2025: An Inflection Point for the Multifamily Market

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As the Fed began a series of rate hikes in 2022, the apartment market went from one of frenzied growth and optimism to a market characterized by decline, be it declining sales volume, declining occupancy, or declining values. As we near year’s end, stability and even positive momentum have begun to take hold, and there is good reason to expect them to carry into 2025 with the return of large, open-ended funds and an improved debt environment.

The sales market started to thaw after a prolonged period of declining sales volume and pricing, with the Fed kicking off the rate-cutting cycle in September 2024 with a 50 basis-point rate cut, increasing seller acceptance of price reductions from the 2021 peak, surprising fundamentals on the demand side, and a market set to have a large decrease in new supply in the next few years. With multiple large portfolio transactions announced in Q2 this year, sales volume turned positive on a year-over-year basis for the first time since Q2 of 2022, as tracked by Real Capital Analytics. In total, nearly $40 billion of assets traded in the second quarter. Cap rates also held flat for the quarter for the first time since Q2 of 2022.

The NMHC Quarterly Survey of apartment conditions reported, as of July, a second straight quarter of respondents indicating a return to a positive sales environment. This shift was driven by both the reported tightening of fundamentals and a large improvement in the availability of debt financing. A measure above 50 indicates improving conditions and volume: fundamentals registered a 47, which was its highest measure since July 2022; the sales volume index registered 57, its highest measure since January 2022; and debt financing registered a 63, which was only its second positive quarter since July 2021.

From 2017 to 2018, Real Capital Analytics reports an average quarterly apartment transaction volume of $43 billion. Given the changes in market sentiment shared by NMHC, increasing portfolio and transaction volume, and what is highly likely to be an increasingly favorable debt environment, it would be surprising if the market failed to achieve prior late-cycle norms throughout 2025. It is also highly likely that the large open-ended funds on the sidelines due to redemption issues reenter the market in 2025, as those issues are subdued, bringing back another large source of transaction volume.

One major reason for improving sentiment in the sector is the healthy demand/absorption the market is experiencing, largely thanks to the strength the U.S. labor force has enjoyed since the pandemic. With the ongoing retirement of the Baby Boomers, the American labor force participation rate today remains below pre-pandemic and long-term averages. At the same time, the prime-age 25–54 employment-to-population ratio has increased to within 1 percent of its record high (80.9 percent versus 81.9 percent), according to the Bureau of Labor and Statistics. The lack of older workers has created a market environment where the young have outsized opportunity for both income growth and job retention, especially relative to the post–Great Financial Crisis labor environment, where prime-age employment-to-population ratios were still 76 percent three years after the recession ended. Labor market tightness has resulted in, as the Fed reported in its working paper from February 2024, Gen Z becoming the highest-earning generation on record at its age (in 2019 dollars).

Today, Gen Z has as many working people as the rapidly retiring Baby Boomers (according to Glassdoor and the U.S. Census Bureau). The strength of today’s younger labor force has resulted in Gen Z being able to form households at a rate much quicker than the millennials during the early parts of the last cycle, due to the constraints that stem from a much different labor reality. The strength of the younger labor force has, in turn, created a strong demand for apartment units.

Moody’s projects 2024 to end as the sixth-strongest demand/absorption year since 2000 and is projecting 2025 to be the fourth-strongest year. Other third-party providers have even stronger relative projections. According to Moody’s, the United States averaged roughly 247,000 units absorbed from 2015 to 2019 and roughly 260,000 units absorbed from 2017 to 2019. Provided the Fed can navigate a soft landing, and the labor force remains strong, demand likely ends up somewhere between the two totals, which would represent what must be considered a very healthy demand-side story. Qualitatively, reports from the market back up these assertions, as traffic and leasing activity remains strong, and large vacancy expansions are limited to certain high-supply submarkets. Moody’s also reports 2024 occupancy rates above 94 percent, with a projected slight increase in rates in 2025.

One thing that will become increasingly important in 2025 is the efficiency and effectiveness of building-level operations. Given the high supply the market is experiencing (especially in certain nodes, including Downtown Nashville, Downtown Austin, Downtown Seattle, and parts of Charlotte), the ability to attract and retain residents will become increasingly important—particularly through strong service and having a respected brand behind you.

Additionally, while demand remains high, outsized net operating income (NOI) growth is unlikely until supply subsides in 2026 and 2027, meaning that cost efficiencies will become increasingly important in driving NOI in the near term. Buildings that are mismanaged are likely to present buying opportunities, as they are where most distress exists today. A notable subsection of buyers that entered the market during the market peak in 2021 were not equipped to operate their own apartment buildings, due to a combination of inexperience and a lack of cash resources in an increasing interest rate environment. These inexperienced operators are the players that are most likely to continue to suffer in the market.

Next year should represent a return to the norm for the apartment market, as strong demand continues to manage the near-term supply wave and fundamentals stabilize. Declining interest rates, plus a market with much friendlier prices than in the early part of the decade, should yield a return to normal for the capital markets. That said, quality operators will yield the strongest market results, as supply continues to create competition for new tenants and distress spreads through the least-well-operated buildings.