Manufactured
Housing Communities
United States | Summer 2020
The COVID-19 pandemic continues to impact the real estate industry in new ways. Across the manufactured housing sector, owners and operators are facing these unprecedented challenges head-on, and are quickly adapting to apply learned best practices that ensure the health and wellbeing of their residents while maximizing investment returns.
To shed more light on the full impact of COVID-19 on market valuations, current and future, JLL Valuation Advisory has summarized sector valuation trends to reflect current market sentiment and underwriting practices of market professionals.
Executive Summary
- Institutional investment activity in the manufactured housing sector is expected to increase as the sector’s recessionary resilient performance outshines the majority of commercial real estate sectors.
- Unlike most other commercial real estate sectors, valuations for manufactured housing communities continue to trend upward. The second quarter price per pad averaged $50,792, with favorable growth trends, up 6.6 percent from the first quarter of 2020 and 26 percent year-over-year.
- Stabilized occupancy remains near an all-time high at 93.5 percent, with western markets experiencing the highest average occupancy at 94.7 percent and the lowest occupancy in south central markets at 92.3 percent occupancy.
- The rate of rent growth has tapered with year-over-year rent growth for the second-quarter 2020 reported at 1.5 percent. Rent roll performance remains strong with rent collections averaging a 1 percent to 5 percent discount to contract rents.
- As the supply of manufactured homes has been slowly declining due to zoning restrictions and core development expansion, the increased need for affordability is expected to push net demand upward.
- The percentage of delinquent loans barely exceeded 5 percent in the period following the 2007 and 2008 financial crisis with current delinquencies remaining at all-time lows, despite the spike in delinquent loans being experienced in other sectors.
- Capitalization rates for the manufactured housing sector continue a downward trend, showing a year-over-year decline of seven basis points, to 5.89 percent for the second quarter of 2020.
- According to the JLL Valuation Index, year-over-year indications show two-star properties experiencing the largest decline in capitalization rates, down 78 basis points. Three- and four-star properties experienced a decline of 42 basis points and 46 basis points respectively.
- The year-over-year spread between the 10-year treasury and capitalization rates has produced a 10-year average of 438 basis points for the manufactured housing sector and 361 basis points for multi-housing. With the 10-year treasury at an all-time low, second quarter spreads rose above the 10-year average, creating opportunity for investors to capture yield.
Capital markets
Transaction volume
After peaking in the second quarter of 2019, the trailing four-quarter transaction volume dipped for the fourth consecutive quarter, reporting a second-quarter 2020 rolling four-quarter total of $3.23 billion. This decline is primarily due to a decline in portfolio transaction volume after the industry went through a significant period of consolidation, with the first-quarter 2020 rolling portfolio volume hitting a 10-year low.
On a quarterly basis, the second-quarter 2020 transaction volume totaled $821 million, marking a 12 percent increase over the fourth-quarter 2019 total and a 23 percent increase over the first-quarter 2020 volume, in defiance of the COVID-19 pandemic. This is a stark difference in investment trends for all commercial real estate, closing the second quarter of 2020 at $44.6 billion, a year-over-year decrease of 68 percent, showcasing investor confidence in the manufactured housing sector.
Trailing four-quarter transaction volume
Source: CoStar & JLL Research
Valuation trends
Valuations for manufactured housing communities continue to trend upward. The second-quarter price per pad averaged $50,792, with favorable growth trends, up 6.6 percent from the first quarter of 2020 and 26 percent year-over-year. For comparison, multifamily pricing moved in an inverse direction, down 5.3 percent from the first quarter of 2020 and down 0.86 percent year-over-year.
Price per pad indications experienced the strongest growth in the Midwest markets, increasing from an average price per pad of $32,114 in the fourth quarter of 2018 to $54,285 in the second quarter of 2020, jumping from the lowest regional average to the second-highest regional average. Western markets maintain the highest average valuation at $56,875 per pad, with southern markets reporting the lowest average at $41,910 per pad.
With increased investor demand and limited product available for sale, the manufactured housing industry has experienced consolidation of single-asset and smaller portfolios, driving valuations upward, with reported valuations in excess of $300,000 per pad. As a result, smaller or lower-quality assets that may not have previously been a desirable investment for an institutional investor, have become sought after as investors seek regional scale to help drive cost savings.
Average price per pad by region
Source: JLL Property Intelligence Exchange (PIX)
Capitalization rates
Capitalization rates for the manufactured housing sector continue a downward trend, showing a year-over-year decline of seven basis points, to 5.89 percent for the second quarter of 2020, again with a significant range based on location and quality attributes. Regional averages ranged from 5.48 percent in western markets to 6.56 percent in eastern markets.
The year-over-year spread between the 10-year Treasury and capitalization rates has produced a 10-year average of 438 basis points for the manufactured housing sector and 361 basis points for multi-housing. With the 10-year Treasury at an all-time low, second-quarter spreads rose above the 10-year average, creating opportunity for investors to capture yield in a sector that so far has proven its resiliency in the COVID-19 market.
Manufactured housing market pricing vs. Multi-housing pricing
Source: Real Capital Analytics & JLL Research
Capital sources
Seasoned investors continue to successfully raise capital as new investors continue to gravitate toward the manufactured housing sector, driven by mounting pressure to deploy capital in a sector insulated from the impact COVID-19 is having on other commercial real estate sectors. Private capital represented 70 percent of total manufactured housing investment volume year-to-date, with institutional capital representing the second-highest investment volume at 28 percent of total, marking the highest percentage of institutional capital investment ever recorded. This distribution is opposite the core commercial real estate sectors, including multi-housing, each reporting ten-year lows of institutional capital investment at 20 percent and 14 percent, respectively.
Debt liquidity was abundant throughout 2019 as lender and borrower appetite for manufactured housing mortgages increased. Fannie Mae Multifamily closed 2019 with record loan volume of more than $70 billion, with manufactured housing loan volume reported at $2.5 billion, compared to the 2018 volume of $2.9 billion, and up significantly from the $1.9 billion in 2017.
Manufactured housing capital composition by buyer type
Source: Real Capital Analytics
Property markets
Performance snapshot
Stabilized occupancy remains near an all-time high at 93.5 percent, with western markets experiencing the highest average occupancy at 94.7 percent and the lowest occupancy in south central markets at 92.3 percent occupancy. The rate of rent growth has tapered, with year-over-year rent growth for Q2 2020 reported at 1.5 percent, falling below the compounded annual growth rate of 1.9 percent over the past decade. Rent roll performance remains strong, with rent collections averaging a 1 percent to 5 percent discount to contract rents.
The supply of manufactured homes has been slowly declining as communities are being purchased for redevelopment as an alternate use, and often not replaced. After a period of year-over-year increase in renter-occupied homes, the trend reversed in 2018 with an increase in owner-occupied homes, as renter-occupied homes currently comprise 40 percent of total manufactured housing supply.
The increase in owner-occupied homes is favorable as communities with renter-occupied manufactured homes may have more trouble collecting rent amid economic downturns, compared to communities that are primarily occupied by owner-occupied manufactured homes.
Manufactured housing occupancy trends vs. rent growth
Source: CoStar & JLL Research
Debt service performance
Looking at debt service performance, the percentage of delinquent loans for manufactured housing communities barely exceeded 5 percent in the period following the 2007 and 2008 financial crisis, with current delinquencies remaining at all-time lows, despite the spike in delinquent loans being experienced in other sectors. This recessionary resilient performance is expected to increase investor interest.
Debt service trends by asset class
Source: Trepp, LLC
Looking forward
Manufactured housing is viewed as a major part of the solution to the nation’s lack of affordable housing, providing an affordable option for residents seeking home ownership in comparison to other housing options. Communities in the northeast and coastal metropolitan areas, where affordable housing is less attainable, have benefited the most.
Traditional home prices have increased more than 20 percent in the last three years, forcing potential home buyers to seek alternative living arrangements. While demand for manufactured housing continues to improve, new supply is limited primarily due to challenges obtaining the necessary approvals. The asset class has experienced strong occupancy growth and rent growth stability.
Although these factors will drive strong demand, the growing unemployment rates due to COVID-19, particularly in the low-wage income segments, present some risks toward some residents’ ability to pay pad-rent, increasing turnover and vacancy. Age-restricted or 55+ communities are better insulated as residents depend on pensions and other government subsidies to afford pad-rent. Early indicators suggest that the manufactured housing market will remain strong through the downturn, as it has during prior recessions.
The compelling narrative created by favorable investor returns, and growing need for affordable living options, will continue to attract attention from investors. Deep pools of debt capital to finance buying activity, low cost of capital, and increasing investor interest should help bring reluctant sellers to the market.
Investor sentiment remains cautiously optimistic. JLL expects sustained enthusiasm for manufactured housing investment through 2020 and into 2021, with a focus on value and risk shaping investor behavior. With asset pricing at or near previous cycle peaks, investors are adjusting their approaches to investing capital in a recessionary cycle, with manufactured housing proving to be one of the more reliable performers.
Laguna Terrace, Laguna Beach, CA Provided by Hometown America
JLL valuation index
JLL Valuation Advisory[1] closely tracks transaction activity in the marketplace through our internal proprietary database. The JLL valuation index represents an aggregation of market valuations completed by JLL’s valuation advisory practice on a trailing 12-month basis as of the second quarter of 2020.
The aggregate market values of this dataset total approximately $14 billion, or 6 percent of the total estimated market capitalization of the $233.4 billion institutional manufactured housing supply.
| Two-star | |||||
|---|---|---|---|---|---|
| Stabilized Indications | Lower Decile | Lower Quartile | Average | Upper Quartile | Upper Decile |
| Occupancy(%) | 57 | 68 | 86 | 94 | 99 |
| Effective Gross Rev. per Unit($) | 2,171 | 3,083 | 3,939 | 5,064 | 5,838 |
| Expense Rati(%) | 33 | 38 | 45 | 52 | 59 |
| Cap Rate(%) | 5.8 | 6.0 | 6.3 | 6.8 | 7.3 |
| Value per pad($) | 16,433 | 25,991 | 32,413 | 39,704 | 49,875 |
| Three-star | |||||
|---|---|---|---|---|---|
| Stabilized Indications | Lower Decile | Lower Quartile | Average | Upper Quartile | Upper Decile |
| Occupancy(%) | 62 | 74 | 90 | 97 | 99 |
| Effective Gross Rev. per Unit($) | 3,422 | 3,969 | 5,077 | 6,701 | 7,921 |
| Expense Rati(%) | 33 | 37 | 42 | 48 | 56 |
| Cap Rate(%) | 5.0 | 5.3 | 5.8 | 6.3 | 6.8 |
| Value per pad($) | 28,330 | 36,012 | 48,596 | 73,020 | 95,084 |
| Four-star+ | |||||
|---|---|---|---|---|---|
| Stabilized Indications | Lower Decile | Lower Quartile | Average | Upper Quartile | Upper Decile |
| Occupancy(%) | 63 | 81 | 96 | 99 | 100 |
| Effective Gross Rev. per Unit($) | 3,874 | 6,874 | 7,913 | 9,253 | 11,843 |
| Expense Rati(%) | 27 | 31 | 37 | 44 | 47 |
| Cap Rate(%) | 3.8 | 4.3 | 5.0 | 5.3 | 5.5 |
| Value per pad($) | 47,747 | 78,091 | 98,531 | 128,852 | 159,579 |
Source: JLL Property Intelligence Exchange (PIX)
The value indications presented represent statistical ranges of independent datapoints. The year-over-year indications show the two-star properties experiencing the largest decline in capitalizations, declining by 78 basis points. Three- and four-star properties experienced a decline of 42 basis points and 46 basis points, respectively.
In terms of price appreciations, the largest appreciation was experienced by four-star properties at $16,000 per pad. Two-star properties came in second at $12,500 per pad, with three-star properties experiencing year-over-year appreciation of $4,750 per pad.
Source: JLL Valuation Index
(1) U.S. property valuation and tax consulting services are performed by JLL Valuation & Advisory Services, LLC, a wholly owned indirect subsidiary of Jones Lang LaSalle Incorporated.
Investment class descriptions
Four-star+ or investment class A: Excellent-quality assets located in highly desirable market locations, primarily core markets, but can be in non-core markets. Low density allowing for larger lots. New vintage homes in excellent condition built primarily after 1980 with a home mix of mostly multi-section. The community is subdivision quality with resort-style amenities, or an amenities package considered to be at the high end of the local marketplace. Roads are asphalt or concrete and in good condition. The community operates on public utilities. Typically, there are two off-street parking spaces per lot.
Three-star or investment class B: Good-quality assets located in desirable market locations, primarily core markets, but can be in non-core markets. Medium density allowing for average-sized lots. A mix of new vintage and older homes in good condition built primarily after 1970 with a home mix of single-and multi-section homes. The community has a typical layout of high-quality grid or curvilinear with a standard amenities package for the local marketplace. Roads are asphalt or concrete. Typically, the community operates on public utilities. Typically, there are one to two off-street parking spaces per lot.
Two-star or investment class C: Average-quality assets located in primarily secondary or tertiary market locations. Typically, higher density resulting in smaller-sized lots. Housing mix is primarily built prior to 1980, in average condition and a home mix of primarily single-section homes. The community is typically in a grid layout. Roads are gravel or dirt in average condition. The community operates on a mix of public and private utilities. Parking is typically on-street parking with no off-street parking available at each lot.
Please feel free to reach out to any of our team members if you would like to schedule a customized presentation of this report.
Woodlake Community, Greensboro, NC Provided by YES! Communities
About JLL Valuation Advisory
JLL’s Valuation Advisory platform leverages the firm’s global experience and deep knowledge of local real estate markets to provide industry-leading valuation, market analytics and advisory services to a wide range of clients. We offer the highest quality market insights and property valuations to help our clients make optimal business decisions and manage risk. JLL Valuation Advisory is comprised of over 1,700 valuation experts and 145 offices globally. For more news, videos and research resources on JLL, please visit the firm’s U.S. newsroom.
