Cyclic Recovery in 2025 is Just Ahead

With continued solid fundamentals, multifamily is the most preferred asset class for commercial real estate investors in 2025.

For all the short-term negative effects brought on by rising interest rates and record levels of new supply, strong renter demand will drive improving occupancy and accelerating rent growth. This in turn will lead to increased multifamily investment activity. The average multifamily vacancy rate is expected to end 2025 at 4.9% and average annual rent growth at 2.6%.

Developers will add more multifamily units to the U.S. housing market than in any period since the 1970s. Most of this new supply will be in the Sun Belt and Mountain regions, where some markets will grow their inventories by nearly 20% in just a three-year period. However, many of these high-supply markets are now past their peak for deliveries, and occupancy rates have already begun recovering. This recovery will accelerate next year and markets with negative rent growth in 2024 are expected to turn positive in 2025 as completions slow considerably following the marked slowdown in construction starts.

Figure 14: Recovery Timeline for High-Supply Markets with Negative Rent Growth

Source: CBRE Research, CBRE Econometric Advisors, Q3 2024.

Ten of the 16 markets with the largest supply pipelines (ranked by inventory growth) are expected to enter 2025 having already reached their peak in new deliveries. Supply in the remaining six (Charlotte, Fort Lauderdale, Phoenix, Raleigh, Riverside and San Antonio) will peak in 2025. Despite the negative supply-side pressures on market fundamentals, all of these markets are expected to benefit from improved average vacancy rates and rent growth for several years ahead.

By mid-2025, multifamily construction starts are expected to be 74% below their 2021 peak and 30% below their pre-pandemic average. As the construction pipeline shrinks, strong renter demand will lower the vacancy rate and precipitate above-average rent growth in 2026. This exceptional renter demand has come at a critical time and has already absorbed a large amount of this new supply wave. Job creation, population growth and the competitive discounts being offered by landlords to fill these new units is driving much of this demand, along with a relatively unaffordable single-family housing market.

Figure 15: Average Monthly Multifamily Rent vs. New Home Mortgage Payment Forecast

Note: Does not include estimates for homeowner's or renter's insurance. Assumed down payment of 10% with prevailing and forecast interest rates.

Source: CBRE Research, CBRE Econometric Advisors, Q3 2024.