Jerome Powell at the Federal Reserve is in the process of raising interest rates farther and faster than America has seen in over 40 years. And the effect of these increases has resulted in a plunge in the stock market coupled with a great deal of uncertainty regarding commercial real estate. While some sectors of real estate are already going down – such as single-family homes – the impact on mobile home parks has been much lower. Why is that?
Better ability to raise rents
The first reason that mobile home parks are faring better than other real estate sectors is the simple fact that mobile home park rents are ridiculously low and have massive potential for increases. Here’s how the average mobile home park is positioned: the average mobile home park lot rent is around $300 per month while the average apartment rent is around $2,000 per month. How did mobile home park rents get so low to begin with? To understand, you have to go back to the 1960s when the industry was young. Moms and pops owned virtually all of the mobile home parks and they simply were not good about increasing rents. The average lot rent in 1960 was $50 per month, which is $500 per month today in inflation-adjusted dollars. But moms and pops only raised rents at about half the level of inflation, resulting in rents being so ridiculously low. Because of this one feature, mobile home park buyers and owners have an endless ability to raise rents to increase cash flows.
Access to lowest interest rate debt
Mobile home parks are a part of the “housing” sector along with apartments. As a result, they have the ability to obtain the coveted Fannie Mae/Freddie Mac mortgages. These are at a lower rate than all other forms of real estate lending. Office, retail, self-storage and industrial properties do not have access to Fannie Mae/Freddie Mac since they are not housing related. Currently Fannie Mae/Freddie Mac represent over 50% of all mobile home park loans each year based on dollar amount.
Warren Buffett often talks about the most essential feature of a successful business being the “moat” that keeps competition at bay. And mobile home parks have the biggest “moat” in all of American real estate as no city in America allows new mobile home park construction since the 1970s. On top of that, “mobile homes” are any but mobile as they cost around $5,000 to move, if they will survive a move at all. This keeps the supply/demand equation always in the park owner’s favor, and the customers may leave but the homes never do and simply get re-occupied.
Contrarian product line
Mobile home parks do their best when the economy declines. This contrarian feature of mobile home parks makes them strong bets when the U.S. economy is in recession. And that’s exactly where America is at right now, with nothing but bad economic news daily. While office, self-storage, retail and industrial sectors need a booming economy to do well, mobile home parks flourish at times when all other niches collapse. That’s because bad times yield greater demand for affordable housing. So while Jerome Powell is busy raising rates and destroying the U.S. economy, he’s also acting as a powerful force to push mobile home park demand even higher.
Being the “hottest” sector in real estate pays big dividends
One of the biggest reasons that mobile home parks have been weathering interest rate hikes better than other sectors is because mobile home parks have seen renewed enthusiasm from private equity groups and others that have given “trailer parks” a boost in perception by lenders who follow these trends as examples of massive opportunity.
Sure, America is in deep trouble. A dysfunctional Fed has driven rates up too far and too fast and there will be great economic suffering as a result. Mobile home parks are better positioned than any other real estate sector for this new reality, and the greater demand that recession brings for affordable housing will allow offsets – such as higher lot rents – that will battle back the higher rates on loans.