Investor confidence in the multifamily sector remains strong, but market pressures are shaping a more cautious outlook for 2025. Uncertainty around construction costs—heightened by potential tariffs on building materials—is forcing developers and investors to reassess strategies. Markets reacted to President Donald Trump’s announcement of a 25% tariff on imports from Canada and Mexico, followed by the temporary 30-day pause as negotiations continued. A separate 25% tariff on steel and aluminum imports, set to take effect on March 12, could further drive-up costs for construction, as the construction sector being the largest consumer of U.S. steel, using 47% of total supply, making it especially vulnerable to price increases.
While long-term fundamentals remain solid, macroeconomic headwinds, including interest rate volatility and labor shortages, are driving a more measured and strategic approach to multifamily investment. At the same time, shifting market conditions are prompting closer scrutiny of multifamily lending practices. Fannie Mae reported in its annual filing that it has set aside $752 million for credit losses in its multifamily operations, attributing the move to declining property values, rising delinquencies, and concerns over fraudulent lending transactions.
Rising Construction Costs and Capital Constraints Are Shaping Investment Decisions
Investors and developers are closely watching financing conditions, as persistent interest rate pressures and elevated construction costs continue to shape investment decisions. In December, the Federal Reserve signaled that short-term interest rates would remain higher for longer to combat inflation. As a result, the 10-Year Treasury yield rose by 58 basis points between October and January, increasing borrowing costs and slowing deal flow.
At the IMN Land & Homebuilding Capital Markets Forum, industry leaders discussed how macroeconomic uncertainty—including inflation and interest rates—is impacting capital deployment. “Many developers are shifting toward acquisitions rather than new construction,” noted Brendan Piccora, director of Data & Analytics at LightBox and attendee at IMN. “Some large firms are exploring vertical integration to mitigate supply chain risks.”
Multifamily financing showed signs of resilience, however. Mortgage Bankers Association (MBA) reported that multifamily mortgage originations surged 69% year-over-year in Q4 2024, suggesting that while capital is more expensive, lenders remain active in the space.
Oversupply in Some Markets Is Weighing on Rent Growth
While rental demand remains strong, certain markets are grappling with an oversupply of new units, leading to weaker rent growth. Nowhere is this more evident than in Austin, Texas, where an influx of supply has turned rental growth negative. Tampa, Atlanta, and Charlotte are also experiencing similar pressures.
According to insights from the NMHC Annual Meeting in Las Vegas, vacancy rates have inched up due to increased supply, but net absorption remains positive. Investors are shifting focus toward markets with stronger long-term fundamentals and rebalancing portfolios accordingly.
“We’re seeing clear signs of oversupply in places like Austin, Tampa, Atlanta, and Charlotte,” said Greg Kaiser, director of Strategic Accounts at LightBox and attendee at NMHC. “That’s putting downward pressure on rents, though the pipeline for new deliveries is expected to slow in 2025, which should help stabilize the market.”
CBRE data supports this outlook. According to the firm’s 2025 U.S. Real Estate Market Outlook, the multifamily sector will see its highest new unit delivery levels since the 1970s, primarily in the Sun Belt and Mountain regions, where some cities will expand their apartment inventories by nearly 20% in just three years (CBRE).
However, many high-supply markets are past peak deliveries, and occupancy rates are already showing signs of recovery. By 2025, markets with negative rent growth in 2024 are expected to turn positive as construction activity slows and demand catches up.
Robust High-End Transactions in San Diego
In contrast to markets grappling with oversupply, San Diego’s high-end multifamily sector has shown signs of robust growth. Late last month, Park 12 Apartments at 100 Park Plaza in San Diego sold for $309 million to MG Properties—the highest price since 2020 and the third highest in the city’s history. Since last summer, six apartment sales in San Diego proper have exceeded $100 million, averaging nearly $490,000 per unit, compared to the $430,000 per unit achieved by Park 12.
This robust performance extends beyond just one property; the greater San Diego MSA has seen eight nine-figure apartment sales with an average sales price exceeding $475,000 per unit. Prominent buyers such as Mesirow, GID, Virtu, and Blackstone are actively participating, further underscoring the resilience of this segment. Across California, more than 40 nine-figure apartment sales over the past year have averaged over $350,000 per unit, reflecting “continued investor confidence in high-end multifamily assets even amid broader market headwinds,” noted Manus Clancy, head of Data Strategy at LightBox.
Multifamily Remains the Most Preferred Asset Class for 2025
Despite near-term headwinds, multifamily real estate is investors’ most-favored asset class for 2025, buoyed by strong renter demand and improving fundamentals.
After slight declines in rents over the past two years, construction starts are down 40% from peak levels, according to LightBox’s Q4 2024 CRE Snapshot report. This will balance out supply and demand, setting the stage for rent growth in metros with strong population growth and housing demand. “Investors are showing interest in multifamily properties with stable cash flow potential, particularly in growing Sun Belt metros like Atlanta, Austin, and Charlotte,” said Dianne Crocker, research director at LightBox.
For all the challenges posed by rising interest rates and record levels of new supply, industry experts expect improving occupancy and accelerating rent growth in the second half of 2025. According to CBRE, the average multifamily vacancy rate is projected to end 2025 at 4.9%, with annual rent growth at 2.6%.
A Measured but Optimistic Outlook for 2025
The multifamily sector is at a pivotal moment. While supply imbalances, ‘higher-for-longer’ interest rates, and unstable construction costs are causing some investors to approach deals with more caution, the overall long-term fundamentals remain solid.
“There’s a lot of optimism, but also a recognition that we’re in a different market than we were a few years ago,” noted Crocker. “Investors who are strategic and adaptable will find significant opportunities.”
With record capital raising, a more disciplined approach to new development, and an expected slowdown in new supply, 2025 could be a transitional year—one where resilience and adaptability will define success in the multifamily sector.
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