{"id":179503,"date":"2024-12-04T15:22:54","date_gmt":"2024-12-04T22:22:54","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=179503"},"modified":"2024-12-04T15:22:59","modified_gmt":"2024-12-04T22:22:59","slug":"2025-multifamily-market-outlook","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/2025-multifamily-market-outlook","title":{"rendered":"Is the Multifamily Market Steaming Toward Failure Next Year? The Worst Might Actually Be Behind Us"},"content":{"rendered":"\n

Housing shortage? Not in the <\/span>multifamily<\/span><\/a> sector.<\/span><\/p>\n\n\n\n

If there’s one narrative that held <\/span>true<\/span> in 2024 amongst the confusing strands of debate concerning inflation, interest rates, and inventory, it was that multifamily construction was rolling across the Sunbelt like a flash flood. Next year promises more of the same.<\/span><\/p>\n\n\n\n

Around <\/span>520,000 new rental housing units<\/span><\/a> are anticipated before 2024 ends, with another 900,000 in the development stages, marking the <\/span>largest<\/span> deluge of multifamily construction in half a century. <\/span>These numbers come <\/span>on the back of<\/span> 2023’s 438,500 new units\u2014<\/span>itself<\/span> a new one-year record since 1987.<\/span> According to CoStar data, a five-year construction boom poured a staggering <\/span>1.8 million units<\/span><\/a> into the U.S. market.<\/span><\/p>\n\n\n\n

The Sunbelt Leads the Nation in New Multifamily Construction<\/span><\/h2>\n\n\n\n

The <\/span>Sunbelt<\/span><\/a> has accounted for about two-thirds of the construction\u201467%, or 335,000 units\u2014 with <\/span>Austin, Texas<\/span><\/a>, logging the highest increase of 45,000 more units added in the last five years compared to 2015-2019. <\/span>Phoenix<\/span><\/a> followed, adding 40,000 units. Remote work, new jobs, and lower price points contributed to the Sunbelt surge. <\/span><\/p>\n\n\n\n

However, surprisingly, two Northern cities, <\/span>Philadelphia<\/span><\/a> and <\/span>Minneapolis<\/span><\/a>, added high numbers of rental apartments from 2020 to 2024\u2014Minneapolis at 30,000 and Philadelphia at 48,000 more units, compared to the previous five years. <\/span><\/p>\n\n\n\n

Interestingly, both cities maintained a degree of equilibrium regarding vacancy rates <\/span>in the wake of<\/span> the new construction in the third quarter of 2024, hovering just below the national average of 7.9%. Conversely, Austin saw vacancy soar to 15.3%<\/span><\/p>\n\n\n\n

“<\/span>Basically,<\/span> the worst apartment market in the country right now is Austin,” Matt Rosenthal, managing partner of multifamily investor Eastham Capital, told the<\/span> Wall Street Journal<\/span><\/a><\/em>.<\/span><\/p>\n\n\n\n

As far as the <\/span>overall<\/span> highest number of new apartments added over the last five years, <\/span>Dallas-Fort Worth<\/span><\/a> tops all U.S. cities, adding 151,000 units, while <\/span>New York City<\/span><\/a> added<\/span> 120,000 and <\/span>Houston<\/span><\/a> 106,000. <\/span><\/p>\n\n\n\n

“New multifamily buildings coming online have eased competitive pressure in many markets, but in New York City, construction just simply can’t keep up with demand,” StreetEasy senior economist Kenny Lee said in a statement <\/span>quoted<\/span> by<\/span> CBS News<\/span><\/a>. <\/span><\/p>\n\n\n\n

Developers Have to Be Creative to Attract Tenants<\/span><\/h2>\n\n\n\n

The quest to differentiate units from the competition has led to some unique ideas. In Philadelphia’s<\/span> Broadridge Philly Apartments<\/span><\/a>, for example, among the amenities offered are podcasting booths, appealing to the younger demographic of content creators. <\/span><\/p>\n\n\n\n

Cheryl Smith, AIA, LEED AP, and principal and senior studio leader, mixed-use, with international architecture and design firm NELSON Worldwide, told<\/span> Forbes<\/span><\/a><\/em>:<\/span><\/p>\n\n\n\n

“Broadridge sets the standard for how modern residential developments should <\/span>be designed<\/span> for diverse, vibrant neighborhoods. The developer <\/span>was heavily focused<\/span> on the local community, which included providing a food <\/span>market,<\/span> since the area was considered a food desert, daycare, and local jobs, among other community benefits. NELSON’s site planning centered around these community needs. The largest ALDI in Philadelphia and Chesterbrook Academy Preschool anchor the development and contribute to its success.”<\/span><\/em><\/p>\n\n\n\n

For luxury apartments with a slew of amenities, a central location, and the ability to commute into New York for hybrid workers, the price point for a one- or two-bedroom rental, starting at<\/span> around $2,000\/month<\/span><\/a>, is far more affordable than living in Manhattan or Brooklyn. <\/span><\/p>\n\n\n\n

The scores of new rental units hitting the market in 2025 is a testament to the fact that it is still generally<\/span> cheaper to rent than buy<\/span><\/a>\u2014affording a <\/span>down payment<\/span><\/a> and mortgage payments with high interest rates, along with insurance and taxes, is simply out of reach for many would-be buyers. In an unstable job market, renting allows picking up and moving at short notice.<\/span><\/p>\n\n\n\n

Empty Apartments Will Fill Up in 2025<\/span><\/h2>\n\n\n\n

According to CoStar data highlighted in the<\/span> Wall Street Journal<\/span><\/a><\/em>, vacant apartments nationwide started filling up during the third quarter of 2024. With the construction boom for new apartments likely to taper down as 2025 progresses, the absorption rates will increase, and, assuming the economy stays robust, stability is <\/span>likely<\/span> to spread across the multi-housing sector. <\/span><\/p>\n\n\n\n

“The worst of the pressures on pricing from new supply are likely behind us,” Eric Bolton, chief executive of publicly traded landlord Mid-America Apartment Communities, said on an October earnings call.<\/span><\/p>\n\n\n\n

Nationally, apartment building<\/span> sales have also increased<\/span><\/a>, with investors confident that the market has stabilized, demand for rentals is high, and sellers have become more realistic about prices. Part of this is because rents have been stable for much of the last year, in sharp contrast to the inflation-induced post-pandemic dramatic increases of 20% or more. In contrast, recent<\/span> Yardi Matrix<\/span><\/a> August data shows that a 3.5% rent increase had become the norm for renters renewing their leases.<\/span><\/p>\n\n\n\n

Denver<\/span><\/a>, <\/span>San Francisco<\/span><\/a>, and the <\/span>Washington, D.C.<\/span><\/a> suburbs are among the markets showing the <\/span>strongest<\/span> apartment building sales to investors. In short, 2025 and beyond will continue to be good years for landlords in <\/span>certain<\/span> markets, where affordability makes homeownership impossible for many renters. <\/span><\/p>\n\n\n\n

“Probably the biggest story this year that we’ve seen [is] from people coming in the front door, and then not leaving [out] the back door,” Joe Fisher, president of publicly traded apartment owner UDR, told the <\/span>Wall Street Journal<\/span><\/em>.<\/span><\/p>\n\n\n\n

That said,<\/span> many developers are still skittish about large-scale projects, waiting until the current vacancies <\/span>are filled<\/span>.<\/span> “It’s going to take rent growth moving back into consistent positive numbers for people to feel comfortable with development again,”<\/span> said Jay Lybik<\/span><\/a>, CoStar’s director of multifamily analytics.<\/span><\/p>\n\n\n\n

What Investors Have to Consider When Buying a Multiunit Apartment Building in 2025<\/span><\/h2>\n\n\n\n

Assuming that the interest rate volatility will stabilize around 6% to 7%, taking into account Federal Reserve rate cuts (we can always hope for lower rates, but shouldn’t bank on them) <\/span>and rents<\/span> will remain around the same as where they are now, the one variable potential buyers can control is how negotiable sellers will be on price.<\/span> <\/span><\/a><\/p>\n\n\n\n

Recent sales<\/span><\/a> have shown a willingness from any owners to negotiate. It’s a catch-22 because, in Sunbelt areas where there has been an oversupply, and many units sit vacant, there’s a likelihood that there might be some wiggle room on price\u2014depending on how much debt sellers currently have. However, any investor must <\/span>look at<\/span> the long game and <\/span>finance sensibly<\/span><\/a> if borrowing\u2014assuming lenders are willing to support buildings with high vacancies.<\/span><\/p>\n\n\n\n

Another consideration is expenses. <\/span>Soaring insurance rates<\/span><\/a> and the possibility of increased construction costs stemming from incoming President Trump’s potential tariffs could seriously dent value-added propositions. Also, the <\/span>return-to-office mandate<\/span><\/a> issued by many companies could boost urban and commutable multifamily buildings. Equally, those further afield catering to remote workers could be hurt.<\/span><\/p>\n\n\n\n

Final Thoughts<\/span><\/h2>\n\n\n\n

Though recent data shows a settling multifamily market, <\/span>there are still<\/span> many unknowns and moving parts to consider.<\/span> The market is highly regional, and there is not a one-size-fits-all approach. Estimating cap rates will be a case-by-case proposition based on the variables for each building and a seller’s willingness to negotiate on price. The one thing that seems apparent is that there is no norm.<\/span><\/p>\n\n\n\n

Unless you are sitting on a lot of cash and can afford to wait for dependable returns on larger complexes or negotiate deep discounts, buying one-to-four-unit rentals\u2014possibly with owner-occupied FHA financing for mom-and-pop or new investors\u2014and investing in <\/span>senior housing<\/span><\/a> (the<\/span> silver tsunami<\/span><\/a> is already here) are safer, more assured investments. <\/span>This<\/span> is <\/span>partly<\/span> because they don’t compete with the luxury new buildings and their phalanx of amenities. Rental price points will be lower, and with the affordable housing crisis facing many Americans\u2014even those with decent-paying jobs\u2014that is always an attractive proposition.<\/span><\/p>\n\n\n\n

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\n \"\"\n <\/div>\n <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"

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