One of my favorite things about investing in real estate is the architecture. I love looking at aesthetically pleasing properties. I'm not alone in placing a value on how a property looks. Most Class A real estate -- the highest quality properties in the best locations -- tends to trade at a premium value compared to less desirable properties.
That focus on aesthetics can cause investors to overlook properties that have historically been better investments. One property class where looks can be deceiving is manufactured home communities. The sector has quietly been one of the best-performing property classes for investors over the past two decades.
Manufactured housing communities rent lots to owners of manufactured homes. Some also rent out manufactured homes they own. These communities tend to generate very steady rental income since it's expensive to relocate a manufactured home to a new community. That high switching cost also enables the community owner to push through annual rental increases, even during a recession. Because of the resilient demand, manufactured home communities have delivered above-average net operating income (NOI) growth over the past two decades:
As that chart shows, the average manufactured housing community has grown its NOI at a 4.8% compound annual rate since 2000. That's second only to the self-storage industry during that timeframe. It's more than double the rate of more traditional real estate investments like industrial, multifamily, retail, and office.
Despite its resilience and outperformance, not many large-scale investors focus on the sector. There are currently only three publicly traded real estate investment trusts (REITs) concentrated on manufactured communities. The leader is Sun Communities (SUI 0.40%). It owns interests in 602 manufactured home communities, RV parks, and marina properties across 39 states.
Sun Communities' focus on manufactured housing communities has paid big dividends over the years. The residential REIT has grown its same community NOI at a 5% compound annual rate since 2000, outperforming the sector and all other real estate property classes. The company has supplemented its organic growth with a consolidation strategy. It has steadily acquired manufactured housing communities and other off-the-beaten-path property types like RV parks and marinas. These catalysts have enabled the company to deliver superior total returns compared to other REITs and the broader market over the past decade:
Sun Communities currently clocks in as one of the five best-performing REITs over the last decade. To put its outperformance into perspective, Sun Communities has grown a $10,000 investment made 10 years ago into nearly $65,000. That same $10,000 investment in the S&P 500 would be worth less than $40,000 today.
The REIT has plenty of future growth drivers. Manufactured housing communities, RV parks, and marinas are still very fragmented industries. That provides the company with a large growth runway as it continues its consolidation strategy. It recently entered the marina segment and has quickly become a leader and consolidator. Meanwhile, it's entering the UK holiday home parks sector. It will be the second-largest operator in a segment where the top 10 platforms only control 7% of the market.
An underappreciated real estate investment
Manufactured home communities have delivered above-average income growth due to their high switching costs and recession resiliency. That has benefited sector leader Sun Communities, which has generated tremendous total returns by focusing on consolidating this fragmented sector. It still has plenty of room to grow, especially given its expansion into other property types, making it a REIT that investors won't want to continue overlooking.