Navigating an Onslaught of Industry Change

by Kevan Enger

TThe times, they are a-changin’. The manufactured home community landscape is evolving with change coming at us from a variety of angles. Nationwide affordable housing challenges, new federal and agency initiatives, and investor activity are all coming together to create not a tidal wave of change to be sure, but a ripple effect of steady and continuous tectonic shifts that will begin repositioning the asset class on multiple fronts.

To be clear, it’s important to establish upfront that manufactured home community fundamentals remain strong. Occupancy remains high and rents continue to increase, albeit at a slower pace than what we were seeing six months to a year ago.

Seeking new opportunities for value-add and growth investor interest skyrocketed over the last few years as opportunities for efficiencies became apparent and below-market rents signaled gains. This created a booming seller’s market that pushed cap rates to new lows and prices to new highs, moving rents up, much to the chagrin of residents.

The pandemic and ensuing astronomical single-family price hikes and multifamily rent growth pushed many consumers to look for more affordable housing, driving former apartment dwellers, for instance, to look to manufactured housing communities as an alternative solution.

Meanwhile, as inflation took off and fears of a recession on the horizon loomed larger, investor interest remained robust as they sought a recession refuge in the widely considered “recession-resistant” asset class, while others aimed for a bet against inflation with rent growth and efficiency gains built in.

These same forces that have strengthened the asset class are also the ones putting the manufactured housing industry on the national radar as a heretofore overlooked solution to the affordable housing crisis.

Manufactured Housing As a Solution

It’s no secret that affordable housing is a national crisis and the COVID-19 pandemic made it worse. In the U.S., there is a shortage of more than 7 million affordable homes for the country’s over 10.8 million extremely low-income families. In fact, no state has an adequate supply of affordable rental housing for the lowest-income renters and there is no state or county where a renter working full-time at minimum wage can afford a two-bedroom apartment.

From the get-go, the Biden Administration signaled that it would make affordable housing a priority. With inflation hitting 9.1 percent in June and many consumers seeing their rents hit new record highs, that objective has become more critical than ever.

In the last few months, the administration, Freddie Mac, and other stakeholders have turned their focus and action toward the affordable housing dilemma.

Not as sexy as retail, industrial, or traditional multi-family, manufactured housing has remained the commercial real estate smart wallflower at the prom, and under the radar at the household level. However, a good portion of what the »

manufactured housing industry produces falls under the affordable housing umbrella, and with more Class C complexes being acquired for redevelopment by investors seeking value-add opportunities, more eyes have trickled down to MHCs for a solve. Considering that manufactured homes cost 45 percent less per square foot than site-built homes on average, the solution makes sense.

To that end, the Biden Administration recently announced new and sweeping action to tackle the affordability problem on multiple fronts including supply, financing, and industry liquidity with actions encompassing MH unit production and lowering of MHC development barriers. The Housing Supply Action Plan

In May, the White House announced the Housing Supply Action Plan with the goal of boosting the supply of rental housing for low- and moderate-income families.

The supply-and-demandbased rationale is that new inventory will help reduce price pressures not only on housing but on inflation since housing costs make up about one-third of the contributors toward inflation as measured by the CPI.

Per the plan’s official announcement release, the White House will take the following actions, among others, directly impacting the manufactured housing sector. • Deploy new financing mechanisms to build and preserve more housing where financing gaps currently exist: manufactured housing (including with chattel loans that the majority of manufactured housing purchasers rely on), accessory dwelling units (ADUs), 2-4 unit properties, and smaller multifamily buildings. • The Unlocking Possibilities Program, proposed by

President Biden and included in the reconciliation bill passed by the House last year, would establish a new, HUD-administered $1.75 billion competitive grant program to help states and communities get rid of unnecessary barriers to the production of affordable housing, including permitting for manufactured housing communities. • Supporting production and availability of manufactured housing. Since the purchase of most new manufactured homes are executed through personal property (chattel) financing instead of conventional mortgages, loan terms are shorter and interest rates are higher. To tackle this issue,

With more consumers Freddie Mac has announced looking for alternative and it will conduct a study to more affordable living and determine the feasibility of supporting purchases of perthe federal government sonal property manufactured announcing sweeping housing loans. objectives in the affordable housing category, we do If the Federal Housing Finance Agency approves, Freddie Mac will purchase these types of expect the industry to be loans to assist with product positively impacted by some development and support future of these changes in the loan purchase capabilities. In addition, both Fannie next 12 months or so. Mae and Freddie Mac have announced revised purchase goals for manufactured housing loans. The objective, as relayed in their Duty to Serve plans, is to generate greater liquidity for manufactured housing and increase delivery of manufactured homes. • With manufactured housing’s cost and time efficiencies in mind, HUD will make it easier to finance new units and assist manufacturers in updating their designs to meet the evolving needs of consumers. This is a critical component to attract a broader array of buyers. In addition to other initiatives, this includes updating the HUD Code to allow manufacturers to update and expand their production and supply chain capabilities. • Provide Housing Supply Fund financing for affordable housing production to develop 500,000 units of housing for low- and moderate-income renters and homebuyers. The types of units will include modular, panelized, or manufactured housing. »

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Focus on Freddie Mac

In addition to the actions outlined in the Housing Supply Action Plan, Freddie Mac recently rolled out multiple initiatives in their Duty to Serve Underserved Markets Plan 2022–2024. The programs include loan purchase, loan products, and outreach across four key activity initiatives specifically aimed at manufactured housing: • Activity 1 | Support for Manufactured Housing

Titled as Real Property • Activity 2 | Support for Manufactured Housing

Titled as Personal Property • Activity 3 | Support for MHCs Owned by a Governmental Instrumentality, Non-Profit Organization, or Residents • Activity 4 | Support for MHCs with Certain Tenant

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The activity will include increasing single-family loan purchases of manufactured housing titled as real property, designing new product flexibilities to facilitate the origination of manufactured housing titled as real property in tribal areas, and supporting growth in the MH market through research and outreach.

In addition, the agency will conduct due diligence and gather data to support the development of guidelines for personal property loans on manufactured homes.

With the goal of increasing liquidity, the agency also aims to purchase resident-owned, non-profit-owned, and government instrumentality-owned loans.

Moreover, the agency’s Freddie Mac HFA Advantage program recently added enhancements, including the addition of manufactured housing and 2- to 4-unit properties with attractive loan products that have maximum LTV and TLTV ratios up to 95 percent.

What do these changes mean for MHP owners?

These changes are coming at an interesting time in our industry.

The attraction of manufactured homes and MHPs has been well-hidden from many investors for a long time. As noted, that’s changed over the last few years. What hadn’t changed until now, was the potential future landscape of greater accessibility by consumers, acceptance by mainstream America, greater supply prospects, and interest by the broader capital markets.

With more consumers looking for alternative and more affordable living options, and the federal government announcing sweeping objectives in the affordable housing category, we do expect the industry to be positively impacted by some of these changes in the next 12 months or so. Some will see these as new opportunities for tremendous ground floor growth while others will feel the impact in other ways.

The market certainly is beginning to adjust to a post-pandemic environment. While primary markets remain strong, the MHC asset class is seeing some softening in secondary and tertiary markets. In particular, some new-to-MHC investors are already feeling a bit of a hay day hangover from hastily cobbled together portfolios hurriedly acquired in a rush to get in on the mobile home park action.

In addition, greater government support for affordable housing will mean more developers turn to manufactured housing as a solution. In the medium term, easing permitting restrictions for MHCs also will lead to more supply, which could mean more competition. While permitting and zoning are local issues, the government’s newly announced Housing Supply Action Plan’s proposed Unlocking Possibilities Program is putting $1.75 billion to help eliminate barriers to affordable housing production, including permitting for MHCs.

As the affordability conversation heats up, one thing is certain,MHCs are wallflowers no more. With so much change shape-shifting the mobile home park panorama, now is the time for owners to evaluate their portfolios, consider their positions, and develop a strategic plan to double down or potentially exit. 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.