As the novel coronavirus pandemic wreaks havoc on the economy, the manufactured housing sector remains strong; operators have reported high levels of rent collection each month since the outbreak. In recent years, manufactured homes have experienced a rise in popularity at the higher end of the spectrum—with demand coming from retirees and second-home buyers—but also at the lower end, as a viable solution to the affordable housing crisis.
In an interview with Commercial Property Executive, Lument’s Senior Managing Director, Chad Hagwood, discussed current trends and future scenarios for the MHC sector. Hagwood also talked about financing options for investors and how the current health crisis could impact rents in the near future.
As the housing affordability crisis deepens, manufactured homes are seen as a potential solution to the affordable housing shortage. How has the COVID-19 outbreak affected this view?
Hagwood: There’s no question that MHCs are a big part of the solution to the affordable housing crisis and the pandemic has only reinforced that. It also helps that pre-pandemic, MHCs had gotten a lot more attention in the last few years, thanks in part to one of the more visible spokespeople out there—Dr. Ben Carson at the U.S. Department of Housing and Urban Development—who has helped bring this property into the limelight as a more acceptable form of housing.
Policymakers and affordable housing executives tend to view the affordable housing crisis as an urban phenomenon, addressed primarily with high-density multifamily structures. The pandemic has brought to light the benefits of lower density housing solutions.
In some areas of the country there were, and still are, negative stigmas associated with MHCs. Over time, perceptions can change, and I think it’s headed in the right direction.
Four- and five-star communities have been gaining popularity in recent years. Why do you think the demand for these asset types is on the rise?
Hagwood: Demand for high-quality MHC space is primarily driven by retirees and second-home buyers, many of whom may also be retired people. They seek property in coastal communities, particularly in California and Florida, in which traditional single-family real estate has become prohibitively expensive. In many cases, manufactured homes and communities using a rental pad model have provided a lower cost alternative.
Some of these owners have substantial incomes and seek luxury community amenities. With much of the Baby Boomer generation now reaching retirement age and many younger urban households seeking second homes in lower-density areas as retreats from COVID-19 stress, demand for this sort of luxury MHC option is likely to continue to increase.
Let’s talk about the lower-cost end of the MHC sector. How has the pandemic impacted this segment so far?
Hagwood: Evidence indicates that both production of and demand for manufactured housing has declined slightly since COVID-19. Production is down because factories have either closed or are being forced to run below capacity due to social distancing protocols.
Demand is down for obvious reasons: the lower-income households that form the foundation of product demand have been hit harder economically by the pandemic, impacting their ability to finance home purchases. Sales volumes have also fallen because some states have placed limits on how dealers can conduct tours and sanitize units before and after showings.
Have you seen any trends in MHC financing? Has there been a shift towards fixed- or floating-rate debt?
Hagwood: For something that is stabilized and running well, you would have to be crazy not to lock in today’s low, fixed interest rates on long-term money. That being said, if there are planned community improvements or perhaps a lease-up in progress, floating rate is likely the best option. We have seen an increase in the use of floating-rate financing. Last year, for example, floating-rate debt accounted for about 12 percent of the MHC collateral financed by Fannie Mae. Despite these unbelievably low fixed rates, that figure has increased to almost 21 percent. It is proving to be a very busy year for MHC financing, with both Fannie Mae and Freddie Mac currently tracking ahead of their 2019 figures year-to-date.
Despite rising unemployment, operators have reported high rent collection rates in the affordable and manufactured housing sectors for the first half of the year. How do you explain this?
Hagwood: We are seeing people use the stimulus money as intended—to pay for life’s necessities, such as rent. I would find it hard to believe that the stimulus money won’t be extended, in light of the circumstances.
Many tenants in both sectors are employed in the service and manufacturing industries, both of which have been severely impacted by the pandemic because it is difficult for workers in these sectors to shift to a work-from-home environment. The fact that collections have remained high is likely attributable to ready access to state unemployment insurance, and, particularly, to the $600 weekly enhanced federal unemployment benefit. Already, we are seeing a degree of remittance stress, not so much in terms of the percentage of renters making some payment, but in the percentage of renters making a full payment.
How do you expect rental rates to perform in the second half of this year and even further into 2021 in the current economic challenges?
Hagwood: Certainly, you can argue, rents should be flat to perhaps slightly increasing for the remainder of the year. I think you would be a little bit hard-pressed to argue for dramatic jumps across the board. The average annual site rent increase is 3 percent, according to recent Manufactured Housing Institute data, so I imagine we return to that at some point, but perhaps not right away.
The concentration of service industry and manufacturing employees in the MHC tenant base tends to be higher than in the market-rate multifamily segment. Consequently, there may be more overall downside risk in MHC pad rents than in the broad market-rate multifamily market. Manufactured housing renters are more likely to maintain their residence and seek to remain current, unless economic circumstances make that impossible. However, we are unlikely to see MHC tenants fleeing to lower-cost, lower-density housing options as we have observed in the high-density, high-cost apartment markets.