Multifamily outlook 2025
Seizing Opportunities in a Changing Market
2024 threw its share of curveballs, but as seasoned investors know, challenges often pave the way for opportunity. Oversupply dominated the headlines, particularly in markets like Austin and Phoenix, but beneath the noise lies opportunities in the making. As supply tightens and demand stays strong, the smart moves we make today will pay off for years to come. Here’s what’s happening based on economic indicators.
2024 Reality Check: Oversupply Challenge and the Looming Shortage
Markets with heavy construction pipelines (think Austin and Orlando) are absorbing record levels of new units. Developers, fueled by the optimism of 2021 and 2022, initiated projects at a breakneck pace. The result? A wave of deliveries in 2024 led to concessions, rent cuts, and occupancy challenges. The most affected of these deliveries were Class A properties.
Here’s the kicker: this wave of supply is temporary. Construction starts have plummeted—down 25% in 2023, reaching the lowest levels since the 2008 financial crisis. Rising costs for land, labor, and materials, combined with cautious lending, have slowed the pipeline to a crawl.
Why does this matter? Multifamily development typically takes 18–24 months from start to finish. The lack of starts in 2023 and 2024 means we’re heading for a significant supply shortage by 2026–2027. When demand stays steady and supply dries up, rents climb.
The Economy and Housing Market
Economic strength continues to surprise everyone. Despite high interest rates and inflationary pressures, the U.S. economy remains remarkably resilient. GDP grew by 4.9% in Q3 2023, and unemployment is still near historic lows at 3.9%. These strong fundamentals fuel household formation and rental demand, even as homeownership remains out of reach for many.
Renting vs. Owning: The Gap Widens
Did you know renting is, on average, $1,000 cheaper per month than owning a comparable home? Mortgage rates are sitting at a 22-year high of 5.5%–6%, and starter homes in many markets are priced at $400,000 or more. For young professionals and families, renting isn’t just a choice, it’s the only viable option.
What This Means for Multifamily Investors
* The rent-to-own gap keeps tenants in place longer, reducing turnover and stabilizing cash flows.
* Gen Z renters, who value flexibility and mobility, are driving demand for modern, well-located rental housing.
* With affordability improving (thanks to steady wages and slower rent increases), the stage is set for secular rent growth over the next 3–5 years.
Indicators to Watch
Construction Trends
New starts are down, but it’s not just about what’s being built. The Architectural Billings Index, a leading indicator of construction activity, shows declining demand for new projects. Builders are shifting focus to workforce and affordable housing, but volumes remain far below historical norms.
Interest Rates and Inflation
While rates remain high, inflation has moderated to 3.7%, down from its 9.1% peak in 2022. Expect rates to stay elevated through 2025, but this stability provides clarity for underwriting deals and securing financing.
Demographics and Migration
Strategy for Investing in Mulitfamily
To align with affordability trends, focus on properties where rent-to-income ratios remain below 30%, as these tenants are more resilient and less likely to face financial stress.
Markets like the Midwest and Southeast, which boast lower ratios, are particularly attractive for investors seeking stability. High-growth markets in the Sunbelt, such as Dallas, Tampa, and Charlotte, continue to thrive with strong job and population growth, making them prime targets for investment. Even markets like Austin, currently grappling with temporary oversupply, are expected to rebound by 2026, presenting a unique opportunity to enter at favorable pricing.
With a once-in-a-decade supply contraction looming, playing the long game by investing in high-demand markets now positions investors to benefit from rising rents and property values as supply tightens. Prioritizing Class A and B+ assets, which feature minimal deferred maintenance and attract higher-income renters, further enhances portfolio stability and long-term performance.
The oversupply challenges we’ve seen in 2024 are creating opportunities to acquire quality assets at better prices. And as we head toward 2026, the lack of new construction will tip the scales in favor of existing properties.