Nearly all sectors and geographic regions of the American commercial real estate market have experienced decreasing sales activity and rising capitalization rates since the middle of 2022 and throughout 2023. There seems to be a disconnect between buyers and sellers resulting in this period of inactivity, whereas buyers are ready to purchase at discounted sale prices using higher capitalization rates while sellers are not quite ready to give in. This misalignment of pricing expectations among investors from both sides of the table has caused commercial real estate markets to slow to a crawl.
Despite the sluggish state of the market, there is a bright spot. While retail and office sectors are being hit harder than most since 2020, manufactured home park properties have prevailed as one of the more stable commercial real estate investment options. This is primarily due to the high demand for affordable housing options across the country, leaving most manufactured home parks with little to no vacancy. This was also evident during the Great Recession of 2008/2009, as manufactured home park properties performed as well as ever.
Due to the current demand for affordable living options, the Biden administration introduced a housing supply action plan in 2022 which aims to support the construction and preservation of affordable housing in order to create a more equitable housing market. Freddie Mac, a government sponsored mortgage corporation, also revealed plans to make loan purchases on manufactured homes more accessible. These initiatives will likely encourage manufactured home park development and demand.
On a microeconomic level, many municipalities across the country have turned toward regulations favoring development and prosperity of manufactured home parks. While many California cities already have rent control regulations for manufactured home parks in place, states like Delaware have recently created state-wide regulations requiring rent increase justification and other further hurdles for property owners. Rent control regulations typically encourage tenants to inhabit spaces for extended periods of time, since their rent can only increase a certain amount per year. While this may appear to hurt a manufactured home park investor, it can also be seen as a way to keep vacancy low and demand high. Rent control also protects property owners against inflation in a way.
While rising capitalization rates are no secret in all commercial real estate sectors, manufactured home parks appear to be among the least affected. Market participants throughout the country have reported rates rising anywhere from 50 to 150 basis points for manufactured home park properties in the past year. While this may seem extreme, office and retail properties have experienced more drastic changes.
Of course, manufactured home parks within high-performing markets such as the San Francisco Bay Area, California will fall at the bottom end of this range while properties within lower-performing, rural areas would be near the top. The western region is the highest performing in the country, followed by the Southeast and Gulf Coast. Midwest registers last with notably high vacancy rate as of Q2 2023.