• Rents have risen by a record 13.9% this year.
  • Experts say they will likely grow by around 5% to 6% per year in 2022 and 2023.
  • Lenders offer easy debt to homeowners looking to improve their properties and their income.

In Euless, Texas, a 360-unit apartment complex – Tides on Post Oak – is about to undergo a three-year, $6.4 million renovation.

Tides Equities, a Los Angeles real estate investment firm, bought the 38-year-old property in May and plans to modernize the building by upgrading each apartment, renovating the pool and installing a shuffleboard in the game room.

The tenants living there will have new stone counters and vinyl plank floors, but they will pay for those things. Lenders who provided Tides with debt to renovate and rename the property expect rents to rise 25.7% once the renovations are complete, according to a confidential loan financing document reviewed by Insider.

This building in the Dallas-Fort Worth metro area isn’t the only one. Rents are rising at a record pace across the country, while landlords and


mortgage lenders

such bets that they will climb higher.

Rents are up 13.9% nationally this year and vacancy rates are up just 2.5%, according to RealPage, so landlords have good reason for the bullish outlook. Meanwhile, these landlords have taken out billions of dollars to retrofit their buildings in 2021, betting that with housing demand tailwinds, they’ll be able to meet those more expensive demands over the next few years.

It comes as housing affordability takes center stage: as it becomes harder to buy a home, more people are deciding to rent, putting pressure on a market with no supply. adequate. This is especially pronounced in cities like Dallas, Miami, and Phoenix.

Tides Equities is banking on a continued influx of tenants into booming cities across the western United States, where it has made 93 acquisitions since 2016. The company has spent $1 billion buying apartment buildings in the Dallas-Fort Worth area through 2021, part of the $3.5 billion it spent buying apartments in Dallas, Las Vegas and Phoenix this year, said Sean Kia, its co-founder and director.

Tides’ strategy is simple: Upgrade properties enough that rents can be increased but kept below the cost of new luxury resorts, Kia said.

“It’s our business plan,” Kia said. “Every property we buy, we invest significant capital to renovate them,” he said, adding that they would still meet local standards for “beautiful affordable housing”, which he said was lacking.

To finance renovations to Tides on Post Oak, formerly Palo Alto Apartments, Tides Equities has taken out a type of short-term loan for properties in transition: those that need repair or have not yet reached desired occupancy rates.

The Tides Loan is one of many securing bonds called Commercial Real Estate Secured Loan Obligations, or CRE CLOs, which are sold to mutual funds and other investors betting on future business plans. business of a building. These bonds have resulted in financing so cheap that it effectively limits the rent increases needed to make these projects profitable, Kia said.

While any type of homeowner can take out this type of loan, apartment building owners make up the bulk of those who do, experts say. Most of that debt goes to renovations, they say.

Tides borrowings are just the tip of the iceberg. Homeowners across the country took out $41.6 billion of such short-term loans this year, more than double the $19.5 billion in 2019, according to data from Moody’s Analytics. That total is expected to rise in 2022, according to ratings agency Kroll Bond.

These aren’t the only types of loans a homeowner can use to renovate a building, but their cheap costs are hard to ignore.

Other signs point to rents continuing to rise

Favorable financing isn’t the only reason real estate investors are turning to multifamily properties. There’s also growth in base rents, which some investors predict will be 5-7% per year over the next two to four years depending on building purchases made this year, Darrell Wheeler told Insider. commercial bonds researcher at Moody’s Analytics.

“Some investors are willing to buy a property based on above-inflation rent growth in certain circumstances,” Wheeler said, “which you have to question because the rents aren’t that affordable for a lot of people. people, especially if you throw in a


recession

over the next few years.”

But due to a pandemic-induced multi-family construction shortage and rental demand exacerbated by a burning home buyers’ market, other multi-family market experts say it’s a safe bet. rents will continue to rise.

Rent increases are expected to be double what they are in a typical year based on supply and demand measures, said Kimberly Byrum, multifamily expert at data provider Zonda. Generally, expect an annual increase of around 5-6% for the next two years until more apartments are built.

“You don’t have the pipeline that adds competition,” Byrum said, referring to the number of apartment buildings being built. “Pipeline really keeps markets affordable.”

Additionally, apartment buildings have proven their worth to investors during the worst economic downturns. Overall apartment occupancy remained high and tenants continued to pay their rent. The same cannot be said for other properties, such as hotels and retail stores, which have suffered over the past two years.

“Generally speaking, multifamily has been a great place for investors during the pandemic,” said Manus Clancy, senior managing director at commercial loan data firm Trepp.

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