Hurricane season is off to a rough start.
We hope MHP owners and their tenants in the Southeast were largely unscathed by Idalia.
The recent bout of hurricanes is concerning if you’re a coastal mobile home park owner. While the risk of actual loss is low, the risk of sky high insurance premiums is 100%.
Good news, bad news here.
Good news - Park owners likely have the ability to offset increased expenses via pricing power and the fact rents are still artificially low vs. apartments.
Bad news - mobile home parks are more exposed to the elements (above average climate risk) then every other real estate asset class.
The last decade has seen a surge in insured losses due to climate incidents, costing the U.S. a staggering $1.1 trillion, a significant increase on an inflation-adjusted basis compared to the previous two decades.
High-risk states like California and Florida have been particularly impacted. In Florida, the government is now the primary real estate insurance provider after private companies withdrew in the wake of numerous hurricanes.
Likewise, due to wildfires and regulatory limits on premium hikes, several major insurers have ceased offering new policies in California. These effects are felt nationwide, with the annual growth rate of commercial insurance expenses outpacing other real estate costs since 2018.
More climate events + higher replacement costs + regulatory pressure in the insurance market could keep insurance costs on an uncomfortable trajectory.
Markets most at risk include those in California and Florida, which have seen significant insurance market volatility.
Real estate markets in the Northeast and Midwest, while not immune to higher insurance costs and climate event risks, appear better positioned relative to the Sun Belt.
Yet the Sun Belt is better positioned for long term population and rent growth.
These trade offs are common in real estate investing as the market tends to level the playing field over time.
Valuation Impact
It’s hard to say if these insurance challenges have impacted valuations outside of the direct impact on expenses (lower net operating income which translates to a lower purchase price).
It doesn’t seem like multiples (cap rates) have changes due to increased risk of insurance issues (i.e. the loss of insurance in certain high risk markets).
Parks in impacted markets should manage ~10% annual insurance increases, but valuations might suffer above and beyond that cost if premiums don't stabilize.
In other words - Increased lot rents can offset most variable expense increases, yet investor sentiment could be affected, potentially causing a slight rise in coastal park cap rates.
Operators - What Can You Do?
We don’t have great advice for you on how to reduce your insurance costs right now - it’s ugly out there. There will likely be some innovative insurance products (private / shared risk insurance products) that emerge if the rate hikes continue.
But, you can at least make some moves to prepare your park and tenants in case you get incredibly unlucky with weather.
If your park is at risk of flooding, you can hire an engineer to build dikes, improve your drainage systems and raise pad sites or home levels on any new homes placed in the community.
You can always look for potentially problematic trees (dead branches), consider trimming or removing to avoid home damage.
This is a good quarterly practice regardless as insurance should cover damages from fallen living trees, but they might fight you if the tree was already dying or dead.
For tornado alley parks, what’s the condition of the tornado shelter? Make sure it’s actually accessible, not locked with the manager having the only key.
If you don’t have a shelter, share city recommended guidance to your residents so they know what to do or when to go if the sirens go off.
For MHP Investors
If you are investing in a strong market with a good operator, extreme weather is probably one of the few risks of the deal. Most other real estate asset classes don’t have this luxury - there tend to be far more relevant risks.
Because at today’s average lot rents, tenant demand risk (in great locations) is a probably lower risk than extreme weather. Apartment investors can’t make that claim. I think most park investors are thrilled to take that risk trade off.
But if weather is concerning, you might want to lean toward a diversified portfolio or fund investment vs. a one off syndication.
A one off park investment might have higher return potential vs. a portfolio, but could also result in total loss in an extreme weather event (however unlikely).
Happy trails,
MHP Weekly