MHRV Industry Insights
November 2022 | CPX Insights
by Tyson Cross — Director, Manufactured Housing
As we follow the 10-year treasury during the last 10 to 12 months and the subsequent interest rate hikes that have followed, it is hard to imagine that the manufactured housing (MH) market would slow down, given its roaring demand since COVID sent it into the upper echelon of commercial real estate. While other asset classes struggled to keep delinquency rates from skyrocketing, MH was among the lowest sector in delinquency rates across the board. This, along with the increased publicity of the asset class, propelled sales and values upward, while cap rates and rates of return dropped even lower. This created a record-breaking year in 2021 for MH investment sales.
Similarly, 2022 began as strong as 2021 had finished, and although we have seen the fastest interest rate hikes in years, it is turning out to be another strong year for the industry. Although the first three quarters provided strong sales volume in California, Oregon, and Washington, the fourth quarter thus far has seen a steep decline in sales volume. In 2021, the three states combined had a sales volume of $1.03B with MH community sales that were 30 spaces and up. In the first three quarters of 2022, that number declined dramatically and did not keep pace at $312M. In the fourth quarter, we are on track to see north of $211M in sales volume. Despite this, year-over-year volume is expected to decrease by 49% from 2021. As we round out 2022, here are three trends to watch as we head into 2023:
Values Will Adjust
As we head into 2023, pricing has only just begun adjusting and likely will continue to adjust further into the year with elevated interest rates; however, this is a slow change. According to Greenstreet Commercial Property Price Index, MH has only decreased by a total of 7% in the last 12 months, as of Nov. 4, 2022. This is compared to a 13% drop across all commercial property asset classes this year. We are seeing this firsthand in our markets as evidenced by our offer price to list price which has decreased by more than 20% this quarter, which is indicative of buyers’ expectations and their willingness to pay top dollar, while owners are still holding on and not ready to adjust their expectations to meet buyers. As expected, we will continue to see a stark difference between the two until interest rates begin to normalize.
Strong Investor Demand Remains
Although pricing will likely adjust downward because of rising interest rates, demand for MH communities will remain strong. Since 2017, MH community sales increased year over year by 13% percent. Price per space in West Coast states showed year-over-year increases of 3.5% and 2.3% in 2021 and 2022, respectively. We expect sales to continue, albeit maybe involving a bit more creative financing, until pricing expectations on the Seller’s side adjusts.
Strong Customer Demand Continues
Total MH shipments across the country have continued to climb every year for the last four consecutive years and the demand for affordable homes will continue. Although shipments have slowed in the last two months, there is the expectation that strong demand for these homes will continue in 2023 as investors look to fill vacant spaces in MH communities. Affordable housing is still a drastic need in the United States, and will continue to be as expenses rise, with October showing 7.8% year-over-year inflation, compared to 6.8% as of October 2021, and 1.2% as of October 2020.
While interest rates and inflation are higher than we’ve seen in years, the forecast for MH is strong. The demand for affordable housing, coupled with the predictability of returns for investors, makes this asset class a viable option in the future.