By Zach Koucos, Senior Director, HFF
The financial headlines during the first few weeks of the new year were dominated by political, stock market, and interest rate volatility. Nonetheless, 2018 is positioned to be another very strong year from a real estate capital markets perspective. Providers of capital across the industry are planning to match or exceed their lending and investment volume from last year. 2017 saw the manufactured home community (MHC) industry continue to benefit from a growing shortage of affordable housing in markets across the United States. Furthermore, demand increases have outpaced supply for MHC assets, a trend that should continue throughout 2018.
Most investors and capital providers believe that 2018 will be an excellent time to consume and deploy capital, either by selling assets, acquiring value-add acquisitions, or taking advantage of attractive fixed and floating rate financing. Capitalization rates (the rate of return) for well-located, quality manufactured home communities remain aggressively low, as relatively slow deal flow cannot keep pace with the amount of desired equity deployment from institutional and private investors. Thus, we continue to see more flexible investment strategies across the board, as groups struggle to deploy a plentiful amount of capital.
As an example, we have seen institutional and private investors with a traditional focus on Class A (top quality) MHC's in major U.S. metro areas expand their focus to include Class B and C properties in these same markets, or in secondary or smaller U.S. markets. The continuing disappearance of distressed acquisition opportunities, and the unwillingness of owners of Class A MHC's to sell, has forced certain investors to look at value-add deals that require more complex business plans to achieve acceptable investment returns. Buyers acquiring MHC's are still benefitting from very attractive fixed and floating interest rate financing, and interest-only payments, which help support higher transaction price points. Furthermore, investors understand that most assets will continue to benefit from additional revenue growth over the course of the coming years, and are often willing to factor this growth into present day valuations.
From an MHC financing perspective, liquidity continues to increase and various capital sources are showing more flexibility and aggressiveness as they try to keep pace with their dollar volume allocations. This translates to a very favorable financing environment for owners and buyers of MHC's. Life insurance companies are generally increasing real estate allocations, and can offer extremely attractive non-recourse long term financing solutions (up to 40 years) for owners looking to lock in today's still low interest rates.
We have seen life company lenders reduce credit spreads (the method by which loan interest rates are priced), lengthen amortization schedules, and provide interest-only payment options before amortization kicks in. Since they are on-book" or "balance sheet" lenders
