Are Recession Proof Investments Real?

The year’s 2000, 2008, and 2020 – besides ending in even numbers – all have something else in common.

These were all years marked by major recessions: the dotcom bust of 2000, the Great Recession of 2008, and most recently, the economic crisis sparked by Covid-19-induced lockdowns that saw unemployment reach levels not seen since the Great Depression.

In a recession, the economy as whole contracts marked by rising unemployment and shrinking wages. With less money, consumers spend less on goods and services, with businesses suffering as a consequence.

Naturally, investments also suffer along with the rest of the economy – with very few industries or asset classes left unscathed.

On Wall Street, the stock market lost more than 50% of its value at the bottom of the Financial Crisis and this past March, in the early days of the pandemic, it shed nearly a third of its value. 

On Main Street, many real estate segments track closely with the broader economy. Office, retail, and single-family properties are the hardest hit in a downturn. Retail, professional and business services, IT, and financial services were all in the top 10 industries that suffered the worst during the Great Recession. This had a direct effect on the demand for office and retail space and as people lost their jobs, many were unable to keep up on their mortgages with many eventually losing their homes.

Despite widespread hardships – both at business and personal levels – there always seems to be a handful of industries that thrive during a downturn. During this most recent crisis, Amazon, online conferencing services such as Zoom, and streaming services like Netflix have capitalized on universal lockdowns.

There will always be businesses that thrive during a recession. That’s because life doesn’t just come to a standstill. For the most part, people still work.

Even during the Great Depression when unemployment peaked at 25%, that meant there were still 75% of the population in the workforce. People still need to eat, still need shelter, and still need day-to-day necessities like hygiene products. Procter & Gamble was one of the success stories during the Great Depression. It turns out people still needed soap and toothpaste.

In the world of real estate investments, two segments are not only recession-proof, but that thrive during a recession. 

Those segments are self-storage and mobile home parks (MHPs) / manufactured home communities (MHCs). The resilience of self-storage during a downturn is logical. During a recession, with less income, people downsize and often move in with family to save on housing expenses. With limited space, people turn to self-storage to store their excess belongings as a temporary measure.

As for MHPs, as people cut down on expenses, they naturally seek more affordable housing options. Nationally, the average cost for mobile home living is around $600 per month (including home cost plus lot rental), while the average apartment rent is around $1,100 per month.

Data from this most recent pandemic-fueled crisis demonstrates not only the resilience of MHPs during a recession but their ability to thrive.Compared to multifamily that saw vacancies rise 30 bps (basis points) quarter over quarter and rents shrinking on average of 1.4% during the second quarter of 2020, vacancies in MHPs declined to record levels with rents seeing an average increase of 1.5% nationwide.

The MHP vacancy and rent data for Q2 are amazing given the fact that owners and renters of mobile homes largely fell outside the mortgage and rent protections offered by the Coronavirus Aid, Relief and Economic Security (CARES) ActThat’s because the manufactured homes themselves are considered personal property and not real property.  

There are a variety of factors that support the resilience of MHPs in a recession. Besides affordability, supply and demand are other big factors in explaining MHP resilience. Even before the pandemic, there was an increasing demand for mobile home living. This has a lot to do with the US quickly becoming a renter nation.

The combination of rising rents and rising home prices make it difficult for future home buyers to save for a down payment – making renting more and more the long-term option for people of all ages. Baby Boomers, Echo Boomers (children of Baby Boomers or Gen-Xers), and Millenials are all driving demand as they all choose to downsize and live more simply.

Besides recession-resistant demand, there are a variety of other reasons why MHPs make excellent investments – especially compared to multifamily, other commercial real estate segments, and single-family rentals. Here are a few of the reasons:

  • MHP investments are low maintenance. The investor owns the land and property infrastructure (streets, utility connections, and common areas) and leases the land to homeowners.
  • High tenant switching costs. It costs $5,000-$10,000 for a homeowner to move and reinstall their home into another community.
  • Undersupply. Strict zoning, public perception, and politics limit the number of new mobile home parks being developed. According to PGIM Real Estate research, a unit of Prudential Financial Inc., only 10 new MHCs have been built in the last two decades. Compare that to apartment buildings, where 350,000 new units were built last year. While there’s a never-ending supply of new apartments there is a declining supply of MHCs where not only are new ones not being developed but some of the existing ones are redeveloped into other uses.

In economic terms, high moving costs and undersupply makes MHP demand inelastic. In other words, rents can be increased with little change in demand, which translates to the following advantages of mobile home parks over multifamily and single-family assets as well as most other commercial real estate assets:

  • Higher returns than apartment buildings
  • Recession Resistant Returns
  • Reduced Operating Costs
  • Over Demand / Under Supply Imbalance
  • Minimal Capital Expenses
  • Low Tenant Turnover
  • Tax benefits

Due to being unsexy and boring, MHPs are often overlooked as an investment option. That’s fine with us because they’re reliable, familiar, and always deliver financially – in any economic environment. As the pandemic has proven, MHPs can always be relied on to deliver consistent, reliable income to their investors. Because of the undersupply of MHPs, no other segment can match its income stability in the face of economic turmoil.

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