The data is about why institutional investors are buying mobile home parks. And that’s pretty amazing.
Sam Zell, one of America’s most successful real estate investors, was right. He spotted this trend decades before the rest of us — and he’s reaping the rewards in a big way.
Real Capital Analytics (RCA), one of America’s leading data analysis firms for commercial real estate, recently reported on the rush to buy mobile home parks. There were three big news in his analysis.
sales volume
Although mobile home parks, aka manufactured housing, only make up about 1% of commercial real estate sales volume, the number of transactions has skyrocketed over the past few years. A spring 2021 Jones Lang LaSalle analysis reported that manufactured housing sales volume was up 32% from 2019 to 2020, even amid the pandemic. The sales volume is reported to be $3.2 billion in 2019 and $4.2 billion in 2020.
Twelve-month sales from Q3 2020 to Q2 2021 reached $4.1 billion, a 48% increase over the previous four quarters and a 30% increase from the previous 2017 peak.
Pricing
Pricing on manufactured housing for apartments outside the six major metro areas has now risen significantly to match increased multifamily pricing levels. The cap rate is capped at 5.0% for both asset types till Q2 2021.
Old-timers in the mobile home park space were accustomed to cap rates in the 10% range, so current pricing has doubled from 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 a windfall from this previously undiscovered property type.
Buyer Type
This is the third wonder. Institutional buyers (such as large private equity funds, REITs and insurance companies) have increased their buying appetite by more than 76% in 2017 to 2019 versus the most recent two-year period. Institutional buying accounted for 23% of transactions compared to the previous two years. 13% from 2017 to 2019.
Institutional buyers have traditionally preferred buying the mom-and-pop asset type in bulk, accounting for a total of 83% of the portfolio.
This RCA graphic published on Aug 31, 2021 tells the story of all three of these metrics.
Institutional buyers include Sam Zell’s Equity Lifestyle Properties, which owns more than 158,000 mobile home park pads. America’s most famous investor Warren Buffett is also involved in the manufacturing housing industry. He is the owner of Clayton Homes, the nation’s largest mobile home manufacturer. Buffett’s Berkshire Hathaway is also behind 21st Mortgage, a leading lender for mobile homes, and Berkadia, a large mortgage company that includes mobile home parks on its list of borrowers.
Blackstone is also heavily involved in mobile home parks, with a manufactured housing portfolio valued in the billions. Our firm invested with RateTrees, a Denver operator of Seneca Capital, which sold a prior portfolio to Blackstone and apparently did quite well. I asked Rhett why he thinks the built housing sector is so hot right now.
“I think there is a simple reason why we are seeing this undeniable institutional demand for this asset class. This is truly a roll-up opportunity of a lifetime due to a number of thematic advantages: ownership fragmentation; supply contraction; scale Cost reduction through economies of scale; reduced OpEx requirements; and efficient use of capital thanks to the elimination of the J-curve (Day 1 NOI),” he added.
“The conundrum for our society remains whether landlords will continue to invest in the community and residents following the low cap rate transaction,” explained Rhett. “Often, the spirit of this alliance between landlord and resident is in direct conflict. Our overarching task is to ensure that both investors and residents win by providing the cleanest, safest affordable housing at market rents.
Let’s look at some more reasons why this is happening.
Why is this happening?
I believe there are at least a dozen factors that point to the meteoric rise in mobile home park investment. I’ve written about these in several BigerPockets articles, so I’ll let you dig deeper if you’d like!
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Why Institutional Buyers Are Rushing Into This Space
Institutional buyers are hungry for yield. Their investors expect them to find properties to invest in, and competition is top-notch across multi-family, single-family and many other asset classes. Razor-thin margins and the potential for losses are prompting large investors to look to new types of assets.
Institutional investors want stability. They don’t want drama and lots of value-adds that lead to windfall returns. The past decade has seen the rise of medium-sized professional operators that acquire mom-and-pop mobile home parks and upgrade them with standards and staffing that make them targets for institutional takeover.
These professional operators may duplicate their efforts on many, sometimes dozens of properties. Institutional buyers want to write big checks. There is no opportunity to write large checks (tens of millions) for mobile home parks. There are very few super-sized properties. Sam Zell’s purchases were extremely rare in the Everglades.
This makes portfolio acquisitions a natural fit for this asset type. Buyers pay a portfolio premium for this opportunity, and the professional operators it presents—and their investors—can reap the benefits.
What will happen next?
There are reportedly about 43,000 mobile home parks in the United States. We believe that about 85% of them are owned and operated by mom-and-pop investors. There are still many years 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 for what’s left. With the rise of new operators and institutional capital, that day may come sooner than we wish.
golden rule
Are you planning 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. In most cases you will often be leasing to a less knowledgeable and less affluent tenant base. It is your responsibility to treat them fairly and make their park a better place to live while you own the property.
It’s good business practice, but I’m not talking about it. I’m talking about the reason you and I live on this planet: to make it a better place. As a mobile home park operator, or someone who invests in one, you have a chance to make the lives of the renters better or worse.
These aren’t “metal boxes that spit out cash,” as I’ve heard them called. It is someone’s childhood home, someone else’s refuge, a place where they are creating the memories you had as a child. Come be a part of making great memories and at the same time make huge profits.
Note by BigPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
