The manufactured housing sector is drawing more attention from traditional multifamily and more opportunistic lenders looking for stable niches amid a rising interest rate environment.
The segment saw a surge of investment in 2021 and has gained prominence due to its resilience through the pandemic and increased attention from government-sponsored entities including Fannie Mae and Freddie Mac.
Andrew Chapman, national lead of manufactured housing communities at Chicago-based advisory JLL, says investors know the strengths of the segment, which boasts the strongest occupancy of all property types. Like the self-storage sector, once a tenant is in place, movement is rare.
“There are a lot of lenders who may have been leery of lending on this property class – particularly with the two-star or lower properties – due to preconceived notions. However, this is changing as lenders are seeing the value of the income streams these properties can produce,” Chapman says.
Todd Elkins, senior vice-president of agency finance at Capital One, says several new factors have influenced the growth of the manufactured housing community, including increased mobility and migration across the US and agency requirements related to affordable housing, as well as the general increased institutionalization of the asset class.
He notes that transaction volumes have seen a significant increase since 2013, rising from $1.2 billion to $4.2 billion as of 2020.
“Ten to 15 years ago, investors could buy a [manufactured housing community] for a premium over traditional multifamily,” Elkins says. “Now, manufactured housing can be as competitive as multifamily, with some acquisitions at sub-3 percent cap rates. Consequently, agency loans are typically priced consistent with multifamily loans.”
Damon Reed, senior vice-president of agency finance at Capital One, says the McLean, Virginia-based bank typically sees growth in and around large cities, coastal areas, locations where the population has migrated and places where there is a strong job market.
“Now, we are seeing buyers move into smaller surrounding markets to acquire lower-quality assets and invest significant capital towards upgrading these communities, and ultimately providing new housing stock,” says Reed.
Elkins says manufactured housing communities with an 85 percent or higher occupancy rate, a low percentage of park-owned or rental homes, paved roads and driveways, home skirting, minimal exposed hitches and a predictable, consistent income stream are the most appealing opportunities from a lending perspective.
“The fundamentals are strong within multifamily housing and manufactured housing communities, both of which have shown to be resilient asset classes over the past several years,” Elkins says. “Both agencies consider MHC to be affordable and they typically underwrite to a maximum loan supported by a 1.25x debt service coverage ratio, utilizing a 30-year amortization and the prevailing interest rate.”
Since annual rent increases have been consistent and prevalent, Elkins says the agencies will consider a trailing one-month of collections in most instances, in order to capture a new rent increase, as opposed to requiring a trailing three months.
Inflation and interest rate volatility are influencing sponsors within the manufactured housing sector, though its outlook does have positive signs.
“Agency lending continues to be an attractive option to borrowers, given [its] consistent underwriting standards, loan terms and interest rates,” Reed says, noting agency lending is also based on in-place cashflow, which cuts down on financing volatility and post-closing performance pressures. “That sense of predictability is valuable for borrowers as they explore financing options.”