Issue link: https://read.dmtmag.com/i/179253
COMMUNITY CONSULTANT Why MH Communities Are Uniquely Positioned To Fourish In A Higher Interest Rate Environment BY FRANK ROLFE It appears that the Federal Government's role in keeping interest rates down through "quantitative easing" may be coming to an end. Of course, at $85 billion per month, it couldn't go on forever. But the recent increase in rates at the mere suggestion of a "quantitative easing" reduction has many people wondering what the impact will be of higher rates on the manufactured home community business. The answer is that our industry is probably the best prepared of any niche of real estate. Interest rates are easily handled at the high cap rates we buy under Apartments, office buildings, retail centers – these are all asset classes that people buy readily at 6% cap rates. These deals only work because of low interest rates so they have some semblance of a "spread". But when you buy at those type of cap rates, you don't have much room for error. The REO world is peppered with failed deals that went upside down when adjustable rates increased just slightly and the interest rate outstripped the cap rate. Manufactured home communities, on the other hand, have been trading normally in the 8% to 10% cap rate level, so they have plenty of room for higher rates without much ill effect. On top of that, MH communities have some built-in weaponry to battle higher rates Unlike retail, office and apartment leases, the average manufactured home community lease is month-to-month. This gives the community owner the ability to respond to any hikes with higher rents to cover that expense increase, and to do so almost immediately. Many a shopping center has gone bankrupt because it OCTOBER 2013 18 THE JOURNAL could not up the rents due to leases which can sometimes span a decade. We do not suffer from that disease – we have the ability to raise rents 24/7. Most community owners already raise rents annually around 5%. It may just be that more of that raise has to pay for higher interest rates. And our customers are uniquely well positioned to handle higher rents Sure, any idiot can raise rents, but can the customers really afford to pay them? The typical manufactured home community resident has a very reasonable current lot rent. Our average lot rent, spread out over 17 states and nearly 9,000 lots, works out to around $300 per month. The U.S. average on apartment rents is $1,030 per month, by comparison. Indeed, our customers are still getting a great deal at an even higher monthly rent. On top of that, the bulk of our residents own their manufactured home outright, so they have no additional cost to them from higher rates, as well as an all-inclusive housing cost that is a fraction of stickbuilt homes. And don't forget where we came from Manufactured home communities have their roots in affordable housing, and that means that we are good at holding costs down and providing just enough amenities to satisfy the customer, without waste. If there is any group that can tighten its belt to meet rising rates, it's the manufactured home community owners. It all adds up to more demand for affordable housing – so we win on the macro level The big casualty of higher interest rates will be stick-built housing. Remember that the en- tire "quantitative easing" concept was designed to prop up home prices with cheaper mortgage rates. When that blows up – and the decline in home sales as a result of just the 1 point climb in rates demonstrated – it spells the momentary end for stick-built. That only serves to push more people down into the affordable housing mode that is served by the manufactured home community. In addition, the rise in rates will just add to the woes in corporate America which, along with Obamacare, seem to be destined to drive just about everyone into the affordable housing arena. That's why our phones ring at the rate of over 100 calls per week in many of our communities, from people desperate for housing they can afford. And let's be reasonable about the risk here I'm sure that there are people out there that who are stocking up on food, water and ammunition – but that's really not necessary just because of interest rate instability. Remember that 10-year Treasuries normally trade at 2 points over the rate of inflation. So with inflation at 2%, the interest rates should be 4%, but they are only at 2.8%. So "quantitative easing" is really only keeping things artificially down roughly 1.2 points right now. That's hardly a big deal to most manufactured home community owners – although certain death to stickbuilt housing. As long as inflation stays low, not much of any magnitude will change on rates. Conclusion While higher interest rates may destroy many real estate niches – including apartments, office, retail, industrial and self-storage – they are relatively benign in the manufactured home