The multifamily sector is entering the early stages of a measurable macroeconomic recovery, supported by peaking commercial mortgage rates, resilient rental demand, and early indicators of rental rate inflation across key metros.
Apartment REIT Price Indexes show a steady recovery in multifamily values since late 2023, with variations by vintage and location. Cap rates peaked in select MSAs during 2024 and are expected to stabilize or peak in others through 2025. Multifamily stands out as a leader in the recovery, offering promising opportunities for strategic investors.
Macro Demand Outpaces Supply
For the first time since 2021, absorption outpaced supply for two consecutive quarters across 60+ large metros. A slow- down in new construction starts in 2024 is expected to result in sharply reduced deliveries by 2026 and 2027. Demand will exceed supply in most primary and secondary markets over the next three years, supporting rent growth.
Barriers to homeownership, including the affordability gap and rising down payment requirements, are causing renters to lease longer and driving multifamily demand.
Strategic location selection remains critical, especially in mitigating risks tied to inflation, property taxes, and insurance costs. Rental rate inflation may surprise some growing metros, driven more by a lack of new supply than by robust demand expansion.
Reduced Uncertainty Heading into 2025
Post-election clarity in the U.S. and G20 nations has eased investor uncertainty, providing a more stable economic backdrop. Continued deficit spending and tax reforms are expected to support near-term GDP growth, although tighter immigration controls could constrain labor markets by late 2025.
While tariff policies may introduce volatility in bond and stock markets, multifamily investments remain relatively insulated from these risks, solidifying their position as a reliable asset class across diverse economic conditions.
With the stock market near all-time highs, multifamily offers a promising entry point for investors seeking to “buy the dip” in current conditions. The P/E ratios for stocks and cap rates for multifamily are similar metrics, yet they have moved oppositely in recent years. The multifamily sector’s sensitivity to interest rates could offset softening employment trends, making it uniquely positioned in today’s economic environment.
Multifamily’s Strategic Opportunities in 2025
If the economy achieves a soft landing, job and wage growth could drive higher revenues and asset values in multifamily. Conversely, slower job or GDP growth could shift capital into U.S. Treasuries, driving down long-term interest rates and benefiting multifamily financing. Combined with potential Federal Reserve rate cuts, these conditions would further support multifamily valuations and mitigate broader market volatility.
Cap rate trends, overlooked during multifamily’s last late-cycle phase, are once again a critical metric for discerning investors. Sponsors with cyclical discipline are ready to capitalize on the recovery phase in primed locations.
See the article as it appears in the January 2025 edition of the annual publication Wealth Management 2025 Outlook