Family offices looking for a hedge against inflation should consider the most stable segment of the real estate market, the author of this article argues.

The following article comes from Jefferson Lilly, founder and managing partner of Park Avenue Partners. He addresses a type of real estate asset that family offices might have overlooked. In an age when inflation is a big headache for asset allocators, and when some asset values look strong, what options are there? The author attempts to answer the question. (More on Lilly below.)

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Family offices looking for a recession-resistant opportunity to diversify portfolios may have overlooked a low-risk exposure to a real estate sector that has steadily outperformed higher profile investments such as hotels and apartments. While it might sound counterintuitive, there's money to be made in mobile home parks.
 
Increasingly, family offices are getting wise to the investment potential that mobile home parks offer. It's still early days, but with investor interest increasing, the next few years look like the end of this ground-floor opportunity.
 
The reasons are varied, but let’s start with the obvious: People need places to live. While economic downturns inevitably impact the housing market, mobile home parks have proved to be much more durable than more glamorous sectors of the real estate market. This was demonstrated most vividly during the 2008 to 2009 housing recession – and that was a recession centered on the housing market.
 
The fallout from the subprime mortgage crisis saw site-built homeowners face foreclosure, renters decamp to cheaper dwellings, and new construction starts go unfinished or languish in vacancy.
 
Such was not the case with manufactured housing. The three publicly traded REITs specializing in mobile home parks handily outperformed other asset types in the real estate sector. They had their highest-ever funds then from operations during the housing crisis. Since 2009 the MHP REIT sector has returned 22.0 per cent annually, while the average REIT has returned 11.6 per cent annually.

Mobile home park REITs similarly performed well during the Covid pandemic. The sector’s annual FFO increased 12.6 per cent from the year prior to the onset of Covid, to the first year during Covid, and the sector’s stock prices are up 39 per cent.
 
The inflation factor
Inflation is part of the story as well. Inflation concerns are weighing heavily on family offices but buying into funds with holdings in mobile home parks generally means buying into a highly leveraged investment with fixed-rate debt where the single biggest expense is money. In an inflationary environment, mobile home rents will keep pace with inflation, while the cost of debt will remain constant (these costs will decrease in real terms). This means that investments in mobile home parks tend to produce what economists call real economic returns, where gains outpace inflation.
 
Another distinctive feature of the mobile home park sector is that supply is fixed. There is no federal law amounting to a blanket prohibition on building new mobile home parks, but virtually every city and county nationwide has revised their local zoning ordinances such that there might as well be. One can find isolated instances of perhaps 20 new parks being developed each year, but those are the exceptions. It is far more common to see existing parks being closed and redeveloped into other types of more expensive housing, self-storage facilities, or some other use.
 
The fixed and even shrinking supply of mobile home parks means that the overbuilding that plagues hotels, office buildings, apartments and most other real estate sectors, will likely never afflict manufactured housing. The lack of new MHP construction stabilizes rents and occupancy in this sector.
 
Of course, that also means that mobile homes are not a sky's-the-limit profit opportunity. With virtually no new inventory coming into the market, there is a hard cap on the potential for growth. Nevertheless, rents for existing mobile homes are increasing, and will likely continue to do so, particularly in an inflationary environment. But another major factor involves the management of the parks themselves. The fact is, many parks today are run by undercapitalized mom-and-pop operators who are unable or unmotivated to invest in improving their communities.

Caveats
Family offices considering investing in mobile home parks need to be careful. Not every management company knows what it's doing or has the experience to successfully rehabilitate a mobile home park. Fees also vary widely in this space, so investors should study prospectuses carefully to determine how much of their investment would actually go to sponsor fees versus actually acquiring real estate.
 
And while some may see a stigma associated with mobile home living, well-managed mobile home parks can also be a social good. Professional management will rehabilitate undermanaged mobile home parks, making them safer, more vibrant communities, while also bringing more affordable housing to the market. Layer that on top of the growth opportunity and the inflation hedge, and it's an intriguing asset class.

About the author   
Jefferson Lilly is founder and managing partner of Park Avenue Partners, a fund which invests in buying and upgrading mobile home parks.