As the U.S. heads toward a potential recession in the next few months, the logical question is how that economic reality will impact the RV park industry. In this RV Park Mastery podcast we’re going to drill down on this topic and identify the potential issues to consider. As you’ll see, there’s a lot to consider.
Episode 80: What Happens To RV Parks In National Recessions? Transcript
Virtually every world economist is predicting America will go into a recession sometime later this year or early next year. This is Frank Rolfe, the RV Park Mastery Podcast. We're gonna discuss what happens to RV parks in recessions, based on just some basic thoughts, some data, and some prior experience back in the 2007/2008 Great Recession. So let's first start off with the topic, is an RV park a luxury or a necessity? Because those are the only two things that really work in times of economic trouble in America. Basically, everyone just buys one of two things. They either buy necessities and they buy vices. They buy food and they buy liquor. Where I am, near St. Louis, the old saying during the Great Depression in St. Louis was first in shoes and first in booze. Louis was very proud of the fact that during the depression, it supplied and was number one in America in those two categories.
One, the Brown Shoe Company, biggest maker of shoes in the US, right in St. Louis. And number two, of course, Budweiser, based out of St. Louis. So if we just say that in times of peril, most people gravitate towards things that they have to have, and a few things that they just love so much they can't do without, then where does the RV park industry fit? Well, it really fits into both categories. You have one group of people who use their RV because they live in it full-time, or they live in it most of the year. So their RV is their form of housing. And you'll have lots of people in the next recession who will give up their house because they never really enjoyed it much anyway, and instead will opt to live in their RV. So you'll have that necessity part. But then you also have the vice component, because many people love RV travel. It's had perpetually higher sales almost every year.
Why? Because both baby boomers love it and so do millennials. So people are not going to not use the RV that they already own and insure and garage when it comes time for vacations. They're gonna take them out on the road. The average American uses their RV two weeks per year. They are not going to give up those two weeks. There's no reason economically they should give up those two weeks, because the RV, in fact, is very economical. So when you have the future recession, whenever it may occur, it's a good bet that you will find that RV park usage will still remain just fine. Now, what about RV sales? Well, the first thing you have to know is there's a disconnect between RV sales and the RV park industry. There's plenty enough RVs already in existence on the road to fill virtually every RV park. But yet ever higher sales makes ever higher demand, which just goes to give greater occupancy and higher rents.
So I have nothing opposed to RV sales, but it's a good bet that when the recession hits, you will see RV sales come down. How far will they go down? Well, in the 2007/2008 Great Recession, manufacturing of RVs fell to a little under 200,000 units. Whereas today it's at about 500,000 units. But that was the low point in the cycle. That's still a lot of units being purchased. How many units is that? That's twice how many were manufactured back in 1990. So I think you'll still see a lot of RVs created and a whole lot of RVs sold at dealerships despite the recession. But even if that number fell to zero, the actual impact in RV parks would be also about zero, because you don't need that many RVs to fill the various RV parks. Then you have the impact on banking. Well, yes, you will see some changes in banking when we have a recession. Typically at recession banks go to what's called a flight to quality.
They're only gonna want to finance deals that they feel to be safer. So they'll probably be a little less enthused doing RV park turnaround deals as opposed to good established RV parks that are already doing well. But it will be a little bit different, and it's the environment. Now you'll still have those SBA loans provided by the different governmental agencies. I don't think those will go away. And you'll still have conduit lending, because conduit lenders will still be out there making loans, as will banks. But I think you will see a shift in the desire for the product, and you're gonna see more lenders giving more weight to deals that they consider safer. Safer because of location, safer because of infrastructure, safer because of just the simple books that they feel confident in. But banking will be a little changed. Also, you'll see the interest rates go down significantly during the recession.
That will have an impact on both banking and on cap rates that you buy properties at. I once laid out every recession since 1950, tried to get an idea myself of how much rates decline. And what I found is from the start of the recession to the end of the recession, interest rates typically fall an average of two and a half points since 1950. One of the largest declines was during the 2007/2008 Great Recession, where they fell all the way down to nearly zero. But if you take two and a half points off of current banking interest rates, I think that's a survivable amount. It'll take you down to loans which will be typically in the 4%-5% category, going forward, which is pretty much in line with where America always was prior to the Great Recession, the 0% interest rates. And if you already owned that RV park and you bought it at the higher cap rate before those interest rates and cap rates declined, then you'll have a built in profitability just from that one process alone.
Finally, you look at how the industry did during the 2007/2008 Great Recession. Well, it did very well indeed. Going into that, people had never really known what will happen to RVs in times of economic peril, because it had been fairly untested. The number of RVs had been purchased and that were on the road had been enormous since the last big recession had occurred. And in 2007/2008, although manufacturing failed under 200,000 units, RV park occupancy remained just as brisk during the recession than it had been prior. There were virtually no RV parks, to my knowledge, that went into default. I never saw them going to auction. So if they were having problems, I certainly never saw that occurring. So what you found is, you found the reality which we're describing, which is that RVs and RV park usage is hybrid; it's both a necessity and a vice. Some people do it for the cost, for the living, because it's what they can afford, and others do it just because they really, really enjoy it.
The bottom line to it is the RV park industry should fare just fine in the upcoming national recession. In fact, some would argue the industry will benefit from it. All real estate will benefit from interest rates coming down. There's no question of that. But also in times of trouble, it weeds out the weaker players, and it puts more of a spotlight on those who are stronger. We all know right now that there's about to be an enormous commercial property collapse in the office, retail and lodging sectors. The average occupancy of office buildings in America right now is around 50%. In St. Louis where I am, it's an average of 35%. Virtually all of those buildings will be ultimately foreclosed on, in all likelihood. And we all know the shopping malls you go in where almost every storefront is abandoned. And we all know that hotels are never what they once were prior to Covid.
When those sectors collapse, which the recession will no doubt usher forward, that'll just point out those sectors that are actually strong. Things like RV parks, that will make lenders want much more to make loans to RV park owners. It'll be a greater appetite to investors to the RV park industry, pushing them forward in value. So really it's not a bad thing to have the occasional recession. Many famous business people welcomed recessions. J. Paul Getty, the richest man in America back in the '50s and the '60s, was a huge fan of recessions. He once said that recessions allowed all businesses to clean the barnacles off the boats. And it's in many way true. So I would not fear the upcoming recession if you're an RV park owner or buyer. I think, if nothing else, you'll probably benefit from it. And I think it's probably, based on every economist that I read, is a certainty to happen fairly soon. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.