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REITs Love Manufactured Housing - 27% Annual Returns

A recent article by BisNow (see below) describes a trend we have all seen over the past several years.  The manufactured housing industry is changing as, across the country, REITs have recognized the strong investment returns realized in manufactured housing communities.

However, it will be interesting to see how REITs manage properties in an industry that is filled with perils such as rent control, failure to maintain lawsuits, and ever-increasing local governmental restrictions.  They will to have to depend heavily on professional management companies and legal representation who know this product and how to navigate its obstacles.

In a business which for decades has been held almost entirely by family owner/operators, this investor class is quickly changing the landscape of the industry.  REITs have the ability to outbid the smaller individual and family investors as properties come on the market, and have rapidly become the owners of many of the larger 4-5 star communities, with a voracious appetite for more. 

- Richard Close

Trailer Park REITs: These Quiet Moneymakers 

Are Bringing In Crazy Returns For Investors

August 03, 2017  │ Champaign Williams, National Editor

Read the complete BisNow article here.

Manufactured home communities have turned a corner for the better. Commonly referred to as "trailer parks," these communities have evolved beyond the negative stigma that plagued them in the past. Many of these housing communities resemble high-end gated neighborhoods of affluence - and investors have taken note.

Once an overlooked sector in the housing market, manufactured home REITs have become one of Wall Street's quietest moneymakers. National Association of Real Estate Investment Trusts data reveals these communities are rolling in returns that so far year-to-date are outpacing the S&P 500. 

From January to the end of July, the sector brought in 18.3% in returns, a rarity in the market. On an annual three-year basis, this small segment in the REIT market has averaged returns of 26.7%, according to NAREIT. Strong returns have been fueled by low building costs, strong supply and demand dynamics and a solid net operating income.  

"It is rare to find a segment that has double-digit returns, and so consistently," NAREIT Senior Economist Calvin Schnure said. 

 More than 20 million Americans live in manufactured homes, also known as mobile homes, and as the country continues to experience a housing crunch, demand in these communities is growing.

Housing Constraints 

 America is undergoing an extreme housing shortage. Though there is a great deal of supply underway this year - the largest number of new units under construction this cycle - those new deliveries are overwhelmingly concentrated in densely populated urban markets and they are extremely expensive.

The multifamily sector is expected to have 320,000 new deliveries this year. Most of this supply will fall within a handful of the sector's largest metros and all of these new apartments are on the high-end of the spectrum, according to Yardi research. 

Demand for low- to mid-scale housing, driven by blue-collar working Americans, is in full swing, but affordable supply is all but unavailable.  

Manufactured homes are aiding in residents' search for affordable housing. Last year the average price for a manufactured home was roughly 10% to 30% less per square foot than traditional site-built homes, ranging between $50K to $90K for single- and double-wide units.

"Certainly the manufactured housing sector is facing strong demand just given the challenges with the lack of availability of affordable housing, of any type of housing, in other places across the country," Schnure said. 

Still, affordability is not the only thing about these communities that is fueling demand.  

Trailers Parked In A Resort

Sun Communities Inc. and Equity Lifestyle Properties are two of the country's largest publicly traded manufactured housing REITs. These trusts own and operate a combined 550 manufactured housing communities across the country, each owning an assortment of all-age and active senior living communities - though age-qualified communities make up the bulk of their portfolios. 

Far from rundown trailer parks, these communities feature resort-style amenities that include swimming pools, fitness centers, golf courses, playgrounds for children and more.  

"As with other property types, the REITs own higher properties so these are investment-grade communities they've created," Schnure said. "Most of these can't be in a downtown urban area, they don't have the space for it. Many are spread pretty much all across the country. There are quite a few in the Southeast through Georgia and Florida, there are also some in the West in New Mexico, Nevada, California, Texas." 

What Goes Up, Must Come Down

"The manufactured housing REIT sector is providing very good quality homes where people can live at an affordable rate and that provides a good return for investors. This is a win-win situation," Schnure said. 

So far there have been 46,600 manufactured homes delivered this year, according to the U.S. Census Bureau. This number is up slightly from 2016, which delivered a total of 81,000 units. Within the last 60 years, the number of pre-fab homes to come online has decreased exponentially after peaking in the 1970s, then again in the 1990s. 

Experts attribute the deceleration in mobile home construction and sales in the 21st century to lenders easing their credit standards, affording residents better access to traditional housing. Federal officials cracked down on the issuance of faulty loans following the housing crisis, and as of 2014 pre-fab construction had gradually increased from 64,000 deliveries in 2014 to 70,000 in 2015 and 81,000 last year.  

"The country is still recovering from a national housing crisis," Schnure said. "The question is - what if the economy improves and people decide they want to move out and get a traditional house built on a foundation. I wouldn't expect the people in the retirement communities to be prone to move out, and that accounts for a really large share of the overall communities ... Traditionally we haven't seen a whole lot of move-outs like that. People who have been there for five to 10 years, there is a reason why they stay that long - they tend to find them comfortable." 

Read the complete BisNow article here.

If you have any questions, please contact Richard Close or Susy Forbath in our office at (310) 393-4000.

Source: https://www.bisnow.com/national/news/multifamily/the-quiet-money-maker-manufactured-home-reits-are-averaging-27-annual-returns-77376?utm_source=MorningBrief&utm_medium=email&utm_campaign=20170807_los-angeles_morningbrief&be=sforbath%40gilchristrutter.com&utm_source=Bisnow+Article&utm_campaign=MHP+REITs+Bisnow+Blast&utm_medium=email

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