Our Perspective 6/ 8/ 2021

Investor appetite for manufactured housing fuels cap rate compression

Manufactured housing is no longer the overlooked property type that it once was. It was one of the best performing sectors in 2020, and that performance is attracting new capital to the space and heating up competition for investment sales.

Manufactured housing has gone from a niche asset class to a sector that is in the spotlight thanks to its proven ability to deliver stable cash-flows with rent collections that remained consistent even during the pandemic. According to NorthMarq’s latest research report, occupancies at manufactured housing communities held fairly steady at 93.7% during first quarter with annual rent growth at a healthy 4%.

Buyer demand is evident in strong market pricing and cap rate compression. Cap rates averaged approximately 6.5 percent during Q1 – 50 basis points lower than the average cap rate for 2020. If interest rates stay the same, those cap rates could move lower this year.

Following robust sales activity in the fourth quarter, transaction volume did drop sharply in first quarter by about 40%. However, that slowdown is not surprising considering the flurry of activity that occurred late last year due to pent-up demand from the pandemic and uncertainty ahead of the November presidential election. People moved up their investment timelines due to questions about what a new administration would mean for changes in tax law.

Sales activity is regaining momentum in second quarter and transaction volume could very well jump in the second half of the year as debate heats up on President Biden’s proposed tax changes. There has been an uptick in for-sale inventory hitting the market in second quarter as some owners look to get ahead of potential increases in the capital gains tax rate or changes that would limit the use of 1031 Exchanges.

While there is no shortage of for-sale inventory, the opportunities that are available are becoming more expensive. People need to be thoughtful in their proformas and where they can take a manufactured housing community, because most of the deals on the market today are going to require some work to create stable, cash-slowing assets.

As buyer competition continues to heat up, some of the larger buyers – the REITs and private equity groups – also are expanding their investment criteria to win deals. Previously, the larger buyers were focused on acquiring 200-site communities and five-star communities in good markets. Now those same buyers are willing to consider smaller manufactured housing communities or slightly lower quality that come with the potential to do clean-up, make improvements and improve leasing. Those value-add buying opportunities are proving to be worth the time and effort as they result in attractive returns for investors.

Looking ahead, new manufactured housing communities in the development pipeline have the potential to elevate the asset class by providing quality, safe, clean affordable housing options for people. NorthMarq is helping to source the debt and equity for some of these projects, including a $150+ million construction loan for a project in Texas that is expected to develop nearly 4,000 new manufactured housing sites. The new communities are helping to further distance the sector from the outdated stigma of a “trailer park” traditionally associated with the sector. As other states see successful communities emerging as affordable housing solutions, it could prompt those states to approve legislation that would make it easier to develop new manufactured housing communities. Such activity would be a big positive for the industry as it would create new investment opportunities and expand the inventory of institutional-quality assets.