Will Multifamily Thrive in ’25? Outlook is Improving
As we step into a new year, the shift in administration and policy priorities is creating a renewed sense of optimism about economic prospects. As both a multifamily owner-investor and a commercial mortgage banker, I’ve observed common themes in conversations with peers and clients preparing for the year ahead. Many of these revolve around critical questions: How accessible is financing? Will deal flow improve? Here are some insights into what to expect.
Deal flow and development
In the development arena, 2024 saw the largest wave of new multifamily construction deliveries since 1987, particularly in high-growth regions like the Southeast and Texas. This influx has led to some rent softening, but stabilization is anticipated in 2025 as fewer new projects are slated for delivery through 2026.
Outside of these high-growth markets, rents have remained steady in most major metropolitan statistical areas, where demand continues to outpace supply. Movement on this front will require alignment of current capital costs with project costs to achieve necessary yields able to meet the returns required by available debt sources. However, aligning capital costs with project yields remains a key challenge to advancing these new developments.
We did not witness the advancement of many projects in 2024 due to cost challenges over the past couple of years–including rate volatility–that have spilled over into other project areas. Three primary obstacles to multifamily development in 2025 include:
Rising supply costs: Post-pandemic, material costs (e.g., steel, concrete) have increased by approximately 50 percent, compounded by supply-chain delays that extend project timelines and strain budgets.
Labor shortages: The U.S. construction industry continues to face a critical labor shortfall, with 60 percent fewer workers hired than projected in 2024 to keep up with current demand. Limited skilled labor is driving up costs and creating project backlogs.
Lengthy approvals: In states like California and New York, securing approvals for new developments remains costly and time-consuming, particularly in high-barrier-to-entry markets.
While these factors push project costs beyond acceptable yield thresholds, incremental improvements in any area could unlock more favorable loan-to-cost underwriting conditions. Additionally, disaster recovery efforts, though disruptive, may present opportunities to streamline cumbersome approval processes.
Debt access
Today’s market is not constrained by liquidity. Multifamily continues to enjoy the widest array of debt options in the commercial real estate sector. There exists an abundance of sources for construction, bridge and permanent loans meeting diverse business plans. However, the primary challenge remains debt service capacity at current rates and yields. The type of financing you choose will depend on these factors.
Agencies: Fannie Mae and Freddie Mac remain dominant in providing permanent debt for stabilized multifamily assets. They’re starting the year with competitive spreads that may widen as 2025 progresses. A key policy to watch is the potential privatization of these agencies, which could open the door to new programs and underwriting criteria.
Life companies: These time-tested and reliable lenders offer stability and lower debt service baselines, non-recourse terms, with the added benefit of locking rates at application to hedge against volatility. They are also a resource for fixed-rate bridge, construction and construction-to-permanent debt. Expect debt from life companies to range between the mid-5 percent to mid-6 percent range, depending on Treasury yields.
Debt Funds: Private debt funds and structured capital sources have become essential for bridge and construction lending. Their loans often include preferred equity components but come at higher costs as they target yield in a volatile market.
Banks: While banks are reentering the market cautiously, liquidity constraints mean they remain selective. Expect terms to require deposit relationships and performance covenants. Banks are more active in construction financing due to its short-term nature and higher yields.
Market dynamics and fundamentals
Multifamily fundamentals remain strong overall. Rent softening has been concentrated in regions experiencing a surge in new supply, such as the Southeast and Texas, but these markets should stabilize over the coming months. Despite rate volatility and inflation pressures over the past two years, multifamily real estate remains the most resilient commercial asset class.
It’s important to note that, historically, interest rates remain within the low-to-mid range, offering opportunities for refinancing stabilized assets. While the cost of capital will likely remain elevated, its impact on the sector is becoming less disruptive.
Challenges persist, including labor shortages, rising construction material costs and increased insurance premiums. However, multifamily continues to outperform other asset classes in stability, liquidity and long-term growth potential.
As we navigate 2025, optimism in multifamily real estate remains well founded. Deal flow is expected to pick up as legacy loans mature and cap rates adjust to current realities. Development will hinge on addressing key cost challenges but improving fundamentals and continued liquidity provide reasons for confidence. Multifamily’s position as the most financeable and stable commercial real estate asset class will remain a defining feature in the year ahead.