Real estate experts have consulted their crystal balls about the multifamily sector in 2025. For example, CBRE stated, “With continued solid fundamentals, multifamily is the most preferred asset class for commercial real estate investors in 2025.” In 2024, renter demand was robust, occupancies were steady, and rent growth demonstrated signs of an increase.
A PWC Urban Land report is also bullish on 2025: “Industry experts remain bullish on demand remaining strong for the next few years due to strong job growth, favorable demographics, immigration, the high cost of homeownership, and the lack of single-family inventory.”
CBRE acknowledges that there were short-term adverse effects in the past year brought on by rising interest rates and record levels of new supply.
In fact, in 2024’s third quarter, the multifamily housing sector had supply-side challenges, as vacancy rates were 5.8%, slightly higher than 5.3% a year earlier, the highest level since 2011, according to Multihousing News. The ongoing development of new apartment units kept rent levels stable, with the national asking rent reaching $1,845.
However, as demand slowly catches up with the glut of new supply, the market has been coping with frictional excess supply, reducing revenue growth due to higher vacancy rates and lower (though not negative) rent growth, as explained in the Multihousing News report.
Nevertheless, strong demand for rental units should boost occupancy levels and accelerate rent growth next year. Those factors should lead to increased multifamily investment activity. As a result, CBRE predicts that the average multifamily vacancy rate will reach 4.9% by 2025, and the average annual rent growth will be 2.6%.
Significant Investments in Multifamily Properties May Portend Rent Growth
In 2024, Wall Street firms purchased several multifamily assets. For example, KKR paid $2.1 billion for more than 5,200 apartment units nationwide. The deal included 18 new mid- and high-rise buildings. A few months earlier, Blackstone purchased the Apartment Income REIT for $10 billion and Brookfield purchased a portfolio of 7,000 apartments for $1.55 billion, according to the Wall Street Journal.
Reports suggest that the KKR deal, and other acquisitions may indicate that there is growing confidence among large investors that rents and values for apartments will soon begin to appreciate. Rent has started to climb in several Midwest and Northeast cities.
Several Economic and Demographic Factors Driving Demand for Multifamily Units
Higher Home Prices
A decline in home affordability due to surging house prices and high mortgage rates has made renting more appealing. In fact, the gap between owning a home and renting an apartment is at its largest in 15 years.
A recent study from Redfin reported that the cost of owning a home was lower than renting in only four U.S. markets: Detroit, Cleveland, Houston and Philadelphia. As a result, Redfin discovered that throughout the U.S., the typical home costs an estimated 25% more per month to own than rent; not surprisingly, nearly 38% of U.S. renters polled this past April said they don’t believe they will ever own a home, up from 27 a year earlier, according to Redfin.
After a brief decline in early 2023, home prices climbed to a 5.6% annual rate for the year. As of September 2024, house prices had declined to an annual rate of 3.9%, according to the S&P Core Case-Shiller National Home Index, though home prices are still climbing faster than inflation. Home prices have remained relatively high due to a shortage of homes for sale.
Home buyers needed salaries of $115,000 to afford the typical U.S. home, down 1% year over year, according to a Redfin survey. That represents the first annual decline since 2020, thanks to falling mortgage rates. However, the typical U.S. household only earns $84,000—27% less than the amount needed to afford the typical home. Texas has three of the five metros with the largest declines in income required to afford a home, while the East Coast is home to four of the five with the biggest increases.
At the mortgage rate of 6.78% as of October 2024, if a home buyer made a 20% down payment on a $407,000 home, the monthly payment would be $2,119. The mortgage payments would represent 26% of the typical family’s monthly income, according to Bankrate. Mortgage rates have been volatile in recent months: after falling to 5.89% on September 17, though they rose to 6.68% as of December 12.
The national average for rent is $1,748, according to Rent Café data, but it varies significantly throughout the country.
Demographics
According to data from the Joint Center for Housing Studies of Harvard University, at the end of 2023, there were 130.3 million U.S. households, of which 85.9 million were homeowners and 44.5 million were renters. Most of the recent household growth is among members of Gen Z (born 1995–2009) and millennials (born 1980–1994). As they entered peak household formation years, Gen Zers, the oldest of whom celebrated their 29th birthday in 2024, formed 8.1 million households from 2017 to 2022, according to the American Community Survey. Most of these were renter households.
The Rental Alternative
According to Multi-Housing News and Yardi Matrix data, strong demand for rental units has benefited multifamily market fundamentals in 2024. Multifamily development is peaking, with two million apartment units slated for completion across the U.S. from 2024 to 2028. The supply surge is already in full swing, according to Yardi Matrix, as the top-10 performing cites had 85,055 units that came online in the first half of 2024, about 20,000 more than in the first half of 2023. The top metros for apartment unit deliveries include Dallas, Phoenix, Houston, Atlanta, Orlando and Austin, with Sun Belt cites comprising the bulk of the list with eight cities.
Cushman & Wakefield reports that more than 360,000 units were absorbed nationally, a 44% increase from 2023’s total.
Multifamily Trends
Cushman & Wakefield reports that since the Federal Reserve Bank cut interest rates, mortgage rates continued to rise due to a strong labor market and a strong and resilient economy. These trends are favorable for the health of the rental market as a strong labor market drives consistent apartment demand. In addition, the relatively high mortgage rates will probably put the brakes on renters’ shift to home purchases, which means that apartment absorption will continue to be quite robust in the near term.
Cushman & Wakefield monitors its portfolio for signs of distress among its tenants. So far, delinquencies are still near historic lows. Unlike 2023, delinquency rates have fallen across all classes, representing a healthy renter pool.
Supply vs. Demand
Yardi Matrix reports that national occupancy was 94.7% in October, while growth was unchanged from a year earlier. Most markets monitored by the company had modest changes, though Las Vegas outperformed, with rates climbing 100 basis points to 93.7%, mainly due to a robust job market. Yardi Matrix’s recently updated its supply forecast to indicate multi-year high deliveries in all rental segments in 2024: 554,000 market-rate multifamily units, 71,500 affordable multifamily units and 36,700 single-family rental units.
Deliveries in the segments followed by Matrix are concentrated in high-growth markets such as Dallas and Austin. These markets are experiencing negative rent growth year-over-year as supply temporarily outstrips demand. For example, rents in Austin dipped 5.5% year-over-year in October, Phoenix was -2.4%, and Dallas 1.5%, according to Yardi data.
Yardi predicts a drop in deliveries in 2025 and a sharper decline in 2026. The reduction in deliveries could spark a new round of rent growth in 2026.
Finally, a report in Forbes predicts that cap rates may fall in 2025 as interest rates decline. The article states that cap rates will decrease, particularly in fast-growing markets like the Sun Belt. As a result, the cost of capital may decline and boost investor returns. A declining cap rate indicates that property values are rising, though net operating income may not increase. In turn, investors may gain from asset appreciation and cash flow, improving the overall return on investment.
Conclusion
The multifamily sector is poised for a brighter 2025, with rents and construction costs expected to rise despite ongoing economic challenges.
After two years of rising inflation and interest rates, the multifamily market is beginning to turn the corner, according to a Yardi Matrix report. Yardi wrote that “U.S. multifamily looks to have another strong year in 2025, with ample demand from job growth, weak home sales and demographic shifts.” The firm forecasts that rent will grow 1.5% on average in 2025.
Metros in the Northeast and Midwest should maintain their lead in advertised rent growth, boosted by positive demand and weak supply growth. Strong supply should continue to place pressure on rents in Sun Belt metros. Absorption totaled 370,000 units through November 2024.
New construction dropped in 2024 to 256,000 rental units, far below 2022 when 708,000 units started construction. This will lead to a drop in deliveries starting in 2026, helping to rent growth.
David Goodhue, Colliers’ Head of Multifamily Capital Markets and U.S. Executive Managing Director, wrote that capital left on the sidelines waiting for deployment is still near record highs. Investors waited patiently during the Fed’s interest rate hike cycle but now look forward to additional interest rate cuts and improving market conditions. The Fed has broadcast a path of lower interest rates into the future, with cuts expected throughout 2025. Goodhue wrote that a tailwind of declining rates will support a market rebound over the next several quarters.
“With this cycle’s wave of development wrapping up, vacancies are due to fall in the near term, resulting in improved fundamentals and a better outlook for rent growth. Structural tailwinds, such as the cost of homeownership and demographics within the U.S., make multifamily an investor favorite,” wrote Goodhue.
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With more than $2.9 billion of managed assets, including estimated costs to complete assets under development, Caliber’s 15-year track record of managing and developing real estate is built on a singular goal: make money in all market conditions. Our growth is fueled by our performance and our competitive advantage: we invest in projects, strategies, and geographies that global real estate institutions do not. Integral to our competitive advantage is our in-house shared services group, which offers Caliber greater control over our real estate and visibility to future investment opportunities. There are multiple ways to participate in Caliber’s success: invest in Nasdaq-listed CaliberCos Inc. and/or invest directly in our Private Funds.
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