Issue link: https://read.dmtmag.com/i/720597
By Art Tuverson As we look to the future of the MHC industry, it is rel- evant to first look at where it all started. In the 1960s and 70s the MHC industry was operated almost entirely by in- dividual, 'Mom and Pop' operators who, unlike today, often developed communities from the ground up. In those days there were no large private equity groups or REITs, such as Sun Communities, Equity LifeStyle Prop- erties and UMH Properties. However, as the financial market evolved in the 1980s and 90s, we saw new en- trants into the MHC space that began consolidating large numbers of communities under the same umbrella. At that time we started to experience a general shift in ownership from individual owners to institutional owners who were acquiring large, high quality assets across the United States. Since beginning my career in MHC finance approxi- mately 20 years ago, I have been a firsthand witness to the further acceleration of MHC consolidation under institu- tional ownership. The top 10 largest MHC owner opera- tors now control more than 350,000 sites across the country. The two largest owner/operators have grown tremendously in that time – Equity LifeStyle Properties now owns 390 communities and Sun Communities has grown from only 31 communities in 1993 to 233 commu- nities today. Where they once focused entirely on MHC properties, both REITs have large holdings of RV Resorts located in Sunbelt states. Additionally, we've seen ac- quisitions, mergers and further consolidations of the largest players in the industry. In 2016 alone we've been witness to Sun Communities acquiring Carefree Commu- nities and more recently Singapore Investment fund re- portedly buying Yes Communities. As we look to the future of the MHC industry I don't foresee a slowdown of institutional consolidation. In fact, I believe it will be quite the opposite. Individual owners and mid-tier consolidators (groups owning between 5 and 50 communities) will continue to sell their assets to insti- tutional owners. Many of these sellers will be syndicators or investment funds whose life cycle is expiring or they will be private ownership groups that are looking to exit the business entirely. While this phenomenon will continue to run its course, we are starting to receive calls from pri- vate equity groups exploring the idea of ground-up devel- opment. They are encouraged by an increase product demand from institutional owners and positive economic fac- tors that are driving up the price of existing MH Communities to a point where the returns on new MHC developments are becoming more attractive. While we do not expect to see as many ground-up MHC developments as we did in the 1970's, a shift in new construction will be a welcome sign for our in- dustry and likely bring with it new entrants. MHC Industry Perceptions, Limits & Recognition Although the MHC product is better than it ever has been, it still doesn't seem to garner the same recognition as other property types within the commercial real estate industry. I see the problem being at least three fold. First, the public perception of MHCs is still one of crime-ridden trailer parks rather than safe, affordable housing that many in our industry work to provide. I recently read an article posted in the Wall Street Journal, which highlighted several positive updates in the industry, but it caught my attention for another reason. While the article addressed some of the portfolio sales taking place in our industry, the article's headline image was reflec- tive of the MHC stereotype – an older, pre-HUD singlewide mobile home in what appears to be a 1-star park. Having been familiar with the portfolio in discussion, the photo was decidedly not representative of the home quality in those com- munities. While public perception may be slowly improving, there is still a lot of work for our industry to do. Second, from an investor perspective there is a barrier to entry from the lack of scalable opportunities in our industry…..there just aren't that many $500MM portfolios trading hands. Additionally, today's successful operators are often dependent on capital in- tensive strategies from financing homes, carrying paper, pur- chasing homes/rentals, etc. in order to improve and maintain occupancy. Although the returns have been proven, the costs are significant when compared with other commercial real estate lease-up strategies. The third reason for lackluster recognition is limited supply, which leaves very little room for new entrants in our industry. Imagine if the multi-family in- dustry hadn't developed any new units in the last thirty years; it would look very different than it does today. The lack of new supply has had a muffling effect on investor demand that views the MHC industry as stagnant. For now, the wave of consolidation continues to roll for- ward and net supply continues to slowly decline. Only time will tell if we will again see the right economic conditions suit- able to breathe new life into the MHC industry. PILLAR FINANCIAL The MHC Outlook: How The Product Will Move Into The Future SEPTEMBER 2016 12 THE JOURNAL