Manufactured-Home Communities Come of Age
These Properties Are Solid Investment Opportunities for Large and Small Investors.
Forty years ago they were called trailer camps; 20 years ago, mobile home parks; and 10 years ago they became mobile-home communities. However, today this type of income-producing property is generally referred to as a manufactured-home landlease community, or simply a manufactured-home community. Under any name, it's an investor's gem.
Today's upscale, well-located manufactured-home landlease communities, filled with families and retirees who prefer this lifestyle, bear little resemblance to their predecessors. Not only do these showcase properties command premium sales prices, but the owners of small properties enjoy even more upside cash flow and appreciation potential as they site larger, nicer homes, raise rents regularly and equitably, and trim operating expenses, thus keeping them at levels of profitability unequaled by any other investment property type.
Large, well-located manufactured-home communities "for sale" are harder to find than a proverbial needle in a haystack. Significant opportunity abounds, however, among numerous small to mid-size manufactured-home communities across the United States and Canada. (This property type is rarely encountered outside these two countries.) And now more new manufactured-home communities are being built to meet affordable housing and strong investment demand.
A Growing Industry
A number of positive changes have occurred within the manufactured-housing industry and its closely related real estate arm during the past two decades. Back in the early 1970s, up to 80 percent of manufactured homes were sited in landlease communities. Today, half of the new, larger manufactured homes go onto privately owned, scattered building sites and into housing subdivisions. There are two main reasons for this change. First, contemporary manufactured homes-more spacious, attractive, and full-featured today-"fit in well" practically anywhere, and their $25.19-per-square-foot cost compares favorably to conventional site-built housing's $54.65 per square foot. Second, few new manufactured-home communities were built during the past 20 years, and existing ones are nearly full-averaging a 93.6 percent physical occupancy in 1995. Where vacant rental sites are available, they often can't accommodate today's larger manufactured home, which averaged 1,330 square feet in 1994 and are getting bigger today.
Size is another major development for the industry. Twenty years ago, 80 percent of new manufactured homes produced were single-section (12 to 14 feet wide by 50 to 60 feet long), and only 20 percent were small multisection homes. Today, only a slim majority is single-section-but even these are larger at 16 to 18 feet wide and 70 to 80 feet long.
In addition, there is considerable regional difference in consumers' buying preferences. Retirement meccas, such as Florida and Arizona, characteristically feature spacious multisection homes with pitched, shingled roofs and lap siding. Rural locales sell and site mostly less expensive single-section homes with rounded metal roofs and smooth metal siding.
New manufactured-home production has gone through a feast-and-famine cycle. In 1973, the industry shipped 579,960 new homes, then took a nose dive the following two years-shipping only 212,690 new homes in 1975. It returned to stride in 1994 when 303,932 homes were shipped, the first year since 1974 to top 300,000 homes. The next year saw 339,601 homes produced, and industry optimists comfortably predict between 350,000 and 375,000 in 1996 and even higher production levels in the future.
A Hot Investment
Since 1976, manufactured homes have met a federal preemptive building code known as the National Manufactured Housing Construction & Safety Standards Act of 1974. This code ensures a very high level of product integrity and allows manufactured housing (known as HUD Code homes) to easily cross state lines for siting just about anywhere. Add to this manufactured housing's significant affordability over single-family site-built housing and a clear picture of versatile, cost-effective housing emerges. The manufactured housing industry is so optimistic about its present 33 percent and growing national housing market share of new homes that the 10 years from 1995 to 2005 are referred to by many as the "Decade of the Manufactured-Home Community."
Manufactured-home landlease communities are of specific interest to commercial real estate investors. An estimated 50,000 such income-producing properties are situated throughout the United States and Canada. Of these, roughly 24,000 are institutional investment grade, consisting of at least 50 to 75 rental homesites per property. It takes 50 to 75-or even 100-rental homesites to generate an economy of scale that adequately rewards a passive investor, funds a centralized property management operation for a syndicator or real estate investment trust (REIT), and provides a satisfactory comfort factor for most lenders. (The exact number depends on local market conditions affecting achievable site rents and characteristic operating expenses.) Small manufactured-home communities can be excellent investments as well, but generally they are better suited for the novice or hands-on investor-operator who lives on-site or nearby. Large investors will buy several small manufactured-home communities in the same market and operate them with one management team to achieve that economy of scale. Throughout the Midwest, almost 85 percent of manufactured-home communities have fewer than 100 rental sites.
The 1996 Allen Report on the Largest Community Owners provides some helpful statistics. Of the 500 identified major multiple-property portfolio owners polled (with minimum qualifying portfolios of five properties and/or 500 rental homesites), 155 responded with self-verified statistics. These 155 operations control 2,310 manufactured-home communities representing 531,795 owned and/or fee-managed rental homesites. This represents 4.6 percent of the total inventory of manufactured-home communities and 9.6 percent of the 24,000 investment grade pool. Simple extrapolation indicates that all 500 major owners probably control about 15 percent of the total property count and one-third of the investment-grade manufactured-home communities.
These 155 operators average 15 manufactured-home communities apiece with 3,430 rental homesites, or an average property size of 230 rental sites. Their average operating expense ratio (OER) during 1995 was an impressive 38.6 percent-which compares favorably to garden apartments' OERs that run close to 50 percent. But that property type also requires a greater number of improvements to maintain and support the usual 60 percent annual tenant turnover.
In comparison, turnover in manufactured-home communities is very low-only 5 percent for the actual homes and 10 percent among homeowner-renters who generally sell their homes in-place before relocating. The turnover is so low because today's larger single-section and multisection homes are quite difficult and expensive to move. And manufactured-home community residents usually enjoy their lifestyle: homes are large but efficiently designed and easy to care for; and unlike apartments and condos, they don't have neighbors on the other side of walls, ceilings, and floors; rent is usually one-third that of nearby townhouse apartments; and homeowner/renters are in the process of building up equity as they pay down the mortgage.
Why the Sudden Popularity?
Why are manufactured-home communities such highly sought-after real estate investments these days? There are significant reasons in addition to those already given.
Publicity. Manufactured-home communities are certainly not a new income-property concept; they have been around for many years. But it's only been since 1992 that the industry's low OER (37.8 percent in 1992) has been documented and widely published. In 1994, four new REITs formed-the first (except for tiny United Mobile Homes in New Jersey) for this property type. Now Manufactured-Home Communities (Chicago); ROC Communities (Englewood, Colorado); SUN Communities (Michigan); and Chateau Properties (Michigan) regularly enjoy favorable attention among Wall Street's stock researchers, REIT analysts, and the business and real estate press. The five REITs continue to grow in size through aggressive acquisition (during 1995 they paid an average of $17,632 per site for purchased properties) and development of new rental homesites at their existing portfolio properties. In January 1996, Urban Land magazine devoted an entire issue to manufactured housing and the development of new manufactured-home communities. And the industry's two trade publications, Manufactured Home Merchandiser and The Journal, have surged right along with the manufacturers, retailers, and property owners.
Regulatory Barriers. Over the years, pervasive and ongoing opposition to new manufactured-home community development has artificially restricted the supply of this property type. So existing, well-run, and well-located properties have enjoyed high occupancy and have received premium sale pricing when disposition time arrived.
Now that regulatory barriers have eased somewhat in many locales, more manufactured-home communities are being built and present ones expanded. Of course, this means more competition for present owner-investors, but also greater opportunity-through either development or acquisition-for would-be investors wanting to get on the manufactured-home community investment bandwagon.
In addition, such phenomena as the resident-owned community movement have brought new buyers into the picture. Even nursing home developers and hospitality chains see manufactured-home communities as a practical, affordable, and timely answer to the coming seniors' housing shortage.
Property management is yet another area that has undergone considerable improvement in recent years. Twenty years ago there was only a handful of Certified Property Managers actively involved in managing these properties. Today, more than 75 manage manufactured housing portfolios full-time and provide consulting services to the industry. Until just a few years ago, the only professional property management training available for on-site community managers was via related certification programs. Now the industry has the Accredited Community Manager (ACM) program, administered by the educational arm of the Manufactured Housing Institute. Professional property management has become an increasingly important aspect of manufactured-home community investment. One irony is that the higher the occupancy level, the lower the operating expenses (with less vacant-site grass to mow, fewer utility risers to protect and maintain, and less advertising). Apartments, on the other hand, have more ongoing maintenance tasks to contend with, through increased facility use and even more turnover preparation, as occupancy levels rise. It's just one more reason for the proportionately greater profit potential with manufactured-home landlease communities.
Real estate financing is available for manufactured-home communities. Small loans (up to $2 million) are generally underwritten by local lenders. Several large mortgage brokers (including Belgravia Capital and Bloomfield Acceptance) have ready access to capital sources-even conduit financing-for acquisition and refinance deals that make economic sense.
Development money is harder to come by. However, there are alternative and supplemental means to securing development and acquisition financing. Partnerships between would-be developers and owners of inexpensive and zoneable raw land are common with this property type. Another partnership possibility is with a local manufactured-housing retail sales center owner who "has the product" but needs a manufactured-home community to sell into and site homes. In fact, the profit margin with new manufactured-home sales is such that, given a very supportive market, some new manufactured-home community developments on inexpensive land can be built all but "out of pocket." It is not very unusual to find community owners expanding onto adjacent land, simply using a beefed-up maintenance staff and working as their own general contractor, preparing a few new rental homesites at a time.
The future for manufactured-home community development, expansion, acquisition, and disposition is brighter than it has been in 20 years. Every fall, manufactured-home community portfolio owners gather at a resort location for two full days of industry education, networking, and discussion of national and regional issues. This International Networking Roundtable forum has served as a unifying force for a previously fragmented segment of the manufactured-housing industry. One major recent result of these annual gatherings has been the formation of a Manufactured Home Communities Council within the Manufactured Housing Institute structure. Now a full-time staff looks after the industry's interests on the national level and likely will play a guiding role to further brighten its future.