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, life companies offer unique capabilities such as locking your interest rate at application, and customized combinations of loan terms, amortizations, and prepayment options. Every year, one or two more life insurance companies decide to enter the MHC lending space, as they take notice of the excellent performance and consistency of cash flow within the asset class.
Fannie Mae and Freddie Mac (the “GSE’s” or Government Sponsored Enterprises) both had record years in 2017, eclipsing $134 Billion in total loan originations per the Mortgage Bankers Association. The GSE’s are charged with ensuring that capital is available to providers of affordable rental housing, including manufactured housing. The competition between the two GSE’s to garner market share has resulted in more aggressive underwriting, and an appetite to lend on MHC assets that would not have qualified for GSE financing just a few years ago. This bodes well for MHC owners and buyers, as both Fannie Mae and Freddie Mac have expressed their desire to originate even greater MHC loan volume in 2018 than they did last year. Both GSE’s continue to offer very attractive fixed and floating rate loans, supplemental financing (additional loan proceeds as the property’s cash flow increases), and up to full term interest-only payments.
Life insurance companies and the GSE’s can offer forward rate lock options, allowing a borrower to lock in a loan commitment and fixed rate as far out as 12 months in advance of the desired funding date. This is an important feature, particularly as interest rates have continued to climb over recent weeks. As of February 16, 2018, the 10 year US Treasury yield stood at 2.87%, compared to 2.35% on December 15, 2017. If you have a loan maturity coming up sometime in the next 12 to 18 months, and are concerned about rising interest rates, this would be a good time to start evaluating your financing options and considering whether a forward loan commitment makes sense for you.
CMBS/Conduit lenders continue to offer non-recourse financing solutions at aggressive leverage and competitive rates for MHC’s that would not qualify for GSE or life insurance company financing. Commercial and regional banks and credit unions offer interesting shorter term loan options for MHC owners, with fixed or floating rates and flexible prepayment structures. Recourse requirements have lessened, as many banks are offering partial recourse (often with burn-offs) at traditional leverage. Many banks will offer non-recourse financing for low leverage loan requests.
One of the most interesting developments of the past year has been the increasing competitiveness of debt funds and mortgage REITs in the MHC space. These are balance sheet lenders that offer higher-leverage specialty and bridge financing, and are aggressively deploying capital at very competitive interest-only rates. These capital sources are being utilized more often for MHC acquisitions where repositioning and value-add opportunities exist, and higher loan proceeds make sense.
The capital marketplace is crowded with sources for money, which is positive for borrowers but can be complicated and confusing. It’s important to work with a lender or intermediary who understands the market and is experienced in MHC transactions. The key to success is aligning with the right capital source and program for your specific objectives. Most often this selection requires vetting multiple sources, with consideration of the profile, age, quality, and location of your community, as well as your loan feature preferences and financing goals. Today’s robust marketplace for income property financing, combined with preparation and sound guidance, should make for a very productive 2018 for community owners and investors.
Zach Koucos is a Senior Director at HFF and is responsible for originating commercial real estate financing throughout the U.S., with a specialized practice in MHC and RV Resort financing.HFF offers financing from over 50 Life Insurance Companies, Fannie Mae, Freddie Mac, Banks, CMBS/conduits, and Debt Funds. HFF continually ranks as one of the top financial intermediaries for commercial real estate in the U.S.Zach can be reached at the following:
4350 La Jolla Village Drive, Suite 450, San Diego, CA 92122