Once a marginal asset class, factory-built housing has become one of the fastest-growing segments of real estate and one of the most active in terms of investment. Over the past decade, mobile-home parks (MHPs) and manufactured-housing communities (MHCs) — which have distinct regulatory definitions — have consistently performed well for investors.
Despite the sector’s growing profile, however, misperceptions continue when it comes to financing options. Digging deeper into current trends, it’s clear that old assumptions should no longer apply to commercial mortgage brokers and their clients.
The manufactured-housing sector is the only major commercial real estate asset class that has not experienced a year-over-year decline in net operating income in any year since 2000, according to Green Street Advisors. Not surprisingly, a major driver of the sector’s stellar investment performance is that housing-cost increases have outpaced wage increases.
According to the Manufactured Housing Institute, 22 million people live in manufactured or mobile homes in the U.S., occupying 4.3 million sites in about 43,000 land-lease communities. Homes are manufactured in 136 plants across the country and the average sales price in 2019 (excluding land) was $81,900 for the typical 1,448-square-foot home.
A tenant can expect to pay roughly $450 per month for the pad rental, $75 per month for utilities and $500 per month for the home itself. At $1,025 per month, a manufactured home can be a bargain — especially in comparison to the experience of living in an outdated apartment building and sharing walls with neighbors.
In many U.S. locations, manufacturing housing is the only truly affordable, nonsubsidized form of detached housing available. Strong consumer demand coupled with low supply is why MHCs and MHPs have thrived regardless of economic trends — even during the downturn caused by the COVID-19 pandemic. One measure of the sector’s investment strength is that manufactured-housing real estate investment trusts (REITs) have outperformed the broader REIT index over the past several years.
Limited supply
Today, manufactured housing provides shelter for roughly 7% of the U.S. population. This share would likely be much higher were it not for the high barriers placed on new construction.
With the exception of Florida, Texas and Arizona, most states have seen little development of new MHCs or MHPs in recent years. With fewer than 10 new communities developed since 2008, 68% of MHCs were built before 1980, according to valuation company Datacomp. Prone to old stereotypes, municipalities, zoning boards and neighborhood associations often show great resistance to allowing new communities to be developed or expanded.
Contrary to popular perceptions, however, many MHPs and MHCs are professionally managed and offer safe, secure, high-quality housing at affordable prices. Communities often offer clubhouses, swimming pools, off-street parking and other amenities typical of conventional multifamily communities. Furthermore, today’s factory-built homes increasingly resemble stick-built homes, with luxury finishes and architectural details that blend with conventional home designs — and two-story models have entered the market as well. Well-located and maintained communities can be upgraded and improved, and their values are rising in today’s market.
Despite its potential, manufactured housing continues to be subject to misperceptions. There are multiple indications of how far the sector has come.
First, investments in MHCs and MHPs are thriving outside urban centers. Conventional wisdom claims that location in a primary market with relatively high housing costs is fundamental for the success of these properties. Yet what little new MHC development that has been approved by municipalities is underway in rural areas rather than densely populated ones.
One recent deal, for example, is a $9.75 million first-lien construction loan for a new MHC development in Washington state, in a small but lively community about two hours northwest of Seattle. The community, which will have 217 home sites, will be restricted to residents ages 55 and up. The 38-acre property sits in the city’s downtown area and is surrounded by big-box retail, casinos, golf courses, a country club, churches, cafes and outdoors attractions.
Capital sources
Second, numerous financing options are available for these investments. A decade ago, financing options for MHCs were limited because of misperceptions and stereotypes about factory-built housing. But as these types of homes and communities have become more advanced and sophisticated, financing options have flourished.
Most owners of manufactured-housing communities now use commercial mortgages to finance their properties. Some owners are able to secure chattel financing to buy new homes and rent them out, or they can provide seller financing for new residents. Funding sources encompass a wide range of commercial mortgage lenders — including banks, credit unions, debt funds, commercial mortgage-backed securities (CMBS) lenders, family offices, pension funds, life-insurance companies, and even the government-sponsored enterprises Fannie Mae and Freddie Mac.
Agency lenders are often preferred by investors, but other sources finance a significant volume of transactions for factory-built communities. Private lenders are active in many states. REITs, sovereign wealth funds, institutional equity funds and the like also are active in the sector, although some of these lenders prefer larger transactions valued at $10 million or more.
The financing of individual home purchases is, of course, important for MHC and MHP occupancy rates. Specialty finance firms recognize that lending on mobile homes is quite secure, with the loan amounts being smaller than conventional mortgages, but the default-risk profile is similar as the majority of these homes are the occupant’s primary residence.
Some capital sources, however, continue to be more risk averse than others. Not surprisingly, the COVID-19 pandemic has made banks more conservative and has pushed many large banks to the sidelines. Bank borrowers can expect loan-to-value (LTV) ratios in the 50% to 70% range rather than the pre-pandemic levels of 65% to 80%. The typical debt-service-coverage ratio requirement is likely to be close to 1.25 or 1.3 due to the low interest rate environment.
Securitization growth
Even before the pandemic, some lenders viewed this asset class as special-purpose real estate that warrants more conservative terms. These may include lower LTV ratios or personal guarantees rather than the nonrecourse options that investors naturally prefer.
Life-insurance companies, too, often focus on lower LTV transactions and are highly selective with regard to asset quality. The secondary market is seeing increased investor appetite for the asset class, and CMBS lenders continue to offer competitive rates, cash out and long-term nonrecourse loans.
Mortgages for MHCs and MHPs are often securitized, a significant change from previous eras. Over the past decade, however, Fannie Mae and Freddie Mac became the lenders of choice for investors, especially after Freddie entered the sector in 2014.
In 2019, for instance, Fannie provided $2.5 billion in MHC financing while Freddie injected another $1.4 billion, according to Wells Fargo data. As investors in these securities have come to appreciate the performance of MHCs, securitization opportunities have grown to bring more liquidity to the sector.
Favorable terms
Loan terms can be investor friendly. With greater recognition of the MHC sector’s potential, lenders have become increasingly comfortable. Some banks and credit unions, for instance, have a good understanding of mobile-home parks from a credit perspective and will offer aggressive loan terms under normal conditions.
The previously mentioned project in Washington, for example, was funded through a bank-participation loan that covered 69% of the upfront costs. While it is a recourse loan, the five-year term includes a two-year, interest-only period, followed by an amortization period of three years based on a 25-year schedule.
In another recent example, $9.53 million in first mortgages for two MHPs in the Texas markets of Dallas-Fort Worth and Corpus Christi were secured for a repeat borrower. Five years prior, the borrower obtained funding to acquire the two properties and execute a value-add business plan that created a strong position for permanent cash-out financing.
The 10-year, nonrecourse CMBS loans provided by a Wall Street firm feature a fixed interest rate; a three-year, interest-only period; and amortization over a 30-year schedule. Proceeds from the loan were used to pay off a previous loan, cover closing costs and return equity to the borrowers.
● ● ●
Limited supply and strong demand suggest that the outlook for MHC investments will remain positive. This asset class has long suffered from misleading stereotypes and a lack of understanding of the market dynamics for this housing segment, creating constraints on new development. While limited supply sustains the strong investment performance of parks and communities already in place, growing consumer demand points to additional opportunity for investors and lenders to build in the right communities.
Interest rates also continue to be low and the demand for affordable housing has never been higher. For owners, the opportunity to refinance and tap equity to enhance their properties or to buy new ones has never been better. With awareness of current financing trends, savvy investors and commercial mortgage professionals stand to profit while meeting a critical marketplace need for attractive, affordable housing. ●
