Investor · Johns Creek, GA · Member since 2017 · 463 posts · 488 votes
How does a market downturn impact the mobile home parks and Multi-Family properties differently? For example, how would an apartment building lose its value in a market crash, and be tough sell? Is it because or a lower NOI due to lower demand, or a higher cap rate?
How would a market crash affect the mobile home parks?
Real Estate Investor · Ste. Genevieve, MO · Member since 2009 · 363 posts · 944 votes
7y
I went through the 2007 market crash, and the net effect on mobile home parks was a spike in demand and higher rents (as our rents mirror the apartment rents, which had a huge run after 2007). Apartments and mobile home parks share the same customer base, so the impact of a national recession is that it forces more people into a rental status, which benefits both sectors. It also damages all real estate sectors by reducing the potential number of lenders (for example, the CMBS conduit market for mobile home parks and apartments disappeared altogether for a while after 2007). If your note came due after 2007, you were in trouble unless you had a low LTV and strong pre-existing banking relationships. Some park owners ended up in a "term default" during this period due to bad luck or the failure to start early enough in obtaining a refinance given market conditions.
The only difference between the two asset classes during and after a recession is that the demand for lower price-point housing costs is higher ($280 national lot rent average in mobile home parks vs. roughly $1,250 per month in apartments) so the phone rings a whole lot more at mobile home parks and the potential to raise rents is much greater given the fact that mobile home park lot rents are absurdly low to begin with, as a result of mom & pop "quantitative easing". Read Charles Becker of Duke University's article on this very topic for greater insight.
Another difference is that Class B/C apartments typically need a huge amount of expensive cap-x to maintain their occupancy, while mobile home parks need a much lower amount since the park does not own the homes (or at least many of the homes in most cases), although this is true whether there is a recession or not.
The final main difference is that apartments sell at much lower cap rates, so there is less cushion in the event of a recession, while mobile home parks still sell about 1 to 2 points higher in cap rate, so you have more flexibility to contend with the impact of a recession, whatever it may be.
Specialist · Scottsdale, AZ · Member since 2014 · 626 posts · 700 votes
7y
@Charlotte Dunford, in addition to what @Frank Rolfe mentioned, the transient nature of apartment tenants creates a much easier path to higher vacancy in apartments, while MHP tenants own their homes and tend to be "sticky" tenants.
And to expand a little further on Frank's cap-x comment, during the last recession there were plenty of apartments with 20% vacancy or more, simply because the ownership didn't have the resources to do the capital improvements necessary to attract tenants. Even if they lower the rent to bump occupancy, the net result is the same as it relates to NOI.
Also, it is more likely to see apartment tenants moving to a mobile home park to reduce their cost of living, than the other way around, so mobile home parks tend to have higher demand when everyone is seeking more affordable living.