Navigating the Multifamily Market: 2025 Trends and Opportunities

Insights From the Publisher: The convergence of rising rents, strong demand, and balanced supply could make multifamily a top-performing asset class in 2025.

By Damon Elder, publisher and editor-in-chief, The DI Wire

2025 is poised to be a pivotal year for the multifamily real estate sector. After years of high interest rates and a peak in construction activity, several trends are emerging that may continue to shape the alternative investments landscape. With rent growth gaining momentum and supply and demand finding equilibrium, the future may be promising for multifamily-focused investments.

Rent Growth – Measured, but Confident

In 2024, national rent growth was influenced by both a robust supply and an equal demand, effectively cancelling each other out. As of October 2024, year-over-year rent growth was only up about 0.9%, according to Yardi Matrix, but the outlook for rent growth in 2025 is shaping up to be cautiously optimistic. Strong renter demand, combined with limited construction, is expected to drive occupancy and accelerate annual rent growth by 2.6%, according to CBRE. CBRE also expects average multifamily rents to grow by 3.1% annually over the next five years, above the pre-pandemic average of 2.7%.

Regionally, 2025 rent growth will vary by several factors, such as local economic conditions, job growth, and the balance between supply and demand. For example, the Sunbelt and Mountain regions are expected to see their market inventories grow by nearly 20% over the next three years and may experience modest rent growth, while CBRE predicts that the Midwest, Northeast, and certain gateway markets will see an average rent growth of more than 3% in the upcoming year.

Working Toward a Supply/Demand Balance

A key factor influencing rent growth and overall market dynamics is the interplay between supply and demand. Origin Investments said that 600,000 units were delivered in 2024. This supply is expected to fall by 15.2% in 2025 and 53.8% in 2026. Even areas that are expected to grow in inventory, such as the high-supply markets in the Sunbelt and Mountain regions, are past their peak for deliveries. By mid-2025, multifamily construction starts are expected to be 74% below their 2021 peak and 30% below the pre-pandemic average.

Demand, however, is expected to continue. One reason for this maintained demand is the wide monthly premium between buying and renting. High home prices and mortgage rates have forced many would-be homebuyers to remain renters. Similarly, nearly 80% of homeowners have mortgage rates below 5%, making owners reluctant to sell in the current high-interest rate environment, as reported by CBRE. This challenge is expected to be even more pronounced in larger markets, where the average cost of buying a house can be as much as three times the average 2025 rent. Additionally, job creation, population growth, and overall changing lifestyle preferences, especially among younger renters, should continue to fuel demand.

Average Monthly Multifamily Rent vs. New Home Mortgage Payment Forecast

Possible Challenges and Headwinds 

While the 2025 outlook offers many positive potentials, it will undoubtedly face challenges as well. Some of President-elect Trump’s proposals could spur positive investment activity, but other proposals could dampen it. An increase in tariffs will likely lead to higher interest rates and rising inflation. Higher material costs could negatively affect new construction deals. An increase in deportations may contribute to a shrinking construction workforce.

Resident retention may become a priority for some operators, especially those in higher supply markets, as they look to mitigate costs associated with turnover and vacancy. In 2024, the national occupancy rate averaged 94.3%, slightly below the historical normal level, while resident retention increased with lease renewals reaching 55%, according to RealPage. High-supply markets may have to see rent concessions in order to retain residents.

What Does This Mean for Alts?  

As one of the most popular sectors in alternative investments, multifamily trends will certainly have an effect on real estate investment trusts and other alternative funds. According to the National Association of Real Estate Investment Trusts, or NAREIT, there is the possibility for moderating interest rates and robust economic growth, contributing to an economic soft landing. Multifamily REITs may be able to take advantage of this soft landing and the strong fundamentals of the multifamily sector.

Qualified opportunity zone funds may also be able to leverage the growth potential of multifamily while simultaneously likely benefitting from a favorable Trump administration. Potential tax benefits for investors may further encourage investors and enhance returns.

Private credit funds may also take advantage of the 2025 environment. While interest rates have dropped, alternative lenders continue to seize commercial real estate lending shares. In the third quarter of 2024, banks accounted for only 18% of non-agency loan closings, down from 38% a year earlier, according to CBRE. Those private equity funds focused on multifamily may be able to capitalize on positive rent growth by targeting those markets with strong fundamentals and favorable supply and demand dynamics.

While it is always difficult to make predictions, multifamily real estate seems well-positioned for a positive outcome in the year ahead. Rent growth is expected to continue to grow, while supply and demand approach more of an equilibrium – all of which could bode well for the alternative investments industry. Sponsors and investors who align themselves with these trends may achieve greater success in 2025.

Damon Elder is the publisher and editor-in-chief of The DI Wire, as well as president of Spotlight Marketing Communications. He has worked in the alternative investments industry for nearly 20 years and was previously a congressional aide and political consultant before finding honest work in the private sector. Agree or disagree with what you read here? Share your views with him at damon@thediwire.com. Thoughtful replies may be published in The DI Wire.

The information provided in this article is for educational purposes only and should not be considered investment advice. Investing in real estate involves risks, and past performance is not indicative of future results. Consult with a qualified financial adviser before making any investment decisions.

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