Mobile Home Park Mastery: Episode 315

When Did Parks Become More Valuable Than Office Towers And Regional Malls?

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Who would have ever believed that single mobile home parks would one day be worth more than giant office towers in downtown and massive regional malls? How did this ever happen? In this Mobile Home Park Mastery podcast we're going to drill down on the amazing change in the real estate power structure and how the lowly "trailer park" has surpassed the glossy and glamorous icons of commercial real estate.

Episode 315: When Did Parks Become More Valuable Than Office Towers And Regional Malls? Transcript

I just got a postcard about a 209 space mobile home park in Aurora, Colorado, selling for $42 million. Meanwhile, the largest office building in St. Louis, built back in the 1980s, a giant tower, sold for only $4 million. And a large regional mall with over 500,000 square feet sold for only $12 million. Who would've ever believed a single 200 space mobile home park would one day be worth more than a high-rise office tower or a regional mall?

This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're gonna talk about how did all this happen? How did mobile home parks become worth more than giant malls and giant office buildings?

Well, the first observation would be we've had some definite shifts in megatrends. The internet and online shopping has just absolutely decimated retail. You see that everywhere you go, every shopping center, every place that you typically saw packed and packed with stores, suddenly they're a third empty, a half empty. And look at the quality of those tenants, those have gone from the four and five star big national chain retail shops to things as strange as people selling garage sale items inside malls. We have one of those in a big mall in St. Louis. So, the internet and the ability to shop at Amazon and other similar venues has literally ruined retail. And that's why those big malls, which now stand at huge levels of vacancy, which lower rents from customers who are renting the space, who are not really grade A potential, has destroyed their values.

And then you have the megatrend of remote work, which has basically killed off the demand for office space. It wasn't that long ago that all Americans had to go to the office. If you wanted to hold a job, you had to go to an office and be there every day from a certain time in the morning till a certain time at night. And if you didn't do that, what happened? Well, you got fired because being there was part of being paid. But now, thanks to COVID, and the movement started a little bit before COVID, but certainly COVID was the final nail in the coffin. Americans no longer desire to nor will go to the office. Even after COVID, when they called all those remote workers back, what happened? They said, "No, we're not going to go back." And many companies, worried that they would lose their workers and lose their ability to compete, suddenly agreed and simply said, "Okay, okay, you don't have to come back in." And with that concession came the end of office buildings values as we know it.

But they still haven't found any megatrend to shift how we house Americans. We can't float housing in outer space. We can't let people sleep on radio waves projected off giant towers. So as a result, megatrends for mobile home parks have been very favorable. We've seen nothing but an infinite rise in demand for affordable housing as we simply can't figure out ways to build housing affordably any longer. And it's unlikely to change because the cost of an average lot in America is now $80,000. So the thought of building a cheap house, well that's gone well out the window.

So the first reason that mobile home parks have now eclipsed in valuations office buildings and shopping centers is simply because we were on the right side of the megatrends and they were not. And that, for the most part, is luck. No one ever would've imagined decades back that this could have ever occurred. Those of us who bought mobile home parks in the 1990s would've laughed if you would say one time, well, you realize your park one day will be worth more than that big building there you see in the horizon, or that park will be worth more than that big mall, would seem impossible yet that's occurred.

Another reason why mobile home parks beat out office and shopping centers over the years was simply the fact that our business, the mobile home park business, was always based on very sane lending standards. Those lending standards allowed mobile home park owners to not over borrow. It kept things very stable. And that's why mobile home parks have the lowest default rate of any form of real estate. As a result, you haven't had feast and famine in the credit markets with mobile home parks like you've had in office and retail. Because those, constantly, because they have such problems economically, have lost confidence with lenders, and it's harder to get loans. When a lender makes a loan on a 200 space mobile home park in Colorado for $42 million, they're doing so 'cause they really believe that their money is secured, that they'll get their money back. But it's very, very hard, given the performance of office and retail, for lenders to jump out there and do that.

A big reason why mobile home parks have beat office and retail is around one single item, and that is simply, you can't build any more mobile home parks. You see, all of real estate in America has long suffered from the lack of what Warren Buffet calls a moat, which is a barrier to competition. If you read any books of Warren Buffet, one of his basic tenets of business is you wanna be involved only in businesses that have a moat to shield you from competition and all of the bad things that happen when your business must be constantly attacked by competitors. But mobile home parks don't have that burden because cities have not allowed new ones to be built in nearly half a century, and they're unlikely to ever relax that. In fact, I would bet almost anything that they won't.

The average American stigma on mobile home parks, as we all know, is fairly atrocious. They all assume that mobile home parks are the bastion of what Hillary Clinton called the deplorables, although she referred on that to the Republican party, but in this case, those individuals who all of us as a collective group in society think is at the bottom of the food chain as far as people that we want to live around. So because of that false narrative, what has happened is cities want nothing to do with parks, and the general values of surrounding housing to mobile home parks always are punished. If you look at the price of a house on Zillow, next to a mobile home park and the same house a few blocks away, you'll see that home may be down 20%, 30%, 40%, even 50% of value due to that proximity. And since you can't build more mobile home parks, since that competition is off the table, you don't have the perennial nemesis of retail and office, which is basically overbuilding. That in many ways is the key factor why mobile home parks have maintained and gone up in value over time while retail and office have declined.

Typically, builders are a strange group. They'll just keep on building until the lenders stop them. They don't seem to understand or comprehend the concept that you can have too much office space and you can't have too much retail space. Mobile home park owners, they're the ones who actually could have built many, many more properties because the demand for housing, as we all know, at this moment on affordable housing, is nearly unlimited. But because mobile home parks were shut down the new construction for so many decades, they alleviated the issue that has ruined office and retail, which is simply too many properties. Look at the typical downtown in any major city. Look at a photo of that downtown back in the '60s and the '70s and the '80s. Look at every decade going forward. Look at the change in the skyline. How many buildings were built? My heavens, how many high-rise buildings do you even need?

And the same with malls. I remember when they first brought out malls back in the 1960s, you had very, very few. I remember back in Dallas, we basically had three. Today, how many do you have? Oh, I don't know, 5 or 10 times that many. So there's simply too much retail space competing for too few tenants. So that alone is probably the chief reason why mobile home parks beat out in the end office and retail. But there's even more reasons. A big one is just future potential. Mobile home park lot rents are absurdly low in the United States. It's a topic that makes people uncomfortable, but it needs to be addressed. The average lot rent in America is around $300 per month, at the same time that the average apartment rent is nearly $2000 a month, and the average home sale is $400,000. As a result, we know that there's plenty of room for those rents to increase dramatically.

If you doubled or tripled the national average, you would still be about $1000 a month cheaper than multifamily. So anyone buying a mobile home park knows instinctively that the ability to grow that NOI over time is astoundingly high. But in the world of office and retail, we know that it has no place to go but down. You can't sell the sizzle when there is no sizzle. There's really no future to either office or retail as a commercial real estate sector, and that's one more reason why mobile home parks have now eclipsed them in value. The bottom line is, back in the 1990s, I would've never imagined I could ever record a podcast on the fact that a simple 200 space mobile home park is worth more than St. Louis's largest office building and worth more than a half a million square foot shopping mall. But yet, it is the truth, and it's an astounding fact.

This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.