Don’t Bring a Knife to a Gun Fight By Frank Rolfe

Knights in armor were the gold standard of warfare from about 1300 to about 1600. And then suddenly they fell from prominence due to the invention of the cannon. Virtually overnight, a calvary of splendid knights in armor could be annihilated by a single cannon that cost very little to build. It was a seismic shift and not just a temporary fad. Today, the only place where you’ll find a suit of armor is in a museum. 

And that’s pretty much the same thing that’s happening right now in commercial real estate. Only instead of the advent of the cannon you have the combination of technology and Covid. Here’s the breakdown of who the players are and what their survivability looks like: 

Office Buildings 

This is probably the most hopeless sector in commercial real estate. Nobody needs office space anymore nor will they ever need it again. The reasons are numerous including the advent of remote work and the technology revolution, but also include the end of the “knowledge worker” at the hands of AI. The nationwide office vacancy rate is around 50% and still going down. I would imagine that probably every major office building is worth less than its mortgage. This sector is more like a knight in armor getting hit by napalm than just a mere cannon ball. 

Retail Centers 

While not much better than office buildings, the American retail industry at least still has a small future in housing those businesses that can’t just sell their wares on the internet (such as grocery stores and Dollar General). But let’s face it, the number of retail stores that are closing is phenomenal and only going to get worse. We’ve all been in giant shopping malls that are 50% vacant. So to invest in this niche you have to either be nuts or think you have the answer to filling all that vacant space (which nobody has figured out yet). This sector has all the future of a knight in armor running full blast into a tank. 

Hotels 

Business travel is done and so are conventions. The only future that the lodging industry has is the normal consumer looking for a personal vacation. That means while a hotel on Maui might still hit its budget all those giant hotels in urban centers are as good as dead. The national occupancy rate of the lodging industry is 66%. That’s not going to even remotely cover the values that the mortgages were placed on years ago. So this sector has survivability in limited locations but if you’re talking big hotel towers in major cities then you’re just another knight facing a cannon. 

Self-Storage 

The surprise loser in the commercial real estate industry, the self-storage facility was once touted as being recessionproof yet now is already failing without the advent of the next recession. Nationwide self-storage is nothing more than a story of declining rents and occupancy with no upturn in sight. The industry massively overbuilt during the past few years, but more importantly there’s absolutely no restriction on supply – even office, retail and lodging have barriers based on zoning and cost. You always could build a self-storage on any corner or parcel as cheap a $7,000 per unit and – as most smart investors declared at the time – when there’s infinite, cheap supply there’s no value at all. This sector is becoming a knight vs. hypersonic missile and the shrapnel field is going to be vast. 

Industrial 

Your survivability in this sector is going to be based on how old your building is and who the tenant is. There’s been a lot of turnover from obsolete buildings that no longer have the desired ceiling height for modern warehousing or are simply in the wrong product line and location for the businesses in America that are still doing well. The pending recession should fire a cannon ball into the crowd and, as they say, “when the tide goes out you find out who’s been swimming naked”. 

Apartments 

Now we move into the first of the only two commercial real estate sectors that have survivability. Apartments are like a knight in armor where the iron plate is 10’ thick. It can take a direct hit by a cannon ball and it simply bounces off. The reason? It’s called “necessity investing” and it is based on the premise that what works in bad times are only those sectors based on basic human needs that will never reduce in demand. Of all the categories so far, this is the first one that has the power to succeed in good times and bad. The only issues with apartments are 1) the issue of how much higher rents can go, as they currently stand at around $2,000 per month and 2) the inherent, large capital needs to keep giant structures in good repair. 

Mobile Home Parks 

Last, but not least, on the list is the lowly “trailer park” which turns out to be the strongest of all the sectors when it comes to surviving the modern cannon ball. Just like the apartment sector, mobile home parks are all about “necessity investing” as they are the Dollar General of housing. But more importantly the lot rents nationwide are insanely cheap (around $300 per month) and could double or triple and still be cheap – which is not an option that apartments share. Additionally – and unlike each and every sector shown above – you have not been able to build new mobile home parks since the 1970s. This cap on the supply maintains extremely favorable supply/demand metrics and creates another medieval reference which is what Warren Buffett calls the “moat”: the barrier to competition that protects your investment. And finally, mobile home parks are by definition “parking lots” and have very low capital needs. 

Conclusion 

The commercial real estate sector is a big mess. Only two niches will emerge untouched: 1) apartments and 2) mobile home parks. Of these two, I prefer the “trailer park” as it has some unique competitive advantages. But as long as I’m not in office, retail, lodging, self-storage or industrial I’m happy. The carnage coming up for the other niches will make the worst medieval battlefield look good. Who would have ever thought that this is how the commercial real estate industry would end up? I’m sure the knights on the battlefield when that first cannon went off were equally shocked. Frank Rolfe has been a manufactured home

Frank Rolfe has been a manufactured home community owner for almost three decades, and currently ranks as part of one of the ten largest community owners in the United States, with more than 16,000 lots in 20 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. To learn more about Frank’s views on the manufactured home community

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