Homing In on Manufactured Housing
Look to These Communities to Find Investment Opportunities.
Manufactured housing is a marriage of two industries: the companies that build and distribute manufactured houses, which are single-family homes constructed in factories, transported to a location, and installed on-site, and the manufactured-home communities, which are either landlease, where residents own their homes and lease the land they occupy, or site-owned, where residents own both the home and the land.
Currently, the marriage is experiencing rocky times. An oversupply has slashed production of manufactured homes in half from more than 370,000 in 1998 to less than 200,000 in 2001. The downturn is causing builders to cut jobs and close retail outlets and plants.
Despite these problems, manufactured-home communities remain a stable choice for some real estate investors. Current demographic trends such as the need for affordable housing, an aging population, and the interest in second homes portend positive repercussions for manufactured-home communities. Al-though not for every investor, these communities are a specialized niche that offers investment potential for hands-on property owners or investors looking for turnaround opportunities.
Today's woes sprang from a small manufactured-home community development boom in the late 1990s. Easy credit terms led to overproduction, and lax underwriting standards created credit problems, resulting in an increase in repossessions.
Since then, lenders have tightened their financing standards, slowing demand. In response, new manufactured-home community development has decreased significantly, and infill has stalled in many half-filled communities.
Yet demographic trends point to increased interest in manufactured homes, and industry watchers predict a slight rebound during 2003. As many cities face a growing need for affordable housing, manufactured housing offers opportunities to broaden access to home ownership. The average price for a manufactured home is $46,000, compared with $162,300 for a site-built house excluding land, according to the Manufactured Housing Institute. In addition, aging baby boomers are showing increased interest in manufactured homes, both as vacation and retirement homes. Senior communities currently make up about 10 percent of the manufactured-home communities, with the other 90 percent open to all ages, according to MHI.
Another trend that bodes well for the industry is the growing popularity of site-owned communities, where residents purchase lots and set their homes on foundations or basements. This arrangement allows home buyers to apply for traditional residential mortgages. Currently, approximately 60 percent of new homes are placed on scattered sites, 30 percent are put in landlease communities, and 10 percent are placed into subdivisions or site-owned communities, according to GFA Management.
Probably the biggest trend influencing the rebound of manufactured housing is the design of the homes themselves. Once characterized by flat-roofed, trailer-like structures, manufactured homes today feature pitched and shingled roofs, vaulted ceilings, and spacious layouts in a number of configurations. Amenities include spas, fireplaces, and state-of-the-art kitchens. Two-story models have generated tremendous consumer interest, according to MHI. Certain states including California , Delaware , Maryland , and Washington have markets for two-story manufactured homes with garages, cathedral ceilings, tile floors, and fireplaces. Once in place, they closely resemble site-built homes.
Because of the current depressed state of the manufacturing segment of the manufactured-housing industry, new developments can be very risky unless the property is in a major metropolitan market, a high- growth area, or an area with a pronounced shortage of affordable housing.
Although functionally obsolete because their small sites will not accommodate newer, larger homes, many older manufactured-home communities remain very good investments from a valuation perspective. At times they can be purchased for about half -- or less than half -- of what it costs to build a new manufactured-home community; however, monthly rental rates and possibly the return on investment in older properties may be somewhat lower.
In some properties, the owner/operator owns individual homes and rents them by the month or even by the week. These rentals can be cash cows but usually are converted to contract sales to help sell the property when it's placed on the market.
Repositioning an older community may mean enlarging sites to accommodate new homes, moving roads, and upgrading utilities and amenities. It may involve moving residents or combining sites to accommodate larger homes -- both expensive propositions. The least risky investment approach is to acquire adjacent land to improve or expand older communities.
Given the low turnover rates per year, well-run landlease communities can offer a fairly secure income stream over a long period of time. The best investment-grade communities usually are adults-only facilities, which tend to have the lowest turnover rates. These are often mature, mostly full communities with low operating expenses, strong on-site management, and excellent curb appeal.
Size and utilities are also major factors. Most private portfolio owners and REITs look for communities with a minimum of 250 sites that have access to public utilities. Given current difficult-to-meet federal environmental regulations, manufactured-home communities with wells and septic systems or even packaged plants and lagoons may present difficult and expensive problems. Private utility-serviced manufactured-home communities often are upgraded to tap into public utilities if water and sewer services become available. The costs to upgrade vary depending upon the distance to the utilities and the tap-in fees. When upgrading utilities in older properties, owners pay for the upgrades and can justify raising site fees to offset the costs.
Comparing manufactured-home communities to garden apartment complexes offers a closer look at their investment potential. Operating expense ratios for manufactured-home communities are typically 38 percent vs. 50 percent for apartment complexes, according to the 2002 Allen Survey. Annual turnover is typically only 5 percent for manufactured homes proper, because they are so costly to relocate, and 10 percent for residents who either relocate their homes or sell them. Annual turnover among apartment dwellers averages 55 percent to 60 percent.
About 21 million people, or close to 8 percent of the U.S. population, live in 8.9 million manufactured homes nationwide, according to MHI. Five real estate investment trusts -- American Land Lease, Chateau Communities, Manufactured Home Communities, Sun Communities, and United Mobile Homes -- control about 583 manufactured-home communities. Stock prices among these five REITs have been down only slightly, and collectively they are viewed as healthy, stable investments. REITs have tightened their credit standards for new residents, and the portfolios that contain higher-end communities have been less affected by repossessions, according to a National Association of Real Estate Investment Trusts report. In addition, nearly 30 percent to 40 percent of REIT community residents pay cash for their new homes, limiting the REITs' exposure to credit problems.
The great majority of manufactured-home communities are owned by small owner/operators, syndicators, and an increasing number of municipalities. Approximately 500 portfolio owner/operators control an average portfolio of 15 communities a piece with approximately 230 home sites per property. Some portfolio owners have 20 to 50 communities under fee-management and ownership, according to the 2002 Allen Report.
REITs continue to search for quality investments, although they still have vacant development sites in their portfolios. Some REITs and large portfolio owners recently have sold some holdings, mainly lower-end communities and remote properties that don't enhance their image or cost too much to manage effectively.
While manufactured-home communities are located throughout the country, nearly 60 percent of new manufactured homes were placed in southern states, with Texas , North Carolina , and Florida receiving the most, according to the 2001 Census.
Texas has experienced strong rental increases and development activity during the past year, according to JLT & Associates, a market research company specializing in the manufactured-housing industry. Occupancy is strong in older communities and somewhat lower in areas where new communities have opened recently.
Manufactured-home communities with strong ownership and management are performing well in North Carolina , though overall occupancy rates decreased slightly from 2001 to 2002, according to JLT. The majority of manufactured-home communities in North Carolina are all-ages communities, with several new developments completed this year.
Florida 's occupancy increased slightly between May 2001 and May 2002 for all communities with more activity occurring in south Florida where single-family home prices are higher, according to JLT. Many new age-restricted seniors communities offer luxury amenities and active lifestyle packages, which are less common in Florida 's older manufactured-home communities.
Outside of Texas , other southwestern states have suffered from an oversupply of manufactured-home communities. From January 2001 to January 2002, several cities registered falling occupancy rates: Albuquerque , N.M. , down 5 percent; Las Vegas down 7 percent; Phoenix down 5 percent; Tucson , Ariz. , down 3.2 percent; and Salt Lake City down 4 percent, according to JLT.
Developing New Communities
A number of issues contribute to the high cost of developing new communities. In many areas, it is difficult to obtain zoning approval for manufactured-home communities due to resident opposition, which often is true for many types of affordable housing.
Once zoning hurdles are surmounted, construction costs for roads, utilities, and other improvements can range from approximately $15,000 to $25,000 per site, including raw land cost. Once a community is finished, it may take several years to fill depending on its size and the local market conditions. Relocation costs can be high depending upon the home's size, ranging from $2,000 to $4,000. Due to steep relocation costs, residents tend to stay in place, keeping turnover rates low. Once a community is stabilized, it usually remains so for a number of years.
The current state of new development has slowed due to the decrease in manufactured-housing production and sales; however, one emerging trend is the interest in subdivision-type communities where residents purchase the land and the manufactured home. If the home is set on a foundation or basement, the resident can title it as real estate (instead of personal property) and apply for a typical 30-year residential mortgage.
Professional property management is essential to a well-run community. Large portfolio owner/operators often employ Certified Property Managers, a designation conferred by the Institute of Real Estate Management , to oversee regions of manufactured-home communities. In addition, more than 500 on-site and regional property managers have earned MHI's Accredited Community Manager designation. Also, GFA Management in conjunction with PMN Publishing offers the Manufactured Housing Manager designation to professionals who complete a one-day manufactured-home community management course.
Strong on-site management often makes the difference between a good community and a great one. Proactive site managers who interact with residents on a daily basis often can stop problems before they get out of hand. Good site managers also identify opportunities to create supplemental income to improve a community's investment status. For example, Chateau Communities rents on-site storage barns to residents. Some communities sell homeowners insurance, pest control, and home security services. Laundry facilities are available in many older communities. New and/or used home sales on-site, parts sales and installation, as well as service income, value appraisal, and home brokerage fees are other income sources.
Owner/operators also reduce traditional operating expenses through utility submetering and group purchasing and by delegating site maintenance responsibilities such as grass cutting to residents.
Outlook for the Future
The mid-1970s through the 1980s was the heyday for manufactured-home community syndications. In the 1990s, REITs gained a foothold in the industry. Currently, a new breed of young wealth builders are purchasing the middle-tier manufactured-home communities -- those with approximately 75 to 200 sites. Some buy two or three properties in a local or regional market to promote more efficient management. In the future, it is likely that some of these new and rapidly growing private portfolios will take their offerings public and create a new generation of manufactured-housing REITs.