This blog post is one of a series excerpted from Aaron Quach’s white paper on rental housing, available at the link above. For other posts in the series, click here.

The vast majority of institutional real estate portfolios are invested in the rental housing sector in some form. The rental housing sector is unique in that it fulfills the basic human need for shelter and therefore benefits from a certain inelasticity of demand not found in most other property sectors.

The rental housing sector is comprised of several different housing types serving various segments of the market, including market-rate multi-family apartments, rent-regulated multi-family apartments (“affordable housing”), manufactured housing communities, single-family rental homes, student housing accommodations, and senior housing facilities.

This blog post will detail issues for institutional investors regarding manufactured housing. Other blog posts will examine the additional sectors as well as implementation issues faced by all of the housing types categorized under the rental housing sector.

Manufactured Housing: What It Is

Manufactured housing refers to a structure that is built in a controlled environment to the Manufactured Home Construction and Safety Standards and transported in one or more sections on a permanent chassis, according to the U.S. Department of Housing and Urban Development. Many modern manufactured homes closely resemble traditional single-family homes, featuring multiple bedrooms and outdoor spaces, and are often affixed to concrete foundations. These homes can be placed on individually owned land or rented plots within manufactured home communities.

Despite misconceptions, most manufactured homes are not actually mobile, with around 80% remaining in their initial locations. If a tenant moves or gets evicted, it can cost from $5,000 to $13,000 to transfer the home to a new site, according to Forbes, an amount that many residents cannot afford. For residents, the economic dynamics of manufactured homes combine elements of both renting and homeownership. The average cost of these homes is approximately 24% of the overall cost of a traditional site-built single-family home, according to the U.S. Census Bureau, a significant discount that offers homeownership to individuals that otherwise would not be able to afford to own their own home.

While in some cases tenants may rent both the home and the land beneath it, manufactured housing residents typically own their dwelling while leasing the underlying land and paying to hook up to utilities in a manufactured home community. As a result, they are generally unable to participate in land appreciation and cannot finance these homes with traditional mortgages. Instead, residents must secure higher-interest personal property (chattel) loans. Manufactured homes typically offer the most affordable unsubsidized housing in many markets, and their resident retention rate is notably high, with an average of 13 years compared to 3-5 years for other rentals, according to the Consumer Financial Protection Bureau.

More than 21 million Americans—or approximately 7% of the population—live in one of the more than 43,000 manufactured housing communities in the U.S., according to the Census Bureau. The quality of these homes and the communities where they are located vary widely, spanning areas resembling conventional residential neighborhoods to more stereotypical “trailer parks.” Approximately 25% of the manufactured housing market is dominated by a handful of institutional owners, including public REITs, real estate private equity firms, and private owner-operators; the remaining 75% is fragmented across other private owners, which tend to be small “mom-and-pop” owners, according to Census Bureau data.

The investment thesis for the manufactured housing sector is based on an acute shortage of affordable housing in the U.S., where manufactured homes offer naturally occurring affordable housing for lower- and middle-income families, as well as retirees on fixed incomes. Manufactured homes are a low-cost alternative to other types of rental housing, costing approximately 40% less than multi-family, single-family, and duplex housing, and approximately 75% less than traditional single-family homes, according to the U.S. Census Bureau. The sector has historically faced less new supply risk than other rental housing types due to restrictive zoning and community resistance to manufactured housing communities. As a result of these factors, in addition to the resident ownership model, there tends to be lower turnover of tenants in manufactured housing relative to traditional apartments.

Demographic drivers for manufactured housing include the aging population, which continues to support demand for manufactured housing communities that are reserved for residents at least 55 years old as well as non-age-restricted communities whose general affordability appeals to retirees on fixed incomes. The size of the cohort of seniors between 55 and 79 has increased from 68.7 million in 2012 to 86.7 million in 2022. Looking ahead at the most recent projections by the U.S. Census Bureau, this cohort is projected to continue to increase. In addition, affordability challenges in both traditional homeownership and apartment rentals is expected to continue to support demand of other residents between the ages of 18 and 54.

Institutional investors have very limited investment options for allocations to dedicated manufactured housing funds. Aside from just a handful of closed-end value-add funds, investors may gain exposure to the sector through diversified funds, including open-end core/core plus funds investing in stabilized communities as well as non-core funds targeting portfolio aggregation strategies or taking on lease-up or renovation risk.

Notably, some large institutional investors, including public defined benefit (DB) plans and sovereign wealth funds, have taken a more direct approach, investing in joint ventures with leading operators. Manufactured housing development opportunities are few and far between due to the challenges in achieving zoning approvals and overcoming community opposition. Institutional investors should be aware of the potential headline risk associated with investing in manufactured housing, as several of the largest institutional manufactured housing operators have faced public scrutiny and legal challenges due to the displacement or eviction of vulnerable tenants in manufactured housing communities.