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The commercial real estate market is in turmoil. Some sectors are experiencing more distress than others, but most have lost value.

Rental rates are mostly flat or declining, and demand is not what it once was. As interest rates have risen, new loans and refinancing aren’t effective, and because properties have lost value, there’s even more potential for distress as loan maturities loom.

While this is all taking place, one sector has experienced little to no impact. But before we explore this single sector that is still performing well, let’s look at the distress in each of the other sectors:

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Office

Office buildings are facing the most significant challenges in the current environment. The demand for office space has greatly diminished thanks to factors such as the rise of work from home employment and advancements in technology that allow people to work anywhere. The vacancy rate in office buildings across the country stands at approximately 50%, with no relief in sight.

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Retail

The retail sector is suffering a similar fate, although not to the same degree. Online sales have dramatically impacted the sustainability of physical retail space. Massive shopping malls are operating at a 50% vacancy rate. A staggering number of retail stores have closed, with the likelihood of that trend continuing.

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Self-Storage

Once considered recession-proof, the self-storage facility has experienced decline, primarily due to oversupply. Unlike other real estate sectors, self-storage facilities face no zoning or cost barriers, allowing them to be built on almost any corner or parcel for a low cost per unit. This abundance of cheap supply has devalued the sector, causing a decline in rents and occupancy without any pending signs of improvement.

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Industrial

Like self-storage, the industrial sector has been flooded with a surplus of newly constructed buildings, creating an excess supply compared to the demand. The ability to thrive in the industrial building sector relies heavily on the age and tenancy of the building. Numerous outdated industrial structures lack the intrinsics for modern warehousing or are in unfavorable locations for a successful business. The favorable dynamic in this sector is that there remains a degree of demand.

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Apartments

Although the apartment sector has the potential for resilience due to its role as a basic housing need, this sector is experiencing distress as well. Rental rates in prior years have climbed to unaffordable levels and are now flattening or declining in many markets. As with the storage and industrial sectors, apartments have experienced an abundance of new supply in recent years, with a significant number of new units scheduled to hit the market in 2024.

This has led to higher vacancy rates and a transient attitude from tenants, who are willing to move to achieve lower rental rates or higher quality. To attract and keep these transient tenants, apartment owners are forced to offer incentives and inject significant capital to upgrade their buildings.

Declining demand, oversupply, advancements in technology, and higher interest rates have contributed to distress in most commercial real estate and, in some cases, plummeting value. It is probable that many properties are now worth less than their underlying debt. Adding fuel to the fire, some of these commercial loans have looming maturity dates. Tighter lender underwriting will force property owners to bring additional capital to the table to secure a new loan or risk losing the property to the lender.

Now let’s compare the above dynamic to the one sector that remains unaffected: Mobile Home Parks.

Evaluating Mobile Home Parks Against Struggling Market Sectors

Often disregarded by main street investors due to the “trailer park” stereotype, mobile home park investments have proven again to be the most resilient sector in commercial real estate. As the most affordable housing option, the demand for mobile homes is higher than it has ever been. What sets them apart from other housing is their remarkably low rental rates. Rates in the mobile home park investment sector could double or more and still be comparatively inexpensive, so rent growth remains a high probability in this market.

Moreover, mobile home parks essentially function as giant parking lots for manufactured homes that are owned and maintained by the residents. This means the parks require far less capital to maintain and improve than other types of real estate.

Lastly, unlike the dramatic increase in supply experienced by other sectors, the nation’s supply of mobile home parks is shrinking. More parks are knocked over to be redeveloped into something else than new parks being built. This phenomena does not exist in any other sector and has a way of safeguarding mobile home park investments against new competition.

Several factors in today’s real estate market – including higher interest rates, lender appetite, declining demand, and oversupply – have been hard on most commercial real estate sectors. Fortunately, one sector – mobile home parks – has been resistant to these factors. As a result, MHP investments continue to perform well in the face of challenges that are impacting others.

This content is the perspective of the author and is not intended to be relied upon as a forecast, recommendation or investment advice, and is not an offer or solicitation to buy any securities or to adopt any investment strategy. The information and opinions contained in this content are derived from experience, historic data, and other sources deemed to be reliable, are as of the date of this content, and may change as subsequent conditions vary.

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