The Emergence of Niche Property Types: A Feature on Manufactured Housing
INTRODUCTION
The affordable housing crisis placed nationwide pressure to find alternatives for buying single-family homes. Several external forces have accelerated this problem in recent years, including an increase in the national median homeownership price, an undersupply of homes and the COVID-19 pandemic, which profoundly impacted the housing market in the U.S. The pandemic exacerbated the affordability crisis and caused rapid migration out of major cities resulting in a consumer preference shift towards more affordable options like Single-Family Rentals (SFR), Built-to-Rent communities (BTR) and Manufactured Housing. In the wake of the pandemic, inflation levels, construction costs and interest rates surged, putting additional pressure on the housing market. Several market drivers affected residential consumers’ ability and willingness to purchase a home or afford increasing rents. This economic activity affected a large demographic, resulting in the success of Manufactured Housing and other for-rent niches like SFR or BTR. These sectors saw success throughout the pandemic and built traction over the past few years. These niche property types could potentially comprise 15% of the ODCE index by 2030, tripling current levels. Non-traditional property types have delivered some of the strongest returns, with Manufactured Housing delivering a 13.2% return over a 20-year period, the second highest return next to Self-Storage (Principal Global). In the past two years, institutional players accounted for 23% of the volume in the Manufactured Housing market (GlobeSt). These niche sectors provide a mutual solution for consumers and developers as it satisfies consumers’ need for affordable housing and developers’ need for lower construction costs. Additionally, due to recent market conditions and consumer trends, Investors are seeking assets that offer a hedge against inflation, such as for-rent housing.
In this blog, Alliance Global Advisors will explain market drivers that led to the success of Manufactured Housing, delve into who is benefiting from this sector and where we are seeing the most demand, Investor sentiment and whether these sectors are sustainable over the long-term as well as insight on the future projections of this asset class. We want to thank David Cohen, the Managing Director of Brookfield Asset Management’s Real Estate group responsible for the alternative asset sector, for his contributions to this article, given his prior experience with acquiring a portfolio of Manufactured Housing assets.
WHAT FACTORS ARE DRIVING MARKET DEMAND?
The affordability crisis across the U.S. has been a leading driver that has forced many individuals to delay owning a home and seek other options in the for-rent sector. The nation is facing an undersupply of over five million homes, and traditional multifamily has seen increased rents, leading the demand for affordable housing to skyrocket in recent years. In the latest NAHB/Wells Fargo Housing Opportunity Index, only 38% of new and existing single-family homes are affordable to families earning the U.S. median income of $90,000, the lowest affordability measure on the index since the Global Financial Crisis of 2008 (NAHB). Additionally, there is a 46.5% YoY increase in monthly mortgage payments for the median home as the Fed continues to increase rates. Manufactured Housing has become a haven for those unable to meet the financial requirements of purchasing a home or paying the high rents in the traditional multifamily sector.
Specific economic components in today’s market lead Investors and consumers to favor for-rent housing. As inflation reached an all-time high last year at 9%, the Federal Reserve has responded by placing interest rate hikes with four successive three-quarter point increases in 2022 (Forbes). Inflation has put pressure on the housing market and increased the cost of development, while interest rate hikes have made money borrowing more expensive. Although cap rates have decreased, there are still wide enough margins to drive deals in this sector. Manufactured homes offer a unique solution as they are built indoors via a streamlined process that results in lower costs. Recent data revealed that building site-built single-family homes costs $119 per square foot while building a manufactured home costs $57 per square foot, a 108% price difference (Perch Wealth). These for-rent sectors allow developers to capitalize on consumers’ desire for affordable housing while incurring a lower construction cost.
A LOOK INTO THE MANUFACTURED HOUSING MARKET
Manufactured Housing created an opportunity for affordable housing, low to moderate-income individuals and families. According to the Manufactured Housing Institute, 22 million Americans live in manufactured homes. The Manufactured Housing industry produced 105,772 new homes in 2021, approximately 9% of new, single-family home starts. Manufactured Housing communities gained popularity, with 51% of new homes in communities. There are currently over 43,000 land-lease communities and 4.3 million estimated homesites in these communities.
The industry does not push rents as high as traditional sectors but has still successfully raised rents slowly across different economic environments; there is a 4.2% increase in average annual site rent. David Cohen states, “Unlike other housing sectors, rent growth has never been negative, even during economic downturns. Because Manufactured Housing offers the most affordable non-government subsidized housing option, there is very little elasticity in demand, contributing to more stable rent growth. Similarly, affordability ensures that changes in market factors, such as employment rates and demographic shifts, do not cause rent fluctuations like in multifamily.” Not only is this sector considerably lower in price to build, but the median value of Manufactured Housing increased 39% compared to 33% for site-built homes (Manufactured Housing Institute).
Technology is another contributing factor to the growth of this sector. Technological advancements allowed the streamlined construction process to incorporate newer technology, designs and construction techniques that increase the sustainability and quality of these homes. This sector also has the lowest capital expenditures as a percentage of NOI of any property type due to low maintenance costs to upkeep landscaping and amenities. The Sunbelt markets have seen the most success with Manufactured Housing. Out of 143 homebuilding facilities nationwide, approximately 60% are in the Sunbelt region. Regarding demographics most attracted to this sector, about 39% are in the 55-74 age range, 35% are in the 35-54 age group and 86% are making an annual household income of less than $80,000. An aging population, the increase in single-person households, and the number of people living alone are also factors contributing to the growth of the Manufactured Housing market.
OPPORTUNITY
Several opportunities will arise in a niche for-rent sector providing solutions for industry players and consumers. Manufactured Housing is a highly fragmented market, with most ownership being mom-and-pop operators. Additionally, many larger operators look for highly stabilized and turn-key communities, leaving space for opportunities in value-add communities. The graph below was published in a report by JLL on Manufactured Housing and it shows the increase in institutional ownership throughout the years.
Some examples of institutional players that are active in the space are Blackstone, The Carlyle Group and Apollo Global Management, but the market is still about 90% owned by smaller operators. Larger operators in traditional multifamily, equipped with various professional teams, apply their combined knowledge and resources to gain the most value, which is happening less in the Manufactured Housing market. These owners have been open to building relationships with larger operators as they look to retirement, creating an opportunity in this market (Keel Team). David Cohen advises that managers interested in this sector should understand that operationally, the sector is very intense due to three separate business operations involved in running a Manufactured Housing community: community operations, home sales and financing and home supply chain management, like refurbishing existing homes and purchasing new homes from manufacturers. All these business lines must be managed cohesively to deliver effective operational performance.
There are advantages to having traditional multifamily and niche residential sectors in a portfolio. Traditional and niche sectors attract different demographics; therefore, a manager investing in both sectors may have a higher capture rate by retaining tenants in different life stages and target markets. Several consultant recommendations on Manufactured Housing revolve around the opportunity for a sector with little institutionalization. The sector has limited supply with strong demand in the affordable category. On strategies that include Manufactured Housing, Consultants tend to recognize it as a positive element in terms of a Manager’s flexibility and approach when it comes to assessing and identifying attractive sectors and changing target allocations to reflect the market.
The Federal Government is also piloting new financing for housing production; one of these initiatives includes supporting the production and availability of Manufactured Housing. Beyond personal property financing, Fannie Mae and Freddie Mac also released a revised purchase target for Manufactured Housing loans. HUD is making it easier to finance new units and helping manufacturers update designs to meet changing consumer demands (White House). These changes to financing options will facilitate availability and increase consumer demand.
FUTURE PROJECTIONS AND INVESTOR OUTLOOK
Affordable housing is an asset class that will produce stabilized returns over the long term due to the increasing demand across the U.S. Meanwhile, housing starts for single-family homes dropped 30% year-over-year in 2022, signaling that Investor demand in single-family homes is slowing (Conroy, 2023). Manufactured Housing has also proven to be recession resistant; Green Street Advisors reported that between 2004 and 2018, operating income from mobile home parks rose by 87%, with revenue never declining throughout the Global Financial Crisis of 2008. According to a U.S. Commercial Property Outlook published by Green Street in March 2023, the M-RevPAF for Manufactured Housing in the next five years is expected to grow from 5.1% to 7%, making it the second leading sector next to Industrial with a 5.8% to 7% growth. Growth in revenue for the Manufactured Housing industry expects to climb over the next five years into 2027. Allied Market Research estimates that the industry will grow from $31 billion to $39 billion in the next five years at an annual rate of 6.5%. Institutional Investors have begun to view Manufactured Housing as an attractive sector for investment as it offers an opportunity for stable cash flow, long-term growth potential and diversification benefits for a portfolio.
CONCLUSION
The lack of affordable housing in the U.S. has driven demand for niche sectors in residential housing. Manufactured Housing offers an opportunity as it presents a solution for developers, consumers and Investors through low-construction costs that allow for lower rents and a unique opportunity that diversifies a portfolio. Not only has Manufactured Housing proven to be a stable and safe option throughout uncertain economic periods, but it has also been able to leverage new technology and opportunities to elevate this sector into a more competitive niche player.
ABOUT ALLIANCE GLOBAL ADVISORS
Alliance Global Advisors is a women-owned consulting firm focused on empowering the institutional investment community to elevate best practices. Advising clients with over $450 billion in assets under management, Alliance partners with organizations to provide an independent perspective and innovative approach to critical strategic initiatives. Our partnerships allow senior management teams to focus on what matters most: diligently managing client capital, creating value and delivering exceptional returns in a performance-driven market.
ABOUT BROOKFIELD ASSET MANAGEMENT
Brookfield Asset Management is an alternative asset manager with assets and businesses in more than 30 countries around the world and approximately $800 billion in assets under management. The Firm specializes in all alternative asset classes including private equity, private debt, renewables, real estate and infrastructure.
Disclaimer: This blog was originally published in March 2023 and will be updated periodically to reflect changes in the industry. The content may contain or cite personal and/or professional opinions that differ from the views of Alliance Global Advisors.