3 Ways Rising Inflation Will Impact Mobile Home Park Owners and What To Do About It

Industry Development 3 WAYS RISING INFLATION WILL IMPACT MOBILE HOME PARK OWNERS and what to do about it

by Kevan Enger

IIt’s a fact. Inflation is at a 13-year high. The June all-items Consumer Price Index (CPI) increased 5.4% from a year earlier, the largest jump in 13 years. The news prompted a whirlwind of market activity with conflicting opinions from talking heads suddenly filling the airways and investors scrambling to understand what inflation means for the economy and their portfolios.

Further confusing matters is the series of anomalies that preceded and have fueled the current run-up. This includes traditionally paradoxical occurrences of a labor shortage against a backdrop of high unemployment, rising home demand and prices in the middle of a recession, and a confusing drop in the 10-year Treasury yield to 1.3% (July 16, 2021) from 1.75% in March.

Amid the contradicting signals, community owners have multiple things to consider that will directly impact their investment, wealth, and future. In this article, we will look at the impact of rising prices, investor flight, and the increasing cost of debt.

But first, what is the Consumer Price Index and why does it matter?

The Consumer Price Index, commonly referred to as the CPI, measures the change in prices paid by consumers for goods and services. It considers the prices paid for food, clothing, shelter, fuels, transportation, doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. It gives us a good ongoing idea of where prices are at the moment as well as the affordability of daily necessities.

Consumer prices are not the only thing on the rise. Wholesale prices are also increasing — a sign that inflation is moving at a higher-than-expected rate.

The June Producer Price Index (PPI), which measures what companies get for the goods they produce, went up 1% monthover-month and jumped 7.3% year-over-year. »

Industry Development

Rising Costs Versus Raising Rents

While real estate has traditionally been considered a hedge against inflation, the anomalies in this landscape pose some challenges, especially for park owners.

With prices increasing across the board — a perfect storm of price increases, in fact — owners must consider the impact on their operating costs including everything from labor and maintenance to utilities and management.

In typical inflationary scenarios, landlords have the option of increasing rents to offset the increase in prices, or owners could rely on the corresponding increase in property values for a longer-term return.

However, the current landscape is not your run-of-themill inflationary cycle. This go-round we have a high unemployment rate, stimulus payments that just started to run out, and a recently expired eviction moratorium.

Historically, periods of high inflation have been accompanied by high levels of employment. The unemployment rate in June was at 5.9 percent with the number of unemployed persons at 9.5 million. While these are lower than their April 2020 highs, they remain well above their pre-pandemic levels of 3.5 percent and 5.7 million, respectively, in February 2020.

These high unemployment rates plus the end of the stimulus payments could mean tenants will be more resistant to rent increases. Because the CDC’s eviction moratorium has ended, landlords who want to proceed with eviction may find themselves with legal expenses and a loss of revenue from non-producing lots.

Meanwhile, operating costs will go up. In June, labor compensation costs for private industry workers increased 2.8% over the year. Wages and salaries increased 3.0% for the 12-month period ending in March 2021.

Hitting the maintenance and repairs line item are steel, lumber, copper, and aluminum prices that have experienced periods of historically high prices this year. High costs may prompt some owners to put off making repairs, updates, or upgrades to the property. This could put them at a competitive disadvantage against other manufactured home communities when competing for residents.

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Investor Flight

Over the last few years, manufactured home communities have experienced a period of rising prices as investors from a broad array of asset classes seized on opportunities in the asset class.

Year-over-year, manufactured home parks have seen a price growth rate of 18%, according to Green Street’s Commercial Property Index. Since pre-COVID, asset class pricing has increased 13%.

Fueling the mobile home park frenzy was the limited supply, the lack of affordable housing, and the broad range of value-add opportunities.

As a result of the run-up, we are seeing super low cap rates in the market this year. The average cap rate is sub-five at approximately 4.46%. Right now, our team has several deals going at the one and two percent cap rate range — in other words, prices are at peak, and some would say beyond peak. What makes these transactions doable is that they are development deals.

Moreover, the pandemic has changed the landscape creating competing new growth opportunities in other asset classes, namely industrial and storage.

While once the leader in the year-over-year growth category, manufactured home parks are now in third place. Leading the property pricing pack is self-storage at +24% from pre-COVID levels and industrial which comes in second at +21%.

As the pandemic haze clears, inflation fears grow, and investors move to hedge their positions. Community prices may have to decline to compete for buyers. This would shift the landscape from a sellers’ market to a buyers’ market.

Cost Of Debt

Another harbinger of inflation is the latest announcement by the Fed noting that it could execute rate hikes as soon as 2023. This after previously stating that it did not expect to make any increases until at least 2024, moving up the timeline a year.

The only reason why the move was slated for 2023 instead of 2022 was the projections of only two members from their 18-member committee, per Bank of America credit strategist Hans Mikkelsen as reported in CNBC.com.

In addition, they also raised the headline inflation expectation to 3.4% — a full percentage point higher than had been previously announced in March.

For commercial property and community buyers, that means now is the time to make leveraged property purchases and lock in historically low interest rates before they go up.

For the owners that may have a timeline to sell within the five years, it is worth considering following in the Fed’s footsteps and moving up your timeline.

Here’s why.

Still Low Interest Rates

Interest rates have yet to go up, but they will. They cannot and will not remain at these historically low levels. As inflation goes up, rates will be increased to tighten the supply of money.

You Can Still Exchange

Low rates now mean you will pay less for any assets you wanted to acquire with debt in the future. More importantly, because the government has not yet restricted the ability to execute 1031 exchanges, sellers can double or triple their portfolio and wealth with an exchange.

COVID Changed The Landscape

The pandemic disrupted the market and new opportunities for growth and passive income became available in other asset classes such as industrial and self-storage. Recognizing this at this moment in time is a strategic advantage because now is that sweet spot where you can see change on the horizon and act… • Before inflation spikes up further. • Before interest rates are increased. • Before mobile home park prices go down. • Before we shift into a buyers’ market. • Before a pricing frenzy takes hold in the growth asset classes mentioned. • Before 1031 exchanges are restricted or eliminated.

Taking strategic action now, allows you to hedge against inflation, grow your wealth, and position yourself and your portfolio for the next 20 years. MHV

Kevan Enger is a partner and manufactured housing director for Capstone MH. He specializes in helping mobile and manufactured home park property owners across the country successfully position, market, and sell their properties to maximize their returns. Capstone has seven offices in five states throughout Florida, the Southeast, Midwest, and Mid-Atlantic.

Over the past 40 years, we have all weathered many changes. And like a lighthouse during a storm, Newport Pacific has the resilience to help you in a variety of ways. Newport Pacific Capital, our property management entity; Modular Lifestyles, asset development and home sales; and Cirus Development, construction services, can be your beacon of hope so you can sail through any situation with confidence.