The data is in about why institutional investors have been purchasing mobile home parks. And it’s quite surprising.
Sam Zell, one of America’s most successful real estate investors, was right. He saw this trend decades before the rest of us—and he’s reaping massive rewards.
Real Capital Analytics (RCA), one of America’s premier data analysis firms for commercial real estate, recently reported on the rush to buy mobile home parks. There were three pieces of big news in their analysis.
Although mobile home parks, aka manufactured housing, make up only about 1% of commercial real estate sales volume, the number of transactions skyrocketed in the past few years. A spring 2021 Jones Lang LaSalle analysis reported that manufactured housing sales volume was up over 32% from 2019 to 2020, even amid the pandemic. Sales volume was reported at $3.2 billion in 2019 and $4.2 billion in 2020.
Twelve-month sales from Q3 2020 through Q2 2021 tallied $4.1 billion, which was a 48% increase over the prior four quarters and 30% higher than the previous 2017 peak.
Pricing on manufactured housing has now increased to match the level of significantly elevated multifamily pricing for apartments outside of the six major metro areas. The cap rate for both asset types is tied at 5.0% as of Q2 2021.
Old-timers in the mobile home park space were accustomed to cap rates in the 10% range, so current pricing has doubled since those days. This gives credence to the strategy of being in the right real estate asset at the right time and doing nothing…letting the market do the heavy lifting. Mobile home park owners have certainly enjoyed that unexpected benefit from this previously overlooked asset type.
This is the third surprise. Institutional buyers (like large private equity funds, REITs, and insurance companies) have increased their buying appetite by over 76% in the recent two-year period versus 2017 to 2019. Institutional purchases accounted for 23% of transactions in the past two years compared to 13% from 2017 to 2019.
Institutional buyers preferred to buy this traditionally mom-and-pop asset type in bulk with portfolios accounting for 83% of the total.
This RCA graphic, published August 31, 2021, tells the story of all three of these metrics.
Institutional buyers include Sam Zell’s Equity Lifestyle Properties, which owns over 158,000 mobile home park pads. America’s most famous investor, Warren Buffett, is also involved in the manufactured housing industry. He owns Clayton Homes, the nation’s largest mobile home manufacturer. Buffett’s Berkshire Hathaway is also behind 21st Mortgage, a premier lender for mobile homes, and Berkadia, a large mortgage company that includes mobile home parks on their list of borrowers.
Blackstone is deeply involved in mobile home parks as well, with a manufactured housing portfolio valued in the billions. Our firm invested with a Denver operator, Rhett Trees, of Seneca Capital, who sold a prior portfolio to Blackstone and apparently did quite well. I asked Rhett why he thinks the manufactured housing sector is so hot right now.
“I think there is a simple reason why we are witnessing this unquenchable institutional demand for this asset class. It truly is the roll-up opportunity of a lifetime due to several thematic benefits: ownership fragmentation; supply constriction; cutting costs via economies of scale; low OpEx requirements; and the efficient use of capital thanks to the elimination of the J-curve (Day 1 NOI),” he said.
“The conundrum for our society continues to be whether the landlord will continue to invest in the community and the residents after a low cap rate transaction,” Rhett explained. “Often, the spirit of this alliance between the landlord and resident is in direct conflict. Our overarching job is to ensure all parties win, both investors and residents, by providing the cleanest, safest affordable housing at market rents.”
Let’s look at some more reasons why this is taking place.
Why is this happening?
I believe there are at least a dozen factors pointing to the meteoric rise in mobile home park investing. I’ve written about these in several BiggerPockets articles, so I’ll let you dig deeper if you wish!
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Why are institutional buyers rushing into this space
Institutional buyers are starving for yield. Their investors expect them to find assets to invest in, and the competition in multifamily, single family, and many other asset classes is over the top. Razor-thin margins and the potential for loss are motivating large investors to look to new asset types.
Institutional investors are seeking stability. They don’t want drama and a lot of value-adds that lead to unpredictable returns. The last decade has seen the rise of mid-size professional operators who acquire mom-and-pop mobile home parks and upgrade them with standards and staff that make them targets for institutional acquisitions.
These professional operators can duplicate their efforts over multiple, sometimes dozens, of assets. Institutional buyers want to write large checks. There are virtually no opportunities to write large checks (tens of millions) for mobile home parks. There are very few super-size assets. Sam Zell’s purchase in the Everglades was extremely rare.
This makes portfolio acquisitions a natural fit for this asset type. Buyers pay a portfolio premium for this opportunity, and the professional operator who presented it—and their investors—can reap the benefits.
There are reportedly about 43,000 mobile home parks in the United States. We believe about 85% of them are owned and operated by mom-and-pop investors. There are still years of runway ahead for this exciting industry. But there will come a day when the best parks will be gobbled up and new operators will have to fight over what’s left. With the rise of new operators and institutional capital, this day may come sooner than we wish.
The Golden Rule
Do you plan to buy a mobile home park or invest in one? If so, I want to encourage you to deal with your tenants according to the Golden Rule. You will often be leasing to a less knowledgeable and less affluent tenant base in most cases. It is your responsibility to treat them with fairness and to make their park a better place to live while the property is under your ownership.
This is good business practice, but that’s not what I’m talking about. I’m talking about the reason you and I are alive on this planet: to make it a better place. As a mobile home park operator, or someone who invests in one, you have the chance to make tenants’ lives better or worse.
These are not “metal boxes that spit out cash,” as I’ve heard them referred to. This is someone’s childhood home, someone else’s refuge, a place where they are creating the memories you did as a child. Let’s be part of creating great memories while we earn great profits along the way.