagged, along with upkeep of the properties.
Capital Square 1031 Vice President of Acquisitions and Asset Management Jorge Gigueiredo estimates long-term tenants at its properties pay an average of $600 per month for lot fees, nearly 30% less than comparable lot rents in competing properties.
He believes that, even at market rate, its communities would still be an affordable alternative to active adult and independent living communities, but the firm is implementing rent increases in a gradual manner to existing and new tenants. Figueiredo estimates that it will take five to six years to bring its communities up to market rate rents.
“Even at market rate, manufactured housing is definitely the most affordable form of housing there is,” he said.
Sun Communities has always practiced tempered, gradual rent increases across its portfolio, which the REIT is able to do because it has a long-range investment strategy, McLaren told SHN.
And Sun puts that new money to work. He estimates that 60% to 70% of annual rent increases go back into the communities via capital improvements. Its CapEx spends have ranged between 2% and 4% for the past 20 years, which adds to the confidence residents have in Sun as stewards of these communities.
“We’ve been very careful with [rent increases] because if you go too far, you’ve literally stripped the equity out of people’s houses, which is not what we want. It’s not something that supports a healthy community,” McLaren said.
Sun also reports significant growth in new home sales and brokered resales of manufactured homes across its portfolio. Total new home sale volume in the second quarter of 2021 increased 90%, year over year. Brokered pre-owned home sales improved 113%, compared to Q2 2020; new and pre-owned home values increased 11.6% and 23.3%, respectively; and applications to live in a Sun community were up more than 20%.
Another reason manufactured housing experts believe that the segment will remain affordable is the increase in single-family home values over the past year. Median U.S. home values in the second quarter of 2021 increased 22.9% over the previous year, to $357,900, according to the National Association of REALTORS. Comparatively, the new home sale price in a Sun community is $153,000, which is less than half the average single-family home value.
“That speaks to the quality that is within our communities, the level of activity, and the growth that we have,” McLaren said.