A few years ago we shared with you our predictions that there would need to be a “downsizing” and consolidation in the manufactured housing business before supply was equal to, not greater than demand.  This would include the closing of many factories and sales centers and the consolidation of many companies.  Hey, it was just a prediction from one guy in Oregon --- little did I know I might actually be right!  But, alas I wasn’t’.  In my January 2003 Industry Update I declared that the downsizing and “rightsizing” was almost over.  I was wrong --- WAY wrong.  In the past two years the downsizing has continued and in the last few weeks the consolidations have been dramatic. 
 
There has been so much news and transition in the manufactured home industry it almost seems overwhelming.  Let’s take a look at the many significant events, as taken from news on www.thestreet.com:
 
Champion Enterprises to Acquire New Era Building Systems
- PR Newswire

Add to this Clayton’s acquisition of Karsten Homes and most of Fleetwood Retail Corp. and you’ve got three very significant events in a very short period of time.  It wasn’t long ago that Berkshire Hathaway bought Clayton Homes and its subsidiaries, and Clayton bought Oakwood Homes / Oakwood Acceptance (which included Shult), then Palm Harbor purchased Nationwide Custom Homes, a leading Modular Home producer.  Hometown America purchased Chateau not long ago and ARC, the REIT based in Denver has amassed a portfolio of 64,000 land-lease home sites around the nation by acquiring a variety of other companies.  More consolidations are coming, you can be sure.  Who, what, when and where?  I don’t’ know.  Why?  Because we’re going to be a much smaller industry going forward and the only way you survive is through consolidation of facilities, distribution channels, personnel, resources and products.
 
Many companies are announcing quarterly results and they prove downsizing and consolidation is paying off.  Note the latest press releases from Champion and Palm Harbor:

Palm Harbor Homes, Inc. Reports First Quarter Results for Fiscal 2006
- BusinessWire

Champion Enterprises Reports Net Income of $0.17 Per Diluted Share for the Second Quarter of 2005
- PR Newswire

Other companies, including MHC/Equity Lifestyle Properties, Skyline Corporation, Sun Communities, Liberty Homes and American Land Lease remain comfortably profitable while others, most notably Fleetwood Enterprises continue to struggle.  Fleetwood is making all the right moves, steering their ship back to it’s core competence of manufacturing homes and RV’s and distributing them through a large network of independent retailers.  They’ve also made the decision to realign their management structure, giving more local control back to the regions and listening more to those experienced professionals out in the field.  Good thing --- that structure is what made them great.
 
All around the United States manufactured home land-lease communities are being sold and closed in favor of other types of development.  In Oregon these potential closures have made front page news and been the subject of television and talk radio reports.  In Arizona this ran in the local papers:
 
Trailer park ousted for Costco

Florida, Arizona, Oregon, California, Nevada, Idaho, Utah, Texas, Ohio and a slew of other states are experiencing this phenomenon and it’s giving our industry another black eye.  Some will defend a property owner’s right to do what he/she wants with their land.  After all, it’s their land!  Others cry foul, saying they bought homes and rented spaces based on implied representations that they would be able to live there as long as or longer than their 20-30 year home loan, provided they pay their space rent on time and abide by the covenants of the community. You can’t blame people for being angry if they’re told out-of-the-blue they have 365 days to move.  But you can’t put too much blame on a community owner if the community is suffering and does not have the same value as a manufactured home community as it does for other development.  Especially when these offers to purchase, often unsolicited, are for millions of dollars more than anyone expected.  Most of these communities are only partially full and will never reach their full investment potential as manufactured home communities.  The business model they believed when they broke ground no longer exists.  The paradigm has shifted.
 
Much of the responsibility lies with a State and local Government that has yet to properly address the shortage of developable land in many of these metropolitan areas.  Until they recognize this situation and become part of the solution they’ll remain, in a very big but often ignored way, part of the problem.  Simply put, this would not be happening if developers had more bare land available, zoned appropriately, with access to public transportation and utilities.  But government planners and elected officials don’t often see it that way.  In public they feel very sorry for these people --- but in private they often admit that it’s a harsh reality, more market driven than anti-manufactured housing.  I don’t know how this is going to play-out, but Commonwealth Real Estate Services wants to be the leader in developing a reasonable solution.  We are considering hosting an industry conference this fall, attended by community owners, home lenders/dealers/manufacturers, government officials and manufactured home community residents, aimed at listening to input and discussing solutions to the “park closure” phenomenon. It is the belief of the Commonwealth owners and management that time is not our friend on this issue.  Putting off discussions only makes it worse. 

Congratulations to all of you that are doing well in 2005.  While our side of the business (the land-lease “park” business) is stable but not growing much, the manufactured home business overall is making some slight headway.  Some markets are red-hot, like California.  Infill, subdivision and 55+ adult communities are doing OK, and the rural private property business is doing well. The product is fantastic and consumers still realize it.  But in real numbers we continue to lose market share to aggressive homebuilders in metropolitan areas that offer easy financing and density that we simply can’t match.  Planners used to criticize us for putting 7-8 homes per acre.  Now they insist on 10-15 homes per acre.  Are today’s tract housing developments tomorrows slums?

Thanks for taking a few minutes to read this Update.  Keep smiling, stay involved in this industry and support those who work hard to protect our product and our livelihood.

Greg Harmon - President
Commonwealth Real Estate Services
E-mail: greg@cwres.com
Telephone 503.244.2300 Ext. 101