How COVID-19 is Fueling a Final Inning for the Mobile Home Park Seller’s Market

How COVID-19 is Fueling a Final Inning for the Mobile Home Park Sellers’ Market

by Kevan Enger

The COVID-19 pandemic has been hitting our economy hard. From restaurants and retailers to doctors and dentists, most businesses have endured some level of financial or operational hardship from the pandemic. The result has been devastating with real gross domestic product (GDP) decreasing at an annual rate of 32.9% in the second quarter of this year. The economic cliff dive has been accompanied by an unemployment rate of 11.1% in June with approximately 17.8 million people unemployed.

For the commercial real estate industry, the impact has been devastating. Retail, restaurant, and hospitality properties have been whacked the hardest as the pandemic forced most stores to close their doors and restaurants to halt all indoor sit-down business or cut their capacity by up to 75%. Many big restaurant chains notified their landlords they wouldn’t be paying rent for up to one year while innumerable operators had to permanently shut down.

Meanwhile, retailers previously on the brink were pushed over the edge even as lenders and landlords attempted to negotiate workarounds. The first wave of shutdowns was bad, but the second wave was too much for some and we’re already seeing the wave of bankruptcies starting to roll through.

By all accounts, the effect has been disastrous for many commercial real estate asset classes. An exclusion, the mobile home park segment.

The 12th Inning

In my last article, I predicted the upcoming end of the seller’s market bonanza we’ve been enjoying in the mobile home park category over the last couple of years. In fact, I was fully expecting to see transaction volume dwindle by the end of the fourth quarter. If we were lucky, we could’ve potentially run on the last bit of fumes into the first quarter of 2021. Fueled by very tight inventory and record-high demand, we’d had an amazingly good run in a sizzling sellers’ market that was by all measures in its 11th inning.

Then, COVID-19 hit and it changed everything.

The economic and financial impact of the pandemic has put a renewed focus on the now even more urgent need for affordable housing. Even before coronavirus, the National Low Income Housing Coalition was reporting that 10% to 15% of households were “housing insecure” with a quarter of all renters — and 71% of extremely low-income renters — paying over half their incomes for housing.

Now with so many Americans unemployed, the housing crisis is going to worsen, driving many renters and even some homeowners to downsize and look for affordable housing options, which will include mobile home communities.

This awareness has brought renewed attention from investors driving up demand and prices even higher than before. However, it’s essential to note that this boost and push into an unprecedented 12th inning is being partially supported by three situational components.

The temporary nature of these components make the current sellers’ market a phenomenon potentially supported by matchsticks. However, it does provide mobile home park owners an extension on their ability to sell at record high prices, but it won’t last and here’s why:

1. Historically Low Interest Rates

Long the benchmark against which risk-bearing investments are measured, the 10-Year Treasury

Rate, is at historical lows (.52% on 8/4/20). The rate at the time of this writing is much lower than the long-term average of 4.44% and represents a 70.29% decrease over last year’s rate of 1.75%.

These super low rates are inciting renewed migration to the mobile home space for multiple reasons and from multiple investment vehicles as investors seek higher returns. However, even at the height of the Great Recession, rates hit rock bottom on December 30, 2008, before trending upward for almost two years. The recession didn’t technically end until June 2009.

If you’re thinking of retiring or exiting the space in the next five to seven years, now may be the time to sell.

2. Strong Collections

Mobile home park owners are reporting that rent collections have exceeded expectations for March,

April, and May. Undoubtedly contributing to the better than expected collection is the stimulus check sent to Americans, the unemployment benefits, and the additional $600-a-week pandemic-related federal boost that was enacted in March. »

The boost expired July 31 and Congress has yet to renew it with many calling for its nixing or at the very least slashing to around $200 a week. This decrease in cash flow could put rent payments in jeopardy especially for lower-income households that have been particularly hard-hit from the pandemic.

A report in May by the Federal Reserve noted that 39% of people working in February with household incomes below $40,000 reported job losses in March.

Another survey conducted in early April by the Pew Research Center found that 52% of lower-income households reported a loss of employment or income due to the coronavirus outbreak. With the $600-a-week boost gone, millions of people will be in jeopardy of losing their ability to pay their rent. This will soon begin to impact rent collections in the broader housing market as well as in the mobile home space.

Even if the boost is extended and another wave of stimulus checks is paid out, the effect will still be temporary.

3. Economic Stimulus

While it may seem like an eternity, as of the publication of this article, it has only been about five months since the WHO declared COVID-19 a pandemic.

In that short period of time, the government has pumped over $2.1 trillion in stimulus money

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into the economy via the CARES Act which was passed on March 27, 2020. The bill included the Paycheck Protection Program as well as the Economic Impact Payments. While both of these programs were of assistance, the prolonged effects of the pandemic mean uncertainty and a pending potential shove off of the economic cliff.

What Does This Mean for Mobile Home Community Owners?

If you’re thinking of retiring or exiting the space in the next five to seven years, now may be the time to sell. The temporary nature of the situational components supporting this extended run heightens the uncertainty and decreases the likelihood of a longer term run.

In our own shop, while we’ve been experiencing record transaction volume exceeding last year’s activity, we know there’s a much shorter lifecycle to the boost this time around. The catch is that like COVID we don’t know when it’s going to end. 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.