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Welcome to the Mobile Home Park Mastery Podcast where you will learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks! Your host is Frank Rolfe, the 5th largest mobile home park owner in the United State with his partner Dave Reynolds. Together, they also own and operate Mobile Home University, the leading educational website for both new and experienced mobile home park investors!
If you're from Texas, you've certainly been in one of the Galleria malls. There's one in Houston, there's one in Dallas, and those are owned by Gerald Hines. And Hines has become a national firm. They do a lot of very high-end properties, but they also do some lower-end stuff. And today they operate about $100 billion of real estate assets. And they also produce a newsletter called Hindsight. Clever title. And in their latest issue, they had some great quotes on the issue of supply. And the title of that latest issue is 'The Scarcity Advantage.' And that's a title that really is very applicable to the mobile home park industry. This is Frank Rolfe with the Mobile Home Park Mastery podcast. We're gonna talk all about supply and scarcity and how this one factor has allowed mobile home parks to leapfrog over apartments and really almost all real estate as the gold standard of investing today.
So let's first look at why scarcity is such an important issue. Well, we all know about supply and demand. I was an economics major in college. It's probably the very first fundamental formula that you learn in economics. When you have limited supply and high demand, values go up. When you have unlimited supply and steady demand, values still go down. And that is where mobile home parks and apartments have nothing in common. It's all in the area of supply. Let's look at the statistics for a minute. There's only about 44,000 mobile home parks in the United States, but there are 5.2 million apartments. That's a hundred-for-one more apartments than mobile home parks. And on top of that, there are roughly 600,000 new apartment units built every year in America. But mobile home parks are in fact shrinking in supply. There's probably about 200 mobile home parks less of those 44,000 at the end of each year, thanks to people buying mobile home parks and redeveloping them into other uses. So whereas apartments always have more supply coming on the scene, mobile home parks have flat or less supply every year. And as was stated in the Hines newsletter, opportunities appear when demand is durable and future capacity has been hardest to deliver.
Now, Hines is talking probably about all the different sectors that they own, of which mobile home parks are not one, and how values have plummeted in things like office and retail and are being challenged, to say the least, in their apartment sector. Apartments right now are running at about an 8% default rate, according to current stats in conduit and Fannie Freddie loans. Mobile home parks, less than 1%. And I would venture to guess that one big reason that apartments are having trouble servicing their loans and mobile home parks are not, ties back to this issue of scarcity. Because apartments are forever challenged by oversupply, while mobile home parks never have to worry at all about supply. But what's also important to remember is demand. Hines says that demand must be durable and future capacity hard to deliver. So is mobile home park demand truly durable? Well, I would say certainly it is. Affordable housing demand is giant in America. Remember that we're a nation in which 10%, the top 10% of American households, are currently doing 50% of all consumer buying. So the other 90% are clearly in trouble because their percent of the economy has never been lower. They're all having great difficulty making ends meet with all of their many obligations.
And as a result, anytime someone can find a cheaper way to live, they're all in. And affordable housing has no possible sign of ending. It's going to be one of the big topics today, a decade from now, probably even 100 years from now. So definitely the demand side of mobile home parks always remains constant. And also when the economy gets worse, the demand for affordable housing still goes up even higher. And I know many people have been snowed by all of this media that the economy is fantastic and it's gangbusters, but we all know it's not. Statistically, the stock market has never, ever in history, not since the Great Depression, not during dot-com, it's never been so overvalued. Our whole nation is long overdue for a recession. We've always had them every eight years. Right now we're running almost 20 years without one. And when that hits, I don't know when it will be, maybe after the midterms, then the economy will crash, which will only make the demand for affordable housing go even higher.
And when you have high demand and a low ability to create supply, what happens? Well, your rents go up. That's what happens. Because as you have more people needing something under supply and demand, then that makes the rents go up, which we've all seen over and over again with the mobile home park industry. And cities are never going to allow new construction of mobile home parks. This is one of the big issues if you look at apartments and mobile home parks as a battlefield. The problem is that most cities look at apartments as a good thing. They say, "Oh, apartments, that's something we want more of in our town or our city." And they give out permits freely. You rarely see an article on the zoning of an apartment complex being turned down. But if someone merely mentions even a mobile home park expansion, just a few lots, what do you then see? Nothing but negativity. Unanimous decisions by city governments. No, there's no way we want more mobile home parks. So our supply is never going to go up. Apartment supply always goes up whenever apartments want to build new units. And typically in hot markets particularly, there's always someone out there who wants to build a new complex. So the number of units coming on the market is just constant.
But since cities and towns, even my small town of Ste. Genevieve, Missouri, doesn't allow it, nobody allows new trailer parks to be built. And that keeps the supply very, very constant. So what does it all mean when you add it together? Well, what's happened is mobile home parks, because of this one issue, this issue of supply and the blockade against new mobile home parks, has leapfrogged over apartments in almost every way. Lower loan default rate, easier to get loans, and then values. Mobile home parks today often still trade at cap rates which are inverted to interest rates. It's not uncommon to see mobile home parks sell in highly desirable markets for as low as 4 caps, but in average markets even at 6 caps. And why is that? How can they do it? How can mobile home parks right now sell at lower cap rates than apartment complexes do, often by a point or two? And the main reason is scarcity, because the buyers know if they buy a mobile home park at a 6 cap, they'll be able to continually grow the rents annually, which is something that apartment developers cannot say. Apartment rents in many markets right now have been flat or down, and occupancy has declined. Why? Only one reason. Not because people didn't need the apartments, but they oversupplied. When you're in the apartment industry, it's like having a styrofoam cup with a hole poked with a pencil in the bottom and you're putting it under the faucet trying to get a drink, but as fast as the water's coming in, it's going out the bottom. It's hard to really get a good drink from doing that. But a mobile home park, well, that's like having the styrofoam cup with no hole in the bottom.
And that's why mobile home parks tend to oversupply, oversaturate your financial needs, because you don't have to worry about that dreaded concept of oversupply. Now, are there any other sectors that have this unique and highly desirable supply and demand issue? Well, I'd say there really are two others, but they're not really a part of traditional commercial real estate. One is landfill. Landfills are the rarest animal on the earth in the U.S. There's only 3,000 landfills in America, and it's literally impossible to get new permits without massive, massive backlash and literally decades plus of environmental and other issues to be navigated. So landfills, okay, those things are scarce and they have steady demand, so I'll give you that. And then you have cemeteries. There's about 144,000 cemeteries in the U.S. They're really hard to get permits for if you wanted to build a new one, so that's very, very tough. But again, cemeteries are a very complex real estate game, one that people have tried to assemble in the past but didn't do very well at it. But when you take landfills and cemeteries out of the picture, the only thing remaining which has our unique supply issue are mobile home parks. And that's why mobile home parks currently outperform and will continue to outperform apartments for years to come. This is Frank Rolfe with the Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.