I’ve seen this industry’s evolution firsthand through working as a community operator over the past 15 years. As we are amid an economic boom in our industry and everyone’s focus is on value addition, I believe it is important to understand how we got to this point by taking a holistic view of our industry since the 2008 recession. By understanding where we are coming from, we can make the best decisions on how to add value moving forward in this ever-changing environment.
The Old World
Flashback to 2006, when you could purchase a community with 90-plus percent loan to value, there were multiple non-recourse chattel lenders to finance new home sales, and very few operators were renting houses. As such, selling homes could be done at volume (and for a nice profit). Then came the Great Recession, with chattel lenders going out of business overnight, our resident bases losing their jobs, and community financing becoming more difficult to obtain. Communities lost occupancy through resident loan defaults with home inventories purchased, sold, and removed by third-party home wholesalers.
The Climb Back
Infilling communities with used homes and homes for rent became popular value-add business models in the years following 2008. Communities had large vacancies to fill, but selling new product was difficult. Rental homes allowed community owners to fill vacancies in short order by offering an alternative to ownership. Meanwhile, used homes offered a more affordable solution to home ownership (or rental) and removed the need for chattel financing, which for the most part, required community owner recourse.
The Boom (Pre-COVID)
Fast forward to 2019: communities are being sold at record high prices, the rental model is in full effect, the market and supply for used homes is dwindling and new homes are being sold again in markets that have struggled since 2008. The segment is consolidating as tremendous new tax benefits spur a flood of investment as the low cost of capital allows institutional investors to take advantage of large community purchases that would otherwise produce low returns.
The Boom Part II (COVID and beyond)
Since March of 2020 the industry has continued to see an increase in demand as rent collections and occupancy remain high through COVID and as the affordable housing crisis continues. Traditional housing prices across the country have skyrocketed in the wake of low inventory levels and worldwide supply chain issues, which have increased new home prices and lead times to new heights. Because of these real and enduring market factors Manufactured Housing has become an even more viable alternative. For an industry that has battled a negative stigma for years, a positive change is taking place with the future looking bright.
How to Add Value in Today’s Economy
Prices of communities and homes (new and used) have increased dramatically since the onset of COVID and getting those homes onsite has become one of the biggest obstacles to overcome. Community owners and operators are faced with the same key questions as in years past related to one primary factor: How to best add value to our communities?
- Do we hold and wait out the high home prices and lead times? Meanwhile, our communities lose the best opportunity in more than a decade to fill vacancies with qualified tenants
- Do we purchase new homes? Pay the surcharges and patiently wait for new homes and hope that the increase in demand covers the increase in price for the homes and construction cost?
- Do we purchase and rent new homes? Use the profit that we receive for home rent to offset the rising costs all around us?
- Do we try to source used homes? Pay an increased premium along with a decreasing ability to find a good quality product?
The answer to all these questions is: it depends. Owning and operating a Manufactured Housing Community is not “paint by numbers” or a walk in the park. Selling homes as the primary/only business model used to be a no-brainer, but now with community prices being so high, the profit from a home rental program can become necessary for community success. At Blank Family Communities, we have been a strong proponent of the hybrid home sale and rental home model in the Midwest as it still yields the greatest absorption rate of homes and net operating income bump. The rental model is especially successful in secondary and tertiary markets (most communities in primary markets have been purchased by institutional operators). Most community owners we meet now are newer to the industry and have paid a premium for their community, even the vacant sites. So, the pressure to infill homes is at an all-time high.
Today, as president of Blank Family Communities, a third-party property management company based in Michigan, I see great opportunity, coupled with even greater risk. Managing our ever-changing environment in MH is critical. Ownership must possess the ability to properly budget; forecast new home availability and related costs and surcharges; model proper scenarios for the financial needs of a community, and gain and maintain occupancy to push NOI. These factors and others need to be developed properly to ensure success today and for those to come.
