There have been a number of recent articles predicting lending problems for “commercial real estate”. But there is no such thing as generic “commercial real estate”. There are simply several different niches that aggregate into that term. In this Mobile Home Park Mastery podcast, we will explore the similarities and differences between mobile home parks and the other commercial real estate sectors and how the future banking challenges will probably unfold.
Episode 290: Similarities And Differences Transcript
There have been a lot of articles recently describing the portending challenges in the commercial real estate market as far as lending goes. This is Frank Rolfe, the Mobile Home Park Mastery podcast. I thought we would go over some observations regarding lending in commercial real estate and how that relates to mobile home parks and some of the similarities and differences. Let's first start off by noting that by definition, commercial real estate doesn't exist as far as a single term that wraps up all the different niches, because commercial real estate is basically just a broad-based slang term for all these various sectors that are so very different: Different in the markets they serve, different in the risk, the reward, all kinds of factors. So it's important, I think, first to break down mobile home parks and how they compare to other sectors. So let's just go over some of these key differences. Number one, the net fill in our industry, in the mobile home park industry, is a lot easier than it is in almost all other sectors.
We all know what's going on right now, for example, with office. Office currently has roughly half vacancy in almost all US markets, no one is beating down the door to rent any office space. And you all know on retail, just from walking through your local mall, there's nobody beating down the door to get that retail space. And even in the world of self-storage, we're seeing softening demand, we're seeing lower rates, we're seeing lots of self-storage owners having to do all kinds of specials, trying to attract customers. So really, there's nothing out there right now which has the demand of affordable housing. So when it comes to affordable housing and mobile home parks, we are definitely at the top of the pack. When it comes to customers wanting our service, our product, we are far superior to the other niches.
Next, you have getting paid. Now, when it comes to getting your rent for the customer, it's imperative that you have a big stick dangling over them, and also a carrot. The carrot is the fact that if they lose their affordable housing spot, they won't find another and there's nothing they can find that's anywhere near as low priced as a mobile home park. And of course, the big stick is that people don't wanna lose a roof over their heads. We all saw from COVID what happens in a lot of the other sectors, for example, retail. If you recall, when COVID broke out, some large retail tenants just stopped paying rent, they challenged the landlord to evict them if that's what they wanted to do, but they weren't gonna pay any rent. You saw this, I recall, with Cheesecake Factory which almost initially proclaimed, "Well, we're not gonna pay any rent, and if someone wants to kick us out, fine, otherwise, we'll stay." And you probably noticed they're still there, and I'm not sure if the renter ever got paid. So when it comes to getting paid rent, mobile home parks are, again, at the very top of the pile. Also, the ability to boost NOI is absolutely unequaled by any other sector. It does not have the ability in any other niche to fill vacant units and to raise rents and cut costs like mobile home park owners do.
Now, why is that? Well, it's mostly because the people that hand the ball off to us is the new generation of park owners, they leave so much on the table that they should have already done. In most other real estate sectors, you're buying from more professional owners who have mostly adopted the old motto of Chainsaw Al Dunlap of sell, sell, sell and cut, cut, cut. Many of them didn't do those things, and therefore there's huge room for opportunity. Also, mobile home park rents have been crazy, ridiculously low for about half a century. The typical mobile home park lot rent in 1950 was $50 a month, which in today's dollars is about $500 a month, yet the average mobile home park lot rent is believed to be around $300 per month. So between raising rents to market and having water sewer billed back to tenants and other cost-cutting items, not to mention filling vacant lots and filling vacant homes due to the large demand for affordable housing, there is huge potential with mobile home parks to boost that income, which does not exist in almost any of the other niches. Also, mobile home parks have the lowest default rate, or in worst case, second lowest default rate of all forms of commercial real estate lending.
Now, why would that be? Well, you probably recall the infamous Waffle House quote I gave Bloomberg a few years ago, but it was completely accurate. Mobile home park owners know every day exactly how many customers they will have. Why? Because mobile home parks are just... Mobile homes are nearly impossible to move, they either structurally can't be moved or it doesn't make any sense financially since it costs maybe $5000 to $10,000 to move a mobile home from point A to point B. So invariably, they stay in position, so we know every day what our revenues will be, and our costs are also equally predictable. So since our cash in, our cash out is so stable, we stand head and shoulders above all of the other sectors as far as being able to pay our debts. On top of that, mobile home park lenders have never really been too adventurous. There's many lenders who've gone out on a limb for that big, beautiful glass office skyscraper because it looks all kinds of neat and glamorous and fun to have a loan on. But no one really has ever been that proud of their mobile home park loans that they're willing to stretch. Lenders have always maintained very conservative loan-to-value ratios.
Also, on the same topic of lending, mobile home parks have the ability to tap into one of the largest financing sources which many other niches cannot, which is Fannie Mae and Freddie Mac debt, because they only make loans on residential sectors of commercial real estate. You cannot get an office loan in Fannie Freddie, you cannot get a self-storage loan with Fannie Freddie. Now, only mobile home parks and apartments and other real estate items that are geared towards the housing market have that flexibility. And it's a very important item when you consider that roughly half or more of all by-dollar mobile home park loans annually are in fact Fannie Mae, Freddie Mac. So we feel pretty well positioned with mobile home parks compared to the other sectors, but then what do we have in common with the others? What are some of the challenges that all of us will encounter in the months and years ahead due to the huge rise in interest rates coupled with things like the failure of Silicon Valley Bank and just lots of very poor decision-making from an administrative level in the US government?
Well, one similarity we all have is that all sectors of real estate rely on debt, even the reads typically use 50% loan-to-value debt. Why? Because debt is a tool, debt is one of the tools that you use to get higher yields. If you buy things with all cash, to the absence of debt, your cash-on-cash return is simply your cap rate. But if you utilize debt and the cap rate is higher than the interest rate on the debt, then you will have a much higher rate of return by using that debt tool. So there really is no sector of real estate that does buying with all cash. So debt is prevalent. It's an important part of the industry. Next, you're going to see any time you have any kind of banking downturn, what is called the flight to quality. What does that mean? Well, that means the banks, which are invariably non-risk-taking, they don't like to stick their neck out, they like to only bank things which they feel comfortable in the asset, and that they feel assured of getting their money back should there be any problem.
That means over the months and years ahead, you will see many lenders pull out of doing what they consider to be more risky, dangerous types of deals. Those would be deals in the mobile home park sector, such as things with high degree of vacancy or with private utilities that are beginning to fail, or parks that don't have paved streets and areas that demand that you have paved streets, or even locations which they have a feeling are too dependent on areas that are risky as far as employment sector or too low populations. And that will be true of all sectors of real estate going forward, is as long as banks in any way feel challenged, they will typically gravitate towards higher quality properties. Finally, it's very important when you're looking at any form of commercial real estate today, and it's always been true, but it's even more important in times whenever there's any form of banking stress that you simply think like a banker. Don't think just like a buyer of real estate, buy like a banker would want you to buy. Because since banking and debt is such an important tool, you have to be aligned with the decision makers that back up that important tool. Lenders like to always feel that they can go to bed each night living by the mantra that before there can be return on capital, there has to be return of capital.
Remember that banks don't get any upside in any deal. Their best day ever is simply to get you to pay your mortgage payment so they can get the interest on the money that they loaned you. As a result, they're invariably low risk takers, and that's not a bad thing for a buyer to also share. Because it's very important that in any deal you do, that it be successful and that you've mitigated as much risk as possible. As time unfolds in this current debt crisis with the failure of Silicon Valley Bank and the stress testing of others, we're all going to find out indeed which sectors are strong and which sectors are weak. But I feel the mobile home parks, at the end, will just gain more respect as one of the best niches of commercial real estate. This is Frank Rolfe, the Mobile Home Park Mastery podcast. Hope you enjoyed this, talk to you again soon.