Investors Moving Inland From Coasts Amid Occupancy Gains in the Midwest
Growing demand for manufactured housing is lifting occupancies and rents for a 10th consecutive year. The run-up in pricing of homes, condos and apartment rents is generating renter interest in relatively affordable options in manufactured housing communities. In particular, aging baby boomers seek communities located in warm climates with amenities and recreational options. While newer, highly amenitized age-restricted communities in the Sunbelt remain a top choice for older renters, many of these spaces are occupied to capacity. Full occupancy at the newest properties pushes demand to smaller, older parks where lower rents attract tenants. Some of these parks are now also starting to fill vacant spaces, some of which include lot and new home rentals. A 15 percent increase in manufactured house shipments last year shows the demand generated by all age groups. The majority of new homes are delivered to the Southern region in markets from Texas to Florida. A recent rise in renter demand in the Midwest region elevated shipments by more than 20 percent last year. Vacancies in the Midwest have tumbled more than 300 basis points since peaking in 2012, while rents have grown nearly 10 percent during the same time period. The need for spaces in this region continues to grow at a fast pace. As home prices and apartment rents escalate, another year of vacancy improvement in manufactured home communities will boost rents in 2017 while maintaining lower rates than other housing options.
Opportunities abound for buyers willing to look at smaller markets and older parks. Past years’ acquisitions by institutional players and REITs have limited the number of active listings for five-star, age-restricted Manufactured Housing Communities, boosting interest in other sites. Fierce competition for communities with 100 spaces or more heats up due to limited supply on the market. Meanwhile, a number of investors are developing solutions to continue purchasing properties with fewer than 100 spaces. Upgrading existing park infrastructure in older properties and adding popular amenities can produce dramatic upside. Additional measures, such as more efficient property management, allow cap rates for traded communities to compress further, particularly in key coastal markets. Yet, a new trend is emerging in inland markets, where dramatic improvement in vacancies and rents provide a stronger potential for NOI growth. Investors seeking higher initial yields increasingly target the Midwest, where returns are generally 100 to 500 basis points above coastal communities depending on quality and location. After years of overlooking these markets, some investors target the larger pool of listings in this part of the country amid improving fundamentals. Overall, yields will remain tight with value-add locations in a variety of markets showing potential for cap rate compression nationwide but at a more moderate pace than in prior years.
2017 Manufactured Housing Outlook by Region
East: Growing demand and a 150-basis-point drop in vacancy last year foreshadows further improvement this year. Strengthening will be led by sub-8 percent vacancy in the Mid-Atlantic subregion, where rents will be maintained or grow slowly due to small, older properties being filled.
Midwest: A market need for quality communities supported a large compression in vacancy, while rents increased at a fast pace. Initial yields are also above coastal metros, providing opportunities for investors seeking higher returns and value-add options, further elevating buyers’ interest.
South: Tied with the East for the second-lowest vacancy rate among regions, Southern markets also had the strongest rent growth. Average rents are above $550 per month in coastal Florida markets, while some Texas markets such as Austin inch closer to the $500 per month mark.
West: Rising demand for manufactured housing communities pushed vacancy to the lowest rate among the four regions at 6.5 percent. Strong fundamentals attract investors. Cap rates will remain tight along the coast, which already offers some of the lowest initial yields nationwide.