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Is the Multifamily Market in Trouble for Next Year? The Worst Struggles May Have Already Passed.
In 2024, amidst ongoing discussions surrounding inflation, interest rates, and inventory, one undeniable trend emerged: multifamily construction surged across the Sunbelt. This trend is expected to continue into the following year.
By the close of 2024, around 520,000 new rental housing units are projected to be completed, with an additional 900,000 units currently under development. This marks the most significant wave of multifamily construction in the last 50 years. These figures follow a record-setting 2023, which saw 438,500 new units—surpassing any previous one-year total since 1987. According to CoStar data, the past five years have seen an impressive 1.8 million new units added to the U.S. market.
The Sunbelt Region Leads in New Multifamily Housing
The Sunbelt accounts for approximately two-thirds of all new multifamily units, with Texas cities like Austin adding the most, with 45,000 new units between 2020 and 2024. Phoenix added 40,000 units, benefitting from factors such as remote work, job creation, and lower housing costs.
In a surprising twist, two northern cities—Philadelphia and Minneapolis—also saw significant growth, with Philadelphia adding 48,000 units and Minneapolis 30,000 units compared to the previous five years. These cities have maintained relatively stable vacancy rates, staying just below the national average of 7.9%. Austin, however, has seen its vacancy rates soar to 15.3%, making it one of the weakest apartment markets in the country, according to multifamily investor Matt Rosenthal.
Dallas-Fort Worth leads the U.S. in overall new units, adding 151,000 in the past five years, followed by New York City (120,000) and Houston (106,000). Despite the growing supply, demand continues to outpace construction in New York, where the competition for apartments remains fierce.
Developers Get Creative to Attract Tenants
With so many new units entering the market, developers are employing innovative strategies to attract tenants. For instance, the Broadridge Philly Apartments in Philadelphia offer unique amenities like podcasting booths to cater to a younger, content-creating demographic. The development also focuses heavily on serving the local community, providing essential services like a food market and daycare facilities.
Luxury apartments near New York, priced around $2,000/month, offer an affordable alternative to living in Manhattan or Brooklyn. As rents continue to rise, it remains more economical for many people to rent rather than buy, especially given the high costs of down payments and mortgages.
Vacant Apartments Expected to Fill in 2025
According to CoStar data, vacancy rates across the nation began to improve in the third quarter of 2024. As the construction boom begins to taper off in 2025, absorption rates will likely increase, leading to greater market stability. This suggests that, barring any economic setbacks, the multifamily sector could see a period of relative stability.
Investors are already showing renewed confidence, as the market has stabilized and rents have remained relatively stable. After dramatic post-pandemic rent hikes, recent data shows that rent increases have moderated, with typical rent hikes averaging around 3.5%.
Strong Apartment Building Sales in Key Markets
Cities like Denver, San Francisco, and Washington, D.C. suburbs are seeing strong apartment building sales. As affordability remains an issue for many renters, certain markets will continue to see demand for rental properties, making 2025 and beyond favorable years for landlords.
Developers, however, remain cautious about large-scale projects, waiting for vacancies to be absorbed before committing to new developments. In particular, the prospect of consistent rent growth will likely be key in encouraging further development.
Investor Considerations for Multiunit Apartment Purchases in 2025
With interest rates expected to stabilize between 6% and 7%, the primary factor for potential buyers in 2025 will be negotiating price. In Sunbelt regions, where an oversupply of vacant units exists, there may be room for price reductions, particularly for sellers with high debt. Investors should consider the long-term potential of their purchases and avoid relying solely on short-term price movements.
Additionally, rising insurance costs and the potential for tariffs on construction materials could impact the profitability of certain developments. However, the shift toward remote and hybrid work arrangements may benefit urban multifamily buildings that cater to commuting professionals.
Final Thoughts
While recent trends show some stabilization in the multifamily market, regional differences and various uncertainties still exist. The market remains highly dynamic, with cap rates fluctuating based on specific conditions for each building. Smaller investments, such as one-to-four-unit properties or senior housing, may offer safer returns for investors in 2025. As the demand for affordable housing remains high, these sectors may provide more secure opportunities in the coming years.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Is the Multifamily Market in Trouble for Next Year? The Worst Struggles May Have Already Passed.
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“