Monday Morning Scoop - Falling Rates and Rising Confidence Fuel Optimism for Multifamily in 2025

Falling Rates and Rising Confidence Fuel Optimism for Multifamily in 2025

Transaction activity in the multifamily sector is poised for a potential rebound in 2025, as market conditions stabilize and investor sentiment shifts. However, developers and investors caution that the recovery will unfold unevenly across different housing segments, with cap rates, interest rates, and varying risk appetites shaping the pace and scope of that recovery.

At Marcus & Millichap’s annual multifamily investment outlook webcast, John Chang, the firm’s senior vice president, highlighted rising consumer sentiment as a key factor supporting absorption in the coming year. “We’re seeing a bump up in sentiment, and we anticipate that will bolster absorption numbers through at least the first few quarters of the year,” Chang said. He also flagged supply challenges, including labor shortages and tariffs on construction materials, as potential constraints on new development.

Transaction volumes remain well below pre-pandemic levels, with sales activity down 25% in transaction count and 20% in dollar volume compared to 2014–2019 averages, according to Chang. High borrowing costs, rising expenses, and sidelined institutional capital have curbed deal flow, but Chang noted signs of recovery in secondary and tertiary markets. “The differentiation in cap rates between primary and secondary markets has narrowed to just 10 basis points,” he said, underscoring a shift in demand toward smaller cities.

Spencer Gray, president and CEO of Gray Capital, identified two factors likely to reignite activity: lower interest rates and mounting debt maturities.

“If the 10-year Treasury dips below 4%, deals shelved earlier this year could return to market,” Gray said. Looming maturities for properties with debt service coverage ratios below 1.0 could also spark a wave of opportunistic sales, he added.

Zach Haptonstall, CEO and co-founder of Rise48 Equity, noted that distress is likely to concentrate on older, less desirable properties, particularly those with significant operational challenges. Limited buyer interest in these assets could further slow transactions in that segment, he said.

As the market works through distressed assets and the challenge of refinancing debt in a higher-interest-rate environment, some developers see room for cap rate compression and price stabilization, while others remain concerned that prolonged negative leverage could hinder transactions into 2025. Despite these challenges, lenders have already begun showing increased confidence in the multifamily sector. According to the Mortgage Bankers Association, lending activity surged 56% year-over-year in Q3, with strong demand for multifamily assets signaling renewed optimism.

By: Mario Marroquin
Source: GlobeStreet