Supply and Demand
The primary drivers of this sales activity are the usual suspects: supply and demand. In the past couple decades, the cost to develop new manufactured home communities in Oregon (and most of the U.S.) has risen to the point that it is impossible to generate a compelling financial return with a newly constructed park. Add to that the number of parks that are closed, or redeveloped to other uses, and it's clear that we operate in a market with a very restricted current supply - and no future new supply.
Meanwhile, demand for parks is climbing.
According to United Van Lines, Oregon is the most-moved-to destination in the United States for the past two years. If you are buying or selling real estate in Oregon, you likely already know this! People really want to live here.
The Multifamily NW Apartment Report released this spring shows falling vacancy rates in every Oregon/SE Washington market it surveys. Vacancy in Portland/Vancouver, Salem, and Eugene averages just under 3%. Bend is seeing 1.5% vacancy rate... and dropping!
Another recent factor driving demand is the influence of Wall Street and investment fund managers. In 2003, Berkshire Hathaway purchased Clayton Homes and inserted its influence in a big way; designing, building, selling, and financing manufactured homes. This single event began to alter the perception of investing in manufactured home communities.
Fast forward to now: the largest private equity group in the U.S. -- the Carlyle Group - is investing in mobile home parks; Sam Zell, the billionaire American business magnate, is the largest owner of mobile home parks in this country; and Clayton is still crushing it as the largest source of new modular and manufactured homes in the nation.
We've seen out-of-state interest surge right here in our market: At Western Equities, we've closed on $11,000,000 of mobile home park sales in the past year - with just one of our buyers! This buyer is a private equity fund manager, and he has another $10,000,000 committed in offers or pending sales with us. High-power investors like this have, collectively, a tangible effect the mobile home park sales market.
Effect on the Market
Not surprisingly, the limited supply and growing demand for parks has pushed sale prices up, and Cap Rates down. Prices up, and Cap Rates down? That's a seller's market!
"Cap Rate" is short for Capitalization Rate, which is the rate of return if an investor were to pay cash for the purchase price. Cap Rate is the most important initial indicator of the return on investment a property will produce. The formula to determine Cap Rate of a property is Net Operating Income (NOI) divided by Purchase Price.
Cap Rates vary widely with the unique nature of mobile home parks - and reliable cap rate data is available for only about half of the parks sold on the market. Investors and brokers in today's market are seeing steady cap rate compression in a majority of Oregon markets. For healthy parks in strong locations, the Cap Rate range in 2010 was typically between 7-8 _ %. Today, those parks tend to sell at 6 to 7% Cap Rate, or even lower.
One recent sale really affects the 2015 YTD Oregon Cap Rate and price per space averages: Songbrook, a 140-space, award-winning manufactured home community sold on June 10th for $13,800,000 - a stunning $98,571 per space, and a 5.0% Cap Rate! Songbrook was developed and sold by Troy Brost, a noted industry expert who has been a past board member and president of MHCO.
Large parks tend to be well-capitalized, in larger towns or cities, with very low vacancy, less collection loss, fewer deferred maintenance issues, and a significant management operation. Essentially, there is lower investor risk, so the returns are smaller.
Nationally, big funds managers and institutional investors are looking to 'park' multiple millions of dollars, and because of low returns in other investment options, that money is increasingly used to invest in manufactured home communities. Even private investors are rolling large into Oregon parks - i.e., the reported buyer of Songbrook. This demand is significant in driving prices up, and pushing returns down.
The value of smaller parks is increasing as well. Currently in Oregon, there are about 15 smaller (less than 100 spaces) parks listed for sale, with Cap Rates that are advertised between 6-12%. This wide range indicates the diverse nature of smaller parks, which are often very different from each other.
Price Per Space is another interesting indicator when looking at property values, but there is such huge discrepancy when comparing parks - especially smaller ones - that Price Per Space is generally a secondary calculation. Currently, there is an RV park on the market at $6,000 per space, compared with nearly $100,000 per space in the Songbrook sale.
Both of these are extreme examples; a more 'typical' Price Per Space range is $30-60k, and is influenced by many factors singular to that property.
Pricing your park correctly is critical to selling promptly. There are several parks on the market that have been available for multiple years - clearly priced incorrectly for their market.
Consult an experienced park broker. It's our job to know the many parks and markets that exist, and to personally know many of the sellers, buyers, brokers, lenders, vendors, and other industry people that collectively affect the value of Oregon parks. There is a ton of activity right now, and not all of it is apparent to investors without deep connections in the mobile home park industry. There are a lot of interesting and very relevant histories out there that inform our opinion and strategy when selling parks!
Keep an eye out for my next article: "Buying and Selling MH Parks in a Hot Market".
Ty Downing is a licensed real estate broker at Western Equities, and a mobile home park investor. Ty and principal broker Randy Smith own a combined total of nearly 400 spaces in 8 parks, and specialize in mobile home park sales across the western United States. Contact Ty at 503-653-3887.
Ty Downing
Associate Broker
W
Western Equities
Multifamily and Mobile Home Park Investing
3215 SE Raymond St.
Portland, OR 97202
Tel: 503-242-0033
Fax: 503-281-4054
Cell: 503-653-3887
tydowning@westernequities.com
