This is part five of a six-part series on MHC insights and strategies by Chad Hagwood.
In the manufactured housing community (MHC) market, competition is steadily rising, and the right value plays can make a world of a difference with every new investment opportunity.
Because of this, it’s important for MHC owners and developers to know what they are up against and how they can use their capital wisely to maximize property values.
In today’s financial climate, owners and developers need to start by examining their operating expenses line by line along with the local market conditions. Many are seeing insurance and tax assessments skyrocketing like never before. With higher interest rates on top of these other factors, overall expenses are up across the board.
This can take the steam out of reasonable MHC rent increases and dampen asset values as a result. In most cases, MHC values are rising, though not as quickly as they have in the past.
Here is a closer look at how to carefully size up the competition and make the right MHC value plays to maximize returns.
Managing Reasonable MHC Rent Increases
As multifamily rents increase with inflation and other rising costs, MHC owners and operators are in a unique position when it comes to future rent growth.
According to some sources, MHC rents rose as much as 2.5% to $653 per month in the second quarter of this year. Overall, MHC rents have increased 7% in the past year, the strongest annual pace of growth since 2016.
Rent increases are a strategic consideration for most MHC owners and operators. When rents get too high, especially in markets with plenty of supply, occupancy can take a hit. It’s important to look at local market comps to get a clear sense of how high MHC rents and property values can go.
While institutional and high-net-worth investors will always have a competitive advantage with capital, MHC buyers focused on creating high-quality assets can put themselves in a strong position to maximize their values and stay ahead of the pack.
A key question for owners right now in the short term is the cost and availability of debt. In the long term, however, rents are going to go up. For well-capitalized MHC investors who can look beyond the current financial storm, the upside potential is still immense.
But the nuances of MHC operations play a vital role and should never go overlooked. That’s why, regardless of how much capital an owner has, it’s important to partner with a lender like Lument with in-depth knowledge of the MHC market.
Making the Right Value Plays in the Right Markets
With the affordable housing crisis impacting most of the country, demand for MHCs is steadily rising, overall, and unit shipments are accelerating.
The annual number of new manufactured homes around the country has doubled—from under 55,000 in 2012 to more than 112,000 in 2022, recent U.S. Census Bureau data shows.
It’s important for MHC owners to take a close look at where record investment activity is pushing up prices and where rising property values may put a ceiling on future rent increases and potential cap rate growth.
Florida, Texas, North Carolina, and Alabama are among the states that have seen the highest number of newly shipped manufactured housing units in the past two years, for example. Between 2021 and the first half of 2023, nearly 45,000 new manufactured units were added to the Texas housing market alone. Of course, Texas is the second-largest state by land area and population.
California, on the other hand, is another large state that has seen demand for MHC assets steadily increase, with roughly 9,000 new manufactured units added to the market between 2021 and the first half of 2023. This gives investors, owners, and developers more wiggle room for successful value plays.
To make the best value plays today, MHC owners and developers need to analyze everything from local Area Median Income and employment to land prices and labor and construction costs.
Competition Comes in Many Shapes and Sizes
In many ways, the main competitors of manufactured housing communities today are any nearby multifamily complexes offering similarly low rents.
To build market-rate apartments that make economic sense, many owners and developers have to invest in triple-class-A assets. In these cases, they need to generate rent returns that are far outside of average MHC rents. Owners and developers of triple-A apartments are facing their own market headwinds, of course.
Tough economic conditions, including a potential recession, typically benefit MHC and other affordable housing values overall.
This bodes well for MHC investors looking ahead to 2024 and beyond. For more insights on how to best position MHC assets and make the right value plays, reach out to Lument’s experienced team today.
