There’s an old saying that “when the tide goes out you see who was swimming naked”. In this week’s Mobile Home Park Mastery podcast we’re going to analyze what real estate sectors were swimming naked in light of the Covid-19 pandemic – and future such events – and which sectors had their swimsuits safely on the whole time. The world may never be the same after the national quarantine and it’s important to evaluate real estate investing going forward based on the new reality.
Episode 149: Who Was Swimming Naked And Why? Transcript
There's an old saying that when the tide goes out, you see who was swimming naked. This is Frank Rolfe for the Mobile Home Park Mastery Podcast. We're going to analyze what real estate sectors have been swimming naked, in some cases for quite some time. And in light of COVID-19 and urban unrest, we're now seeing, and we can identify very clearly, who had their swimsuit on, and who did not.
So, let's start with those who had been swimming naked. They had a business model that really wasn't working. It was masked by lots of prosperity for many years, but now suddenly reality has shown through, and we find out that it wasn't a very good business model after all. Retail. The retail sector has done terrible, is doing terrible. I'm not even sure if we ever will see bottom in my lifetime, it's so bad. What happened to retail? How did it go down the drain so bad? Well, first off, it's nonessential in nature, so we learned from the pandemic, and future pandemics. And who knows? Maybe we have this pandemic every flu season from now on. Retail is apparently not something that our nation values as an essential service. So basically, in times of trouble, it is not considered worthy of expending much risk to keep open.
Equally disturbing for retail is the advent of internet shopping, and the fact that most people today are buying more and more items online. They don't really need those stick and brick stores any longer. Now, of course, when I talk about retail, I'm not talking about you buying something on Amazon. And there are real estate sectors that benefit from Amazon, such as industrial and warehouse groups, that hold their merchandise while it's sent. I'm talking your good old mall, your good old strip center. The place that you might go to, that big old department store, to buy a dress, or to buy shoes or a belt. Those things are really in tough shape.
I've talked to some retail owners right now that are not getting even 20% collections on what had been formerly 100% collected and full strip or shopping center. Really, this is maybe the end of the road for much of that. They had said that 20% of all malls would close over the next 20 years. I think it's going to come a lot sooner than anyone expected.
Next on the swimming naked list, office sector. What happened to office? It used to be so valuable. People cared about it so much. Well, once again, it's nonessential. Basically, offices are built, those big, beautiful glass skyscrapers. They house people who apparently are not that important to America, and as a result, during every pandemic, I guess, going forward, they'll be shut down. More importantly, though, we learned from this pandemic that maybe we don't need offices that much anymore. A lot of people learned to work from home, using that self-quarantine time. Others learned that they can meet with people based on Zoom. I think now that people have a taste for working from home, they're not going to want to go back to the office. Therefore, you're going to see a lot less demand for office space, which will lead to greater vacancy and lowering rents.
It's also a telltale sign that Sam Zell, who used to be the largest office building owner in America, who's very good at projecting cycles and risk versus reward, he dumped most of his office buildings years ago. So, I think maybe he was a trendsetter, a future thinker, a visionary, because he saw that sector was swimming naked, and he got out of it.
Next I have self storage. Now, self storage comes in two components. I'm only going to put in the swimming naked category self storage in urban markets. What happened to self storage? Well, clearly it's not really essential. Clearly, a lot of Americans, rather than pay their $100 a month to store their goods, are going to cancel those lockers and sell that stuff off on eBay. And the fact that a lot of self storage has been massively overbuilt the last few years. I think there's something like two billion more square feet that came online right in time for COVID-19, probably wasn't the smartest business plan of all time. So you also have, however, the more rural self storage, which we'll come to in a minute. That is not going to be lumped into my naked category. It still has its swim trunks on. But unfortunately, good old self storage in urban markets, the very markets that we saw articles only a few months ago, how great and hot they were... No. They're not.
Then, next up to bat, we have the entire lodging industry. Clearly swimming naked. In fact, not a shred of clothing whatsoever on. What happened to lodging? It was looking so good at one time, right? A lot of hotels going up, and all kinds of good things going on. Well, number one, we learned from COVID-19 it is a nonessential item, on a grand scale. In fact, all of travel was particularly beat up on during COVID-19, was found just to be of no real necessity for America to keep open, and it got shut down, so that was the end of that.
On top of that, a lot of people are finding that they can do a lot of things they used to have to travel to do, and conventions and meetings. Well again, they can do that by Zoom, so they don't really need it anymore. It's just something that they can basically just do from home, and not have the trouble and the cost of going out and doing the travel. On top of that, there'd been a whole lot of overbuilding in lodging. We've all seen it. We know all the new hotels that have gone up, all trying to race to be bigger and more expensive, to capture your nonessential dollar. And now people have no longer nonessential dollars, so lodging, the swim trunks fell off long ago.
Then you have industrial. Again, there's parts of industrial that are doing fine. Some are doing better, despite the sea going out. I'm talking more about that nonessential industrial, the industries that were tagged as nonessential which are now either completely shut down, or doing a fraction of their former capacity. Those are not doing well at all.
And then finally, high end apartments. You know, I got sick to death of hearing all the time about this great new development for a new high end apartment, or a new micro-apartment here and there, and always in big urban markets like Chicago or Boston and Manhattan. And then, you can guess where this is all going. Not only are these hardest hit areas from COVID-19, but also, additionally, they house mostly nonessential workers. So when you add those two together, it's not pretty. Also, people found out from self-quarantine that apartments weren't that much fun. They couldn't be outside in an apartment, so they ended up being trapped inside, sitting in those four walls, deciding, "I don't really like this place much anymore."
So, I think you're going to see huge problems with them. I know they're right now doing terrible on collections. We've talked to some apartment owners who are only collecting sometimes as little as 50% of the rents, whereby they were collecting 100% before COVID-19. But I'm not even certain it's going to rebound. I'm not sure people are going to want to stay around in those cities, where they know coming up soon we might have another resurgence of the pandemic. There's urban unrest. I'm just not sure that product is going to make it. I think that sometimes people develop a business model. For the moment it might have seemed kind of attractive, but it doesn't necessarily age well.
Now, on the not naked front, here are the folks who had their swimsuits on the entire time. Basically anything in the affordable housing sector. Apartments, of course those who house apartment people predominantly on Section Eight. Most of those people are already on a government subsidy. The rent comes in no matter what. So pandemic or not, it's all okay. Plus, as Americans have been losing their jobs and losing their businesses, they need more affordable housing. So, I think apartments that cater to affordable housing have been doing fairly well, keeping the occupancy high, collections high.
Another group... Of course us here at Mobile Home Part Mastery Podcast, our favorite sector... mobile home parks. Why are they doing so incredibly well? Well, number one, most of our customers are in essential services, and/or they are also retired, so they're not as at risk in the employments that were shut down with the nonessential services during COVID-19. Also, just to look at the location of mobile home parks. They're traditionally in non-urban markets. You don't find any mobile home parks in the middle of Boston or New York, because when the land gets valuable, mobile home parks always get torn down and redeveloped. We're just on one story. We're not multistory.
Also, we're in a lot of flyover states. The number one spot for a mobile home park in America, the state with the most, is Texas. Number four is Kentucky. These are not mainstream states that most people talk or write a whole lot about. So, basically mobile home parks are just in the right position geographically to handle the COVID-19 pandemic and urban unrest, and whatever else that you can maybe throw in its way. Also, mobile home parks have an advantage over all real estate, in that we have very little competition. You've not been able to build these things for about a half a century, so as a result, you're dealing in an asset that you don't have to worry about new things going up tomorrow. That's what killed storage. That's what's killed lodging. That's what's killed office. That's what's killed high end apartments. And that's what's killed retail, is the fact that you have rampant, rampant overbuilding.
No restrictions. Cities say, "Sure, build your shopping center here, and build that high rise building. Please, we'd love it." And as a result, the developers just go crazy. They just can't stop themselves. They always have to build that next building, which they know they'll get it filled, because it'll be a story taller than the one next door, and it'll have a more sumptuous lobby. And you get this terrible, continuing cycle of overdevelopment and then crashing. But this time, I think in those sectors as we described, that deal with the nonessential, that crashing is going to be worse than we've ever seen before.
Other reasons we like mobile home parks are they're non-subsidized, so we don't have to worry about the government. Who knows what the government will do, going forward? There will be a whole lot less of tax money coming in, from the pandemic, from urban unrest. What'll happen? Where will that money go? I don't know, but mobile home parks are not subsidized, so a government retraction in, for example, a Section Eight program, would have no impact at all.
Finally, mobile home parks have one thing that apartments don't, and that's called a yard. So, in a mobile home park, you've got no neighbor knocking on your walls and ceiling. You get to park by your front door. You have neighbors who have been around, typically on average 14 years, and... This is very important... you have a yard. And we all learned from self-quarantine, the one place you could go and not wear a mask, and you could go and feel safe and feel happy, and just hang out and commune with nature, was in fact a yard. And apartments don't deliver on that. Never have, never will, can't do it.
I think it's also worthy to note, self storage in urban markets I think has been doing okay. I live in a small town in Missouri. I'm not seeing any new increase in vacancy in self storage. People like self storage, they need self storage, but they don't need a whole lot of overbuilt self storage. So, but I think storage may be okay in those less urban markets.
Also RV parks. I want to talk about that for a moment, because it's partially naked and it's partially clothed, so I guess it's having the swim trunks on, but just on one leg, perhaps. What you have is with RVs, with social distancing, there's many RV activities you can't do. A lot of people right now are saying, "I'm not going to go use that RV park, because I can't use the things I like to do," which are maybe swim in the pool, hang around the campfire. The things that don't meet our social distancing guidelines. But yet others are saying, "I'm going to go get in my RV and go out, because I want to self-quarantine and commune with nature." So, I see it going both ways.
Also on locations, you have some destinations that have remained open this entire time during COVID-19, and then you have others which are fully, fully shut. In fact, I think coming out of this pandemic, people will realize which the true best RV destinations are and which are not, from an investment category. Obviously you want to be around things that remain open, and not things that are closed at the whim of the U.S. government.
So in the end, what does it all mean? It means you want to be wearing your swim trunks. The ocean does go out periodically. I know it's been a long time... The last great recession we had was 2007... so we all got spoiled, thinking, "No, there won't be another recession anytime soon, so maybe I don't need to buy those swim trunks after all," or, "Maybe I've outgrown them, and I just won't buy any more." But in the end, you do, because it is a cycle in America. You always have a boom and bust cycle. You cannot have a good time without a bad time, and when the bad times come in, you don't want to be left swimming naked. This is Frank Rolfe, the Mobile Home Park Mastery Podcast series. Hope you enjoyed this. I'll talk to you again soon.