Simply put, the CMBS market loves manufactured housing. It has one of the lowest default rates out of all the asset classes and on average expense ratios for manufactured housing are lower than for multifamily by 30% to 45%.

Up until the last few years, the CMBS market has been a significant provider of non recourse debt for manufactured housing, able to compete with the private sector and Fannie Mae, which also did deals in this space. Then in 2014 Freddie Mac entered and the market became much more competitive.

Freddie began blending the manufactured housing loans into its K-Deals for securitization as soon as they were originated because its investor base knew and liked these assets. (Indeed as time would show, adding manufactured housing loans to the K-Deals came to be seen as an enhancement for Freddie Mac by investors.)

The following year Freddie Mac deepened its loan products and, separately, GE Capital — one of the main private-sector lenders — abruptly ceased its lending when its parent company pulled the plug on all of its financial operations. Freddie Mac's hold on the market grew stronger and the CMBS market more often than not found itself losing to Freddie for these loans, according to Shih.

Freddie Mac offers more generous interest only terms and an all in interest rate that is lower, he says. And in general Freddie is more flexible than CMBS, which is by nature very regimented. Another plus is that Freddie can offer supplemental financing down the road if necessary.

The CMBS Market Counters

Recently, though, the CMBS market has been trying to counter by considering RV parks or hybrid manufacturing housing-RV parks, lower quality loans and smaller balance loan deals to be more competitive, Shih says. “They are growing their box trying to do fields that Freddie won't.”

It appears to be working.

The CMBS market has gotten more competitive in the last year, Shih reports. Like the rest of the CMBS market, transactions were challenging in Q4 2016 and Q1 2017 due to larger regulatory and market issues. Since then, he says, “the pace has picked up and we are seeing more buyers.”

A Deeper Pool of Equity

A more obvious change in the sector is that the type of investors interested in manufactured housing has expanded, Todd Fletcher, senior managing director and co-founder of ARA Newmark's National Manufactured Housing Group, tells GlobeSt.com.

For years the buyers were primarily individuals who did little else but invest in manufactured housing on a one-off basis — it was rare to see a portfolio deal. To be sure there was always interest on the part of larger, alternative investors in the space, such as smaller private equity funds or family office shops, for example, according to Fletcher.

“But they weren't winning deals, they were just bidding for them.”

What has changed is that for the last several months, these erstwhile bidders became first-time buyers, at least in Shih's and Fletcher's shop.

Not only are these first time buyers winning deals but one investor is putting together a $20 million equity fund with money from friends and family — country club money as it is sometimes called — to invest in more communities, Shih and Fletcher say. The group will operate the properties as well.

Not Institutional Investor-Ready

As exciting as these developments are, Shih and Fletcher say manufactured housing is not an asset class that can support routine institutional investment.

There have been exceptions, of course.

Last year Denver-based Yes! Communities, a portfolio of opportunistic real estate funds managed by Stockbridge Capital Group, recapped its three manufactured housing portfolios in a deal that has been valued at $2 billion. Stockbridge sold a 71% equity interest in its three manufactured home community portfolios to two global institutional investors, one of which is GIC, the sovereign wealth fund of Singapore. As part of the transaction Fannie Mae provided two credit facilities of $1 billion, making it the largest manufactured housing transaction it had underwritten to date.

Separately, in late 2016 Federal Capital Partners and Horizon Land closed on a $106 million fund dedicated to manufactured housing. With leverage the fund, called Horizon MH Communities Fund I, will have $350 million in total purchasing power.

“Deals like Stockbridge Capital Group's are few and far between,” Fletcher says. “Country club and family office money — that is the deepest source of regular equity in our asset class right now and it will probably stay that way for the foreseeable future.”

Still, he adds, that source has become “shockingly deep.”

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