Investors Target Potential Value-Add Opportunities Amid Dwindling Supply
Last year’s steady hiring intensified demand and pricing of site-built homes, encouraging a new pool of households to select the affordable monthly rental cost of manufactured housing communities. In response to rising occupancy, shipments of inventory have reached a four-year high of 70,500 units delivered in 2015. This is an annual 9.6 percent increase, accelerating from the 6.8 percent gain a year earlier. Florida and Texas markets accounted for the most new inventory with a combined 1,600 units delivered. These states compose a large portion of the Southern region, where vacancy sits nearly 400 basis points below the national average. Overall, supply of manufactured home community sites remains short of demand, with three of the four major regions posting vacancy below 9 percent. The drive to affordability in manufactured home communities was strongest in the Midwest, where vacancy fell 120 basis points in 2015. Despite this drop, vacancy in the area remains the highest of all regions as communities face headwinds from lower single-family home prices. Overall, manufactured housing parks in a majority of subregions that demarcate each of the four national regions into smaller territories will maintain tight vacancy and support rent growth for another year.
Operational growth and compressing cap rates are generating intense demand for manufactured housing communities nationwide. Low interest rates combined with rising NOIs are minimizing cap rates in most areas of the country. Yields that exceed other product types are drawing new buyers and syndicates, while also inciting off-market trades for well-placed properties. Coastal metros account for lower cap rates than other regions, with trades starting as low as 4 percent. Buyers target high caliber parks in this cap rate range selling within weeks of listing. At the opposite end of the spectrum, older lower-rent parks can remain on market for more than six months and provide cap rates of 9 percent and above. Investors with the required capital and ease of access to urban services can purchase properties that are on septic systems and wells and transfer them to central utilities, finding potential value-add. Others in this category could benefit from the trend of park-owned homes, allowing owners to take a bifurcated approach by selling homes on note while also maintaining traditional full ownership of the park. This is prevalent in the South. Markets in Texas have seen an overall 400-basis-point drop in initial yields since 2010 as buyers target communities in major urban centers that can trade at 7 to 8 percent cap rates. This and other energy driven markets may face temporary headwinds during shifts in the oil industry, providing more listings with long-term value-add potential. Nationally, as private housing costs rise out of reach for many residents, demand for manufactured housing communities will continue to compress cap rates.