One year ago, multifamily investors were a bit nervous about what the year ahead might bring, especially in markets with a full supply pipeline. But what happened – and what investors hope will happen again in 2025 – is that demand was so robust that the sector weathered the supply storm, says Sam Tenenbaum, head of multifamily insights for Cushman and Wakefield.
“2024 turned out to be the second-best year for multifamily demand that we've ever seen,” Tenenbaum says. “The market held up remarkably well considering it was inundated with new supply.”
530,000 units of multifamily supply delivered in 2024, but the sector also saw a near 75% increase in new demand over last year’s mark.
“The relative gap between supply and demand was the narrowest it’s been since 2021, when demand vastly outperformed supply,” Tenenbaum says. “We saw a relatively minimal increase in vacancies throughout 2024 considering how much new supply we added, so the market did extraordinarily well in the face of that new construction.”
Generally, the U.S. economy is in the “sweet spot,” growing robustly yet with inflation working its way down to the Fed’s 2% target, according to Cushman and Wakefield’s chief economist Kevin Thorpe. GDP is estimated to be above 3% for the fourth quarter of 2024. Bright spots include the resilient labor market, wage growth and consumers benefiting from stock and housing market wealth effects. Thorpe anticipates job growth to be more than 2.5 million for 2024, following the 3.5 million new jobs in 2023. Unemployment has been below 4.5% for 38 consecutive months.
That healthy economy is driving demand for apartments, along with data centers, experiential retail and high-quality offices, Thorpe says.
Supply and Demand Dynamics
The supply and demand trends of 2024 turned out better than expected and bode well for 2025, Tenenbaum says.
In 2024, we had 440,000 units of net absorption, about 20% below 2021, which was by far the best year for absorption rates in the multifamily sector.
“That’s not to say 2024 was a perfect year, because ideally you want vacancy rates to fall,” Tenenbaum says. “But even given increased supply, vacancy rates were under 9% overall, with stabilized vacancy rates trending at about 6.5% to 7%.”
A significant decline – nearly 50% compared to 2024 – in multifamily deliveries is expected for 2025.
“That’s a very good recipe for multifamily fundamentals this year, given that last year was one of the best for demand,” Tenenbaum says. “So, even if demand in 2025 is 60% of what it was in 2024, it will still be a very good year for the apartment market because you’ll still have more demand than supply. And if demand remains as strong as last year, 2025 will be even better.”
As landlords start to feel more confidence in the economic recovery and in the multifamily sector’s demand and supply dynamics, Tenenbaum expects them to push rents a little higher.
“Rent grew by 1.5% to 2% in 2024, which is about half of typical rent growth in a non-recession year,” Tenenbaum says. “But rents could have been worse considering that when vacancy rates climb you don’t normally see any rent growth at all. But because the broader U.S. economy managed to avoid a recession in 2024, we didn’t see rent declines.”
Depending on how the economy performs in 2025, Tenenbaum anticipates rent growth to improve in the second half of the year.
Another trend that could indicate improvement in the multifamily sector in 2025 is that some big institutional investors re-entered the market.
“These buyers bid to win on deals, as opposed to just staying in the game,” Tenenbaum says. “Pricing seems to have stabilized, too. We’re not seeing huge declines in pricing anymore, which seems to be behind us. And some indices have seen pricing accelerate slightly.”
Key Trends for Multifamily Investors to Monitor
Multiple factors in addition to supply and demand impact multifamily performance, including:
- For-sale housing market performance: High prices and mortgage rates that continue to dissuade first-time buyers from entering the market contribute to strong renter demand. An ongoing issue, Tenenbaum says, is not just that homeownership is expensive, it’s that what buyers can afford is less appealing than an apartment. “The average rent in America is about $1,800 per month, so a house that you can buy for a similar mortgage payment is about $340,000,” he says. “That’s about 15% to 20% less than the median home price, so you’re looking at a smaller house, that’s maybe older and offers a much longer commute.” In the past when mortgage rates were lower, that rent would buy a $500,000 house, which was about 40% above the median home price.
- Supply pipelines: Multifamily performance in terms of lower vacancy rates and improving rent growth is likely to pick up first in markets where new construction starts are pulling back the most, Tenenbaum says. Generally, that’s in the Sunbelt, but it depends on the specific market. Some markets are seeing a slight increase in construction starts.
- Operating expenses: In general, the expense pressure in 2024 was significantly lighter than it was in 2023, even though it was still elevated compared to normal years, Tenenbaum says. “Coming off of one of the worst years for expense pressure seen in recent history, it's a good sign that it's moving in the right direction,” he says. “Even insurance costs are stabilizing or at least not increasing at the breakneck pace of 2023.”
- Job growth: One of the biggest indicators for multifamily demand is job growth. While Fed activity has slowed job growth compared to 2023, the labor market is functional and jobs are still being added, Tenenbaum says.
Read more analysis on the trends shaping the multifamily market in Cushman & Wakefield and Greystone's Insights Magazine: 2025 Outlook.
The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.