Multifamily Market 2025: Price Drops, Opportunities & What’s Next
As we enter into 2025, Endurus Capital expects more transaction volume to take place as less volatility happens in the market and the buy/sell gap continues to improve. We expect prices to continue to drop in the sunbelt markets and prices to be flat in the Mountain West, Midwest, and Northeast. Time will tell if we have reached the bottom, with multifamily values down 20-25% from their 2022 peak in most markets. Endurus expects 2025 and 2026 to be at or near the bottom of the market, marking these years as excellent years to buy multifamily real estate and position yourself wisely for the next upward cycle. We are especially bullish about the Midwest, where rents remain positive and economic growth continues.
What is driving price declines?
Multifamily across the nation has been hit with multiple issues at the same time that have caused prices to decline from their 2022 peak:
1. Interest rates have risen dramatically. In 2012-2022 interest rates were below 5% for agency loans, and in 2020-2022 they were below 3.5%. By 2023 inflation was running rampant, and the Fed raised the Fed Funds rate from near 0% to 5% in just over a year. Mortgage interest rates followed suit. Today’s agency loans are hovering around 6%. This is a meaningful change in how a property cash flows, which ultimately affects the value. Interest rates don’t appear to be falling anytime soon as the economy continues to do well and the Fed appears to be satisfied with its current positioning.
Fed Fund Rate increase from near 0% to 5.3% in just over a year.
2. Inflation growth skyrocketed. Inflation affected everything. While current inflation is coming in a 2.8% YoY, that is on the heals of 9.1% peak inflation in 2022. Some major apartment expenses have risen well over the inflation rate. Labor, construction material, insurance, and property taxes have all seen a major boost over the past few years. Insurance has seen the greatest spike, with many properties surging by 60-100%+ over the course of 24 months.
3. Rents are declining. The US as a whole is still seeing rent declines and high vacancy rates. YoY rents have declined by -0.5% according to Apartment List. The good news is that it appears to be turning in the other direction. Nationwide, median rent has dropped 5% below, or $72 per month, below its 2022 peak. Rents are still 20% above prices seen in January 2021. Rent declines are mostly focused in the South, Southeast, and Southwest, while the Midwest and Northeast continue their slow and steady increase.
Rents spiked in 2021 due to the pandemic and peaked in 2022.
4. Record supply has hit many markets, especially those in the sunbelt. The nationwide vacancy rate has hit a 10-year high at 6.9%. Markets like Austin, Phoenix, Denver, Salt Lake City, Nashville, Raleigh, and Charlotte have all seen record new construction that has caused their occupancy and rents to drop. For instance, Austin, TX has seen a 30.7% increase in new units, which has caused rents to decline since 2022. Rents are currently declining at 9.3% in Austin. Most of the rest of the once-hot sunbelt is seeing a similar story. Meanwhile, the Midwest and Northeast are seeing low vacancy and positive rent growth. Nationwide we will see deliveries continue at near peak in the first two quarters and tapering off quickly in the latter half of the year. This again will be concentrated mainly in the southern half of the country.
Highest vacancy rates in over 10 years Nationwide.
Commercial lending is picking up steam
Commercial Multifamily Real Estate loan originations grew by $500 million in Q3 from Q2. Multifamily loans grew 54% YoY. This is still 53% below pre-pandemic levels. The growth is mainly due to lower lending costs and a more stable market. In 2023 and 2024, there was a standoff between sellers and buyers. Sellers wanted and expected 2021/2022 prices, but those prices no longer work for buyers. We've seen the market lose about 20-25% of its value over the past two years, bridging the gap between the sellers and buyers.
Banks are leading the way on non-agency loans. With more deposits and loans maturing, banks have an appetite to lend at today’s spreads. Banks captured a 43% market share in Q4 compared to just an 18% market share in Q3. Life insurance companies saw a 33% market share, while alternative lenders, such as bridge lenders had 23%.
The office sector loan originations are down 77% from 2019. Office loans are also the leader in delinquencies, coming in at 8%, compared to just below 3% for other property types. The drag that office will have on the overall commercial real estate market is still a concern. Banks and investors have negative equity in a lot of the office space around the country, which has become obsolete.
What's happening with interest rates?:
Interest rates have been the talk of the commercial real estate industry for the past 3 years, and we expect 2025 to be the same. 2024 was a volatile year, with US treasuries hitting a high of 4.7% and a low of 3.6%. Today, they are hovering around 4.5% and are expected to remain in the mid to low 4% range in 2025.
Interest rates are rising again despite the fed rate cuts of 25 bps in December. Strong jobs reports, the threat of tariffs, and an increase in inflation are causing US Treasuries to be unstable. The Fed is signaling that we won't see much for rate cuts in 2025.
We continue to be bullish that fixed-rate debt is the best path forward. While many sponsors are counting on interest rates dropping, Endurus Capital feels that it is best to lock in fixed-rate debt and take that gamble off the table. Floating rate debt could end up being a great bet, but if it doesn’t work out as expected, it will create pressure on sponsors and likely a loss for investors. We’re just not willing to gamble.
New HUD Secretary
Finally, in news not related to the above, but very important to today’s market, Scott Turner, former NFL player and Texas lawmaker, has officially stepped in as HUD Secretary. Mr. Turner is promising a major shake-up at the agency while the housing crisis intensifies. Scott is the first HUD Secretary to have worked in the private sector, so we are hopeful his experience will benefit owners as well.
Turner will lead a broader effort to privatize Fannie Mae (FNMA) and Freddie Mac (FMCC). Working alongside Treasury, Congress, and the FHFA, he's leading the charge to shift these mortgage giants, who back $7.5 trillion in home loans, out of government control. If successful, this move could completely reshape housing finance as we know it.
Beyond privatization, Turner is taking a scalpel to HUD’s $60 billion budget. His plan? Cut inefficiencies, scale back DEI programs, rethink return-to-office mandates, and roll back federal housing regulations. All of this fits neatly into Trump’s broader mission to shrink government oversight. He’s also pushing states to ease zoning laws, aiming to bring down housing costs through increased supply.
Trump’s team pegs the privatized Fannie and Freddie at over $330 billion. The government’s 80% stake would translate into $250 billion in common shares. Supporters see a historic windfall, but critics warn that if things go sideways, mortgage rates could climb as investor confidence in mortgage-backed securities wavers.
What’s the strategy for success in 2025?
Buy at a low basis, meaning a value of 20%+ less than the peak.
Buy for cash flow today. It needs to cash flow today and tomorrow, even with 10% rent declines.
Sunbelt markets should prepare for continued rent declines in 2025. Make sure you have plenty of cash!
Lock your debt in for 5 years or longer to allow for the growth to take place.