Fortunately, demand has been exceptional but rent growth over the past year has been modest while vacancy rates have held relatively constant. For 2025, Freddie Mac predicts positive rent growth, but below the long-term average, while vacancy rates are expected to continue to creep up. Cap rates have flattened out, while interest rates remain elevated and volatile, exerting negative pressure on property values, all while property performance is subdued. The multifamily origination market is expected to pick up but will remain below the highs seen in 2021 and 2022. Although the multifamily market is facing short-term stress from elevated supply, higher-for-longer interest rates and moderating performance, over the longer term multifamily will likely remain a favored asset class due to the lack of alternative housing options, continued economic strength and demographic tailwinds.
The economy continues to perform well, but is generally slowing, seen more meaningfully in the labor market. Multifamily demand has been outstanding, while new supply is expected to be at its cyclical high in late 2024 and early 2025. For 2025, we expect rent growth to be positive but below long-term average growth rates, while vacancy rates will see modest increases, remaining above the long-run average. The Sun Belt and Mountain West regions of the country are seeing the bulk of the new supply but are met with some of the strongest demand. On an individual market level, performance will differ. Generally, metro areas with less supply and that have seen less rent growth since the pandemic will likely outperform, while higher supply markets are expected to have weaker performance.
Interest rates remain elevated and volatile while cap rates have been flat, leading to a cap rate spread that is compressed and well below the long-term average.
Meanwhile property prices continue to decline but the rate of decline has moderated throughout 2024.
Even though interest rates remain volatile and higher for longer, multifamily transaction volume is expected to increase up to about $370 billion in 2025.
Multifamily Demand Is Supported By Broader Housing Trends
High homeownership costs and elevated mortgage rates are steering more housing demand toward apartments
Lease renewal rates are strengthening, supported by the affordability gap between renting and owning and home
While concessions are rising, steady job growth will continue to bolster apartment absorption
Construction Pipeline Slows, Easing Oversupply Concerns
Multifamily completions are forecast to decline to 410,000 units in 2025, a significant decline from 2024
Rising costs for construction labor and materials are limiting the ability for new development projects to get off the ground
Slowing construction amid solid demand will allow the national vacancy rate to fall to 5.1% in 2025
Top Multifamily Markets Offer Significant Growth Potential
Miami ranks first (#1) on the 2025 Multifamily Investment Forecast, upheld by strong demographic drivers, above-average rent growth and a declining vacancy rate
Dallas-Fort Worth places second (#2), with robust job growth and a thinning pipeline positioning the market for future gains
Orlando comes in at third (#3), with nation-leading rent growth projected for 2025
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