Chapter 6
Multifamily
U.S. Real Estate Market Outlook 2025
5 Minute Read
Cyclical Recovery 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
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
Source: CBRE Research, CBRE Econometric Advisors, Q3 2024.
As the construction pipeline shrinks, strong renter demand will lower the vacancy rate and precipitate above-average rent growth in 2026.
The wide monthly premium between buying and renting a home will preserve existing renter demand in 2025. Many would-be homebuyers will remain dissuaded by high home prices and mortgage rates.
Making homeownership even more difficult for renters, nearly 80% of all current homeowners have mortgage rates below 5% and will remain reluctant to sell in an ongoing high-interest-rate environment. This challenge will remain even more pronounced in many of the largest markets, where the average monthly cost of buying a house is forecast to be two to three times more than the average rent in 2025.
Vacancy rates across the Midwest, Northeast and six gateway markets have not exceeded their historical averages to the same extent that higher-supply Sun Belt and Mountain regional markets have. As a result, many of these markets are expected to have average annual rent growth of more than 3% in 2025, well above the 2.6% projected national average.
Shrinking construction pipelines, strong renter demand, rising occupancies and accelerating rent growth are expected across all markets in 2025. Investors will have to wait until 2026 or later for market fundamentals in the Sun Belt and Mountain regions to be as strong as those of the Midwest, Northeast and coastal regions. Nevertheless, the long-term prospects for these more challenged regions will continue to attract a disproportionate amount of investment.
Shrinking construction pipelines, strong renter demand, rising occupancies and accelerating rent growth are expected across all markets in 2025.
Cost-to-Buy Premium Will Continue to Favor Rental Market
With average newly originated mortgage payments 35% higher than average apartment rents as of Q3 2024, many U.S. households continue to rent rather than buy a home. Even though the premium to buy a home is expected to come down over the next several years based on home-price, interest-rate and rent-growth forecasts, it will remain high enough to keep today’s renters renting for longer.
We expect average multifamily rents to grow by 3.1% annually over the next five years, above the pre-pandemic average of 2.7%. This above-trend rent growth is expected to outpace home price appreciation and, along with lower mortgage rates, slightly narrow the cost gap between buying and renting. CBRE expects the premium to buy versus rent to ease to 32% from 35% by the end of 2025.
All markets will see their cost-to-buy premiums shrink over the next five years as interest rates fall, home price growth remains subdued and rent growth accelerates. Austin and Los Angeles have the highest cost-to-buy premiums in the country, both more than 2.5 times the average rent. Although that premium will come down over the next five years, it will remain more than twice as expensive to buy than to rent.
High-growth markets like Phoenix, Salt Lake City and Nashville will see the most premium compression over the next five years. This will be driven by above-average renter demand and reduced multifamily construction pipelines leading to accelerating rent growth.
Figure 16: Cost Multiplier of New Home Mortgage Payment vs. Monthly Multifamily Rent
Source: CBRE Research, CBRE Econometric Advisors, Freddie Mac, U.S. Census Bureau, Realtor.com®, FHFA, Oxford Economics, Q3 2024.
Contacts
Matt Vance
Vice President and Americas Head of Multifamily Research
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