Mobile Home Park Mastery: Episode 155

The Harsh Realities Of Supply And Demand

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Back when I was an economics student at Stanford in the 1980s, the most important theory that would help on any essay was the law of supply and demand. It’s a simple concept: if you have greater supply than demand then prices go down, and greater demand than supply makes prices go up. Never in American history has this economic treatise had more meaning or more unhappy endings. In this week’s Mobile Home Park Mastery podcast we’re going to discuss how supply and demand are shaping all sectors of U.S. real estate and mobile home parks in particular.

Episode 155: The Harsh Realities Of Supply And Demand Transcript

In the 256th couplet of a document called the Tirukkural about 2000 years ago was the first mention ever of the idea of supply and demand. Fast forward about 700 years to the 1300s in Syria, a scholar named Ibn Taymiyyah wrote, "If the desire for goods increases while its availability decreases, its price will rise." Fast forward another 700 years, here I was an economics major at Stanford University learning that you can relate almost any issue in economics to the simple formula of supply and demand.

This is Frank Rolfe, the Mobile Home Park Mastery Podcast series. We're going to be talking about the harsh realities of supply and demand, how it relates to, not only the US economy today, but in particular to the mobile home park industry. We're going to start off analyzing the direction of lot rents and how lot rents are actually set by supply and demand. There's this misconception by some of the media that lot rents have risen in the United States in mobile home parks based too on the manipulation of mobile home park owners. It's an interesting idea. It's one of the ones they like to write about. In fact, they've convinced some politicians who are ignorant to the laws of economics of this idea, but it's not in any way true.

Let's just examine for a moment the city of Denver, Colorado. The going mobile home park lot rent in Denver right now is around $800 per month, significantly higher than the US average of about $280 per month. Now, why would that be? Why is Denver so much different? Well, it's based on supply and demand. There's been a lot of people moving into Denver, a lot of people moving into Denver who don't have the money to buy a stick built home, or a class A apartment. So they're faced with two options, class B, class C, class D apartment, or they can have no neighbors knocking on their walls and ceilings, the ability to park by their front door, their very own yard, be a homeowner, and a sense of community. They find that only in a mobile home park. So most of these folks would much rather live in a mobile home park than in an apartment.

And as a result, since there's only a finite number of mobile home parks in Denver, Colorado, it's made the lot rents go up and they've gone up a lot. Now, if you go to these park owners where these lot rents are so high, I mean $800 is no doubt a very high lot rent, you'll find that not only are they completely full, but they have waiting lists. Now, how would that be possible if they were gouging rent? If they were manipulating the rents that high? No one would want to live there, right? So you can't really use manipulation as a concept of economics.

Now, the government engages in it frequently. We all know about quantitative easing, where they actually try and manipulate supply and demand. But park owners don't have that ability. They never have. If you're unhappy where you live and you live in a mobile home park, you always have several options. Number one, you can sell your mobile home. Number two, you could rent your mobile home out. Or number three, you could just walk away from it. People always vote with their pocketbook. They vote with their behavior. And in this case, people vote to stay in the mobile home park because it is still a far superior quality of life than its competition. But that's why a lot rents go up. It's not based on the park owner's magical ability to manipulate numbers, it's not based on our ability to say, "Well, it's our property. Take it or leave it." No, if they really want to, they certainly can leave it, but they choose not to leave it because they like the product so much. And even at $800 a month lot rent in Denver, they view that as a bargain, when apartments of the same size are $1,500 plus and that's not even always class A construction.

Now let's also then turn our attentions to park values. There have not been any meaningful supply of new mobile home parks in America in the last half century. The heyday of building parks ran from about the 1950s through the 1970s, then it was abruptly cut off by city governments, county governments who didn't want any more mobile home parks. Why would they? They reasoned if we have more mobile home parks, we don't get a lot of tax revenue, but we get a lot of cost from it. It's not something that people make postcards of or write back home saying, "You got to move to the city. It's got this great mobile home park in it." So they thought there were a lot of better uses for land in their city, in their county than the good old American trailer park.

Since they decided not to build them anymore though, it constrained supply. So all across America, you have roughly 10 mobile home parks built each year, but you have around a hundred torn down, redeveloped in everything from new apartments to maybe a Home Depot. As that supply shrinks, at the same time, more people are getting interested in the industry. So through simple supply and demand, you're going to have mobile home park values go up. Now they haven't gone up a ton. They haven't gone up over night, doubling, tripling, like some other real estate sectors that get enormously hot or maybe Tesla stock, which outpaces anything even remotely tied to economics. But there's no question that mobile home park values have risen over time.

When I got back in the industry, back in the 90s, there wasn't that much interest in mobile home parks at all. So there wasn't much demand. The supply was still static, had been static at that point for about 30 years, but nevertheless, there wasn't that much demand. Fast forward to today, every year there are new investors saying, "Hmm, I wonder about mobile home parks as an alternative investment idea." Choose the sector and every time you have someone new enter, assuming they buy a park, it's going to create slightly higher values. So as long as our supply remains capped and as long as there are new people saying, "I think mobile home parks might be a neat idea to build an investment stream," you're going to have higher values.

But on top of that, there's another supply and demand reality we all have to acknowledge. And that is the utter annihilation of so many of the other real estate sectors. Not too many years ago, people were just all excited about everything from lodging to office to retail. Well, not anymore. Thanks to COVID-19 starting back in March of this year, what have we seen? We've seen basically the end of retail as we knew it, bankruptcy of many, many of the major retailers. People like Neiman Marcus, names that you'd never think you'd see in bankruptcy court are now over with. And everywhere I go, I see nothing but vacancy in retail, whether it be a strip shopping center, an outlet mall, or a full scale mall, I see lots of empty space with the old names of the stores that have been chiseled off above the door or they tried to cut them out of the glass with a razor, but you can still kind of make out what it was.

So what does it mean? It means retail investors are going to say, "Wait, I don't think I want to invest in retail anymore, can't make any money with it. Nobody wants it anymore. What other sector can I get into? What other niche of real estate actually has a future?" And of course the answer is mobile home parks. And it's not just retail. Look at what's happened to office. Prior to COVID, people all thought that offices were the way to conduct business. Then starting in March, people realized that maybe they didn't need the offices anymore. All across America, millions of people are working from home and finding that they actually like it. And their employers are finding that they're actually as, or more productive without having to do that one to two hour a day of commuting. On top of that, people are learning that they can meet rather than in a conference room, they can meet on Zoom. And they no longer really need to go into the office. They don't really need to have those meetings. It can be done much faster, more efficiently using technology.

As a result, the future of office buildings looks extremely bleak. And let's not forget about lodging. Hotel industry has the same complications, or more so than the office building. Not only do we not need to meet and have conventions anymore in face to face format since we can do it on Zoom, which is a huge part of the lodging industry, on top of that, it's really no longer safe to travel. Can't really get on a plane like you used to, don't feel comfortable getting into that Uber. So consequently, lodging across America is dying and it's dying quickly. Revenues are down up to 90%. I read an article, the one airline's revenue was down 96%. How could you possibly go on like that?

So as a result, lodging investors are going to jump ship and try and find a new niche. And don't forget those people in the industrial sector, all those businesses that were declared as being not non-essential are going to be basically going out of business. If you're not an essential business, they don't need you anymore. We don't know when COVID will end, if ever. So a lot of those landlords are finding they can't get paid by the tenant because the tenant no longer has a going business. So once again, values drop and people look for new sectors. So as a result, mobile home park sector being nothing more than one of the few that was able to survive COVID and actually flourished during it, will be attracting a lot of new investors from other sectors, which once again will push values higher over time.

Finally, we have to talk about industry consolidation. It's a topic I've written about and talked about for about a decade now. It's as predictable as you can be. Our industry, the mobile home park industry is the least consolidated of any in the United States. The self-storage industry, which is actually younger than the mobile home park industry by a couple of decades is already three times more consolidated. However, mobile home parks still remain an industry that's ripe for consolidation. We didn't see any meaningful consolidation until about the last half a decade when you had three $2 billion transactions effectively in one year. You had Carefree Communities purchased by Sun, a US REIT. You had Yes Communities purchased by GIC, the sovereign nation fund of Singapore. And then you also had RHP Communities purchased by Brookfield, which is a Canadian REIT.

That set in motion many other people, particularly a lot of investment bankers in New York saying, "Wait a minute, I never really thought about mobile home parks before. Maybe we should look at this." And since then, there's been a rash of large purchases. Even the Carlyle Group, the largest private equity group in America is now in the mobile home park industry. They're now up to about 5,000 lots. So through industry consolidation, you will once again have a rise in mobile home park values. And it all goes hand in hand. As you have higher lot rents based on supply and demand, you'll have higher values based on supply and demand and you'll have more people wanting to enter the industry based on supply and demand. So the bottom line is, everything regarding the mobile home park industry is all based on that harsh reality of supply and demand. It's not based on manipulation, not based on an unfair business model. It's simply based on the real life factors of economics that were acknowledged fully 2000 years ago, which hold true today.

This is Frank Rolfe, the Mobile Home Park Mastery Podcast series. Hope you enjoyed this. Talk to you again in a week.