While ongoing uncertainty about tariffs, inflation, and interest rates affects confidence among multifamily developers, investors and owners, demand and supply dynamics continue to bode well for the years ahead, according to Kimberly Byrum, Zonda’s managing principal of multifamily advisory during Zonda’s recent Multifamily Market Update.
“Despite the complexities of today’s market, the multifamily sector continues to be ripe with opportunities,” Byrum said. “As the cost of capital improves, we anticipate more development and more acquisitions during the second half of 2025 and towards the end of the year.”
The first peak of the supply pipeline has passed, and deliveries should contract by the summer of 2026. There are minimal additions anticipated for 2027, she said.
Still, there are headwinds including construction cost increases, tightened underwriting and “lease-up fatigue,” that multifamily investors must address strategically, Byrum said.
Construction Cost Challenges
Input costs, which include labor, materials, fuel and power, represent approximately 44% of construction costs, with labor wages accounting for about 50% of input costs. Byrum estimates that construction wages will rise 3.9% in 2025.
“Labor availability has been a big concern that’s exacerbated by the worry about potential deportations of undocumented workers,” Byrum said. “Our research estimates that about 800,000 to 1.3 million of the 3.2 million workers in residential construction are undocumented.”
Zonda estimates that about 66,000 undocumented construction workers might be deported, which is less than 1% of all construction workers in the U.S.”
Materials costs are elevated but stable at 1.3% year-over-year growth now, but Zonda anticipates an increase of 9.6% in 2025 because of inflation and tariffs. However, given the savings on fuel costs, Zonda’s weighted average estimates a 4.8% increase in construction cost inputs.
Underwriting Constraints and Market Fundamentals
The threat of a trade war has sent investors in search of yield in private equity, but interest rate uncertainty continues to be a big concern for investors. While there was some momentum in the availability of equity and debt during the first quarter of 2025, Byrum said that borrowers face extremely strict underwriting standards similar to the period after the great financial crisis.
Underwriters are financially conservative and particularly focused on rent since little to no rent growth is anticipated in 2025 or 2026, Byrum said.
Transactions rose 7% during the first quarter of 2025 compared to the first quarter of 2024, mostly for single assets rather than portfolios. More transactions are anticipated for the second half of 2025.
Byrum expects job growth to moderate to 0.6% annually in 2025 and 2026. She anticipates occupancy rates to be 93.7% in 2025 and climb to 95% in 2026 as deliveries drop. Asking rent is likely to increase in 2026 as well.
Market Performance
The top markets where absorption exceeded supply during the first quarter of 2025 include Colorado Springs, Nashville, Austin, Columbus, Denver, Sarasota, Raleigh, Charlotte and Fort Myers.
Markets that underperformed, where supply exceeded absorption during the first quarter of 2025, include San Francisco, Los Angeles, Cincinnati, Las Vegas, Indianapolis, Sacramento, Washington, D.C., Riverside and Richmond.
However, when looking at occupancy rates, the top performing markets where occupancy rates were above 94% during the first quarter of 2025 include Los Angeles, Seattle, Orlando, Phoenix and Tampa. Some of those same markets – Orlando and Seattle - also saw the highest levels of concessions for new leases alongside Austin.
“Austin’s rents have declined, but its median income to rent at 20.7% is better than the U.S. rent-to-income ratio of 22.3%,” Byrum said. “Austin is a little more affordable right now because of the high supply level.”
Lease-Up Fatigue
A common issue among many of Zonda’s clients is “lease-up fatigue” that sets in when a community is about 60% occupied.
“The owners start to see a deceleration in momentum after they’ve reached the pool of easy to capture renters or if new competition is introduced,” Byrum said. “It’s important to strategize about why leasing activity has slowed and adjust marketing to a more targeted approach. For example, if all you have left are studios, then you need to market to studio renters, not families.”
She also recommends reviewing operational issues such as the staff focusing primarily on customer service rather than sales.
Market Opportunities
Looking ahead, Byrum focused on “resilience economy sectors” – those that are likely to thrive in the coming years such as energy (both traditional and clean energy), technology (especially AI), pharmaceuticals and semi-conductors. Within those industries are markets that serve as the epicenter of activity, are dominant, emerging or micro-hubs with significant job growth and investments.
“If you look at clean energy, for example, you can almost map a line from Austin to Buffalo where they’re building plants for clean energy,” Byrum said. “Right now, Austin, Memphis and Greensboro are the three epicenters for clean energy but there are numerous other dominant markets and emerging markets.”
The semiconductor fabricator industry includes a $165 billion investment in Phoenix, with other epicenters in Austin and Syracuse. Byrum points out that building the infrastructure and bringing in employees in this industry takes about five years, but the payoff for multifamily investors could be worth the wait given the size of these projects.
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.