Thank you George Allen for identifying a critical problem in the MH industry. I’m responding to your “We’ve Got a Problem” blog with an unequivocal “Yes” response. We officially have a problem!

A number of transactions have recently hit the market that suggest an irrational exuberance in MH that is neither informed, nor healthy. There are a very, very large number of new fund managers (I probably talk to 1-2 of them every week, in support of our third-party offerings) who are highly-attracted to the yields in our space, but don’t have a basic working knowledge of the business. They’re literally coming out of the woodwork, and they’re also making a premature commitment to the space before they even understand it. This reminds me of the ARC, Value Family Properties days….it’s 2005 all over again. We’re over-heated. When the market thinks a 6 cap is an acceptable price for a 1960/1970’s, 3-star “vintage” community – we’ve lost our way.

Everyone who has owned those properties understands that there is a silent regulator to profits called obsolescence – it’s definable, it’s measurable and it has to be rationalized over time. You have to invest heavily in older communities – churn old inventory, upgrade mechanicals, upgrade infrastructure –  just to maintain your current income levels. That doesn’t even consider the cost of NEW improvements and NEW homes. Everyone wants to focus on the former, but forget about the latter.  The barometer for an OER in older communities isn’t 40%…it’s closer to 50%…maybe even 55% if you’re digging deep. And that doesn’t consider the true cash impact on capitalized expenses.

I am not suggesting that re-development isn’t viable. On the contrary, I think it can be very lucrative and very rewarding. But when the delta between interest rates and cap rates falls below 2%, you’re in negative cash flow territory on anything that isn’t running like clockwork.  The market is currently rewarding vacancy almost more than occupancy. As an operator just commented to me last week (one who just received an over-ask offer on four properties), “People are paying me more to sell my vacant lots than they are paying me for the full ones”. It’s 100% true.

Taking my example of ARC and Value Family Properties….those models were predicated on buying and operating older communities on razor-thin margins while growing occupancy with (largely) low-end homes – it was simple financial engineering with no backbone. There’s more hungry money on the sidelines than was the case 15 years ago and we’re now a legitimate asset class – conditions that are only making the run-up more acute and more accelerated.