Issue link: https://read.dmtmag.com/i/696291
JULY 2016 18 THE JOURNAL The market for manufactured hous- ing communities (MHCs) has re- cently been affected by events shaping the world economy and demographic shifts here at home. Most of what's hap- pening on the local and global stage has made the asset only more attractive to in- vestors, who are relying upon skilled lenders, armed with a diverse set of products, to provide financing. Until recently, the market for manufactured housing communities (MHCs) seemed rela- tively unaffected by events shaping the world economy. The slowdown in China, political turmoil in the Mideast, the collapse of oil prices—these were just some of the develop- ments last year that brought a surge of foreign capital to U.S. shores. With the S&P 500 volatile but essentially stuck in place, more and more of this money joined domestic funds in moving to the multifamily mar- ket, attracted by its reliably steady re- turns. The result has been pre- dictable. Fueled by sustained low interest rates, valuations in al- most every major apartment market have been approaching or reaching new highs, and cap rates are compressing. In 2014 and early 2015, the spillover to the MHC market was modest. Investors priced out of the multifamily market began entering coastal and Sun Belt MHC markets, jostling for posi- tion with long-established companies. Cap rates for premium age-restricted properties along the Southern Florida coasts settled into the mid-5 percent range, as did properties on the West Coast. Since then, MHC investors have expanded their search for yields across the country, and cap rates have declined generally. There are still values to be had, but sub-5 percent cap rates are common in Arizona and California, 6 percent cap rates have been seen in secondary Texas markets like Austin, and 7 percent cap rates can be found in the Midwest. Millennials, Baby Boomers Fuel Investor Demand for MHCs Driving investor interest in MHCs is a con- vergence of economic and demographic trends. Since the recession, there has been a dramatic shift away from homeownership. According to the U.S. Census Bureau, homeownership crested in mid-2004 at 69.2 percent. In 2016, homeownership rates fell to 63.5 per- cent, their lowest in 30 years, driven by de- clines by the two largest cohorts: millennials and baby boomers. The drop is particularly dramatic among mil- lennials. The homeownership rate of the cur- rent under-35 group is just 34.2 percent, a 22 per- cent decline from 43.6 percent 12 years ago. Higher credit standards, wage stagnation, cultural prefer- ences, and a shortage of new homes are all rea- sons for this de- cline. For the same time period, the rates for people in the 45 to 64 age group and those over 65—are 75.7 percent and 78.8 per- cent, down from 80.8 percent and 81.1 per- cent, respectively. Baby boomers are located inside the age groups the Census references here, and we know that these home ownership rates are likely to drop even lower. Where pre- vious generations of retirees could depend on pensions to augment their Social Security, baby boomers, at best, have defined benefit plans and some money in the stock market. Accord- ing to an Insured Retirement Institute report, six in 10 baby boomers have no retirement sav- ings at all. Those who are homeowners will likely put their homes on the market in an effort to tap their equity. The demographic trends among the youngest and oldest cohorts are coming together to push demand for rental apartments ahead of supply, with predictable results. Vacancies are at 20- year lows and rents are rising steadily. This has created a domino effect, as renters priced out of apartments turn to MHCs. The steadily growing demand and finite supply are a formula for attractive rent and NOI growth, attracting more and more investors to this sector. In a Competitive Environment, Certainty of Execution Is Paramount In these circumstances, the challenge for in- vestors is not availability of financing. Both Fannie Mae and Freddie Mac are committed to this sector—and there is also ample interest among banks and life companies. The real issue is access to lenders with the expertise to provide the kind of creative, certain funding that in- vestors need in this highly competitive, low- cap-rate environment. At Capital One Multifamily Finance, we have a deep understanding of Agency MHC fi- nancing. In fact, Grace Huebscher, our presi- dent, introduced Fannie's MHC lending program during her tenure as a Fannie vice president. This background gives us the ability to tackle complex acquisitions and refinancings successfully. In the last six months, to cite two examples, we have met a court-ordered dead- line for a transaction involving an ownership dispute and refinanced a MHC with a compli- cated and evolving ground lease arrangement within the specified 35 days. If we cannot arrange Agency financing, we have the option of providing a loan from our balance sheet or brokering a deal with life companies. Access to this kind of expert, resourceful funding can be a differentiator for investors in today's MHC market. For more information about how we can help you with your MHC financing, contact Damon Reed, Senior Vice President of Originations, Capital One Multifamily Finance, 205.769.1419, damon.reed@capitalone.com, or Monica Schroeder, Vice Presi- dent of Originations, Capital One Multifamily Finance, 205.769.1427, monica.schroeder@capitalone.com. Economic and Demographic Trends Draw Investors to MHCs Damon Reed According to the U.S. Census Bureau, homeownership crest- ed in mid-2004 at 69.2 percent. In 2016, homeownership rates fell to 63.5 percent, their lowest in 30 years, driven by declines by the two largest cohorts: millen- nials and baby boomers. T J guest editorial