Mobile home parks (MHPs) are ripe for consolidation due to a couple of prevailing trends:
1) Aging mom and pop owners
2) Increasing corporate and private investor interest in this highly profitable segment.
Consolidation happens when ownership moves from single mom and pop owner-operators to corporate owners and professional operators owning multiple properties.
It took longer for the MHP sector to begin to consolidate but the rate of acceleration has accelerated in recent years. Once shunned by institutional investors because of the “trailer park” stigma, investors are no longer ignoring MHPs (hoping it will catch on, I continually refer to mobile home parks as “the darling of the COVID-era” as I believe this will be remembered as the time people began to shy away from other asset classes in favor of MHP).
The MHP sector is expected to follow in the footsteps of the self-storage sector, which is currently three times more consolidated than the MHP sector, but based on recent trends the MHP sector may be catching up soon.
Why? Aging mom and pop owners are selling out to large corporate (e.g. REITS) and private equity investors.
The cat is out of the bag as institutional investors have discovered the stable cash flows MHPs produce and the tremendous value-add opportunities they offer. For years, the few corporate owners in the MHP space have been making a killing (e.g. Sam Zell, the greatest real estate investor of all time).
According to the Wall Street Journal, from the March 2009 stock-market bottom, shares of big mobile-home park owners Sun Communities Inc. (SUI) and Equity LifeStyle Properties Inc. ELS have returned 4,137% and 1,186%, respectively, including price appreciation and dividends. The S&P 500’s return has been 499% (and mom asks why I quit buying and selling mutual funds). (Ok, she doesn’t ask.)
Besides being cash cows, what investors are also discovering is that many mom and pop parks are mismanaged and/or in disrepair. And they are discovering that despite their names, mobile homes are not particularly mobile – costing thousands of dollars to move a home from one park to another.
Institutional investors are discovering that they can immediately hike rents – often with little reduction in occupancy. For example, in 2019, Havenpark Capital, a Utah-based investment firm “bought five Iowa mobile home parks and announced rent hikes ranging from 24 percent to 69 percent.” While I do not condone “rent gouging” and there is a moral point to be made for providing value that corresponds with rental increase. (Note: I am unfamiliar with all of the specifics as it pertains to the aforementioned Havenpark rental raise.) But, of note, the residents of these five parks opted to live with the price increases instead of moving.
Through rent hikes along with improving management efficiencies, investors are able to improve net operating income(NOI) substantially. The COVID-19 pandemic has also played a part in this accelerated pace of consolidation. While every other commercial sector, besides industrial (that saw a boom from online shopping), saw declines in rents and occupancy, the MHP sector was the only other sector that saw increased occupancy and rents in 2020.
MHPs have attracted the attention of Blackstone Group, one of the biggest alternative investment and PE firms in the world. In September of last year, it was reported that Blackstone Group was in exclusive talks to acquire about 40 parks from Summit Communities for roughly $550 million through its REIT, Blackstone Real Estate Income Trust. When Blackstone Group is in the news, people notice.
This recessionary resilience is predicted to increase institutional investment activity in the MHP sector even more. The result of this accelerated consolidation has been an upward trend in valuations of MHPs – unlike most other commercial real estate sectors.
According to a report by global real estate investment firm JLL, the second quarter of 2020 price per MHP pad averaged $50,792, with favorable growth trends, up 6.6% from the first quarter of 2020 and 26% year-over-year.
What does all this consolidation mean for the MHP space?
First, rents as a whole will continue to rise to more accurately match prevailing supply and demand. These rent hikes are not going to be met without protest, with many residents decrying predatory pricing.
On the other hand, investors argue that rents have been too low because of mismanagement and that they are simply being raised to match economic realities. (Some estimates indicate that lot rental rates have risen by merely half the rate of inflation over the last five decades.)
The other result we can expect from consolidation is a highly liquid market for investors looking to liquidate their holdings. This means peace of mind for investors unsure of whether they’ll receive a return of their capital at the end of an investment term. Active consolidation activity will almost ensure a quick sale of a park placed on the market and usually at a premium.
Following in the footsteps of other commercial real estate sectors, the MHP sector is rapidly consolidating. This does not mean a lack of opportunities for smaller investors since over 70% of MHPs are still owned by mom and pops, and with investors having the option to invest via a REIT, a private placement (syndication), or perhaps as an active owner/operator. Opportunities are still out there but this oncoming consolidation means a new reality investors will need to adapt to.