Five Multifamily Predictions for 2025

In early 2024 we said it would be a great time to purchase multifamily properties. We did just that. Our Calvera Income and Growth Fund purchased a 152-unit, 2016 construction, apartment property in high growth Dallas, TX. This property is the best physical asset in Calvera’s entire portfolio. We upgraded what we normally buy in every way. For us, 2024 was a great time to buy, though opportunities were few and far between.

I expect 2025 to be a turning point for the multifamily industry. Between sellers finally capitulating and interest rates staying elevated, the industry will at last be able to move forward. This will continue to produce great opportunities for those with strong balance sheets to acquire property.

1. Interest rates will remain in the 4s.

Unless the economy is much weaker than it appears, the 10-year US Treasury will remain above 4% in 2025. Inflation seems sticky, there’s upside in AI (artificial intelligence), the Fed is planning for fewer rate cuts, and the economy is strong. There are not many reasons to believe longer-term interest rates will move meaningfully lower. This has consequences for the rest of the predictions.

2. Cap rates will stay in the mid 5s, on average.

If the 10-year UST is 4.5%, then let’s assume the 5-year UST is 4.35%. With a narrow loan spread of 125 basis points, the interest rate on a 5-year loan may be as low as 5.6%. Multifamily loans should be anywhere from 5.5% to the low 6% range, assuming normal agency (Fannie Mae, Freddie Mac) financing. Because of this, cap rates are not going lower in 2025. It’s not prudent to pay a cap rate lower than your loan amount, unless you’re expecting significant growth. That growth can come from a value-add strategy or a natural supply/demand imbalance. I don’t expect values to increase based solely on appreciation in 2025. Increases in net operating income will make properties more valuable. Depending on your prediction of rents in the short-term, you might be a more aggressive acquiror of apartments, allowing you to pay a lower cap rate.

3. Rents will grow by Q4.

New apartment supply nationally hit a 40-year high in 2024. In some markets, early 2025 will be peak supply. Though demand in 2024 was stronger than the economists predicted, rents were essentially flat nationwide. Markets like Austin even saw major rent declines due to oversupply. I expect strong demand to continue and most markets to see positive year-over-year rent growth by Q4. Austin still has a long way to go, but places like Dallas and Raleigh should recover sooner.

In addition to interest rates, rents are a lynchpin for property valuations. An investor who strongly believes in above-average rent growth for a couple of years will have no problem paying a cap rate below the interest rate of a new loan. However, I believe most investors will need to “see it before they believe it.”

4. Net operating income will stabilize and trend upwards.

2024 was a double-whammy for apartment owners. Not only did rents fall in many markets, but expenses increased causing net operating income to drop. I see this changing in 2025. With apartment rents stabilizing and growing, and operating expenses calming down, net operating income growth should be flat to positive. All owners have been forced to operate at higher levels of payroll expense, property insurance, and utility costs. I see these increases slowing down in 2025 and helping to bolster NOI.

5. There’s opportunity in every real estate market, but 2025 will be the bottom.

Based on transaction volume, Q3 2024 appeared to be a low for apartment values. The spike in interest rates in Q4 and the expectation for rates to remain elevated to start 2025 means we may not have reached the bottom. I do think 2025 will be a turning point for the multifamily industry, however. Transaction volume will increase as owners come to grips with higher interest rates and have no choice but to sell. Fatigue will set in from operating in a rising expense environment with no rent growth over the past couple of years. With more deal volume, pricing will be set and those able to buy properties will be doing so at a great time. The entire industry believes rents are poised to take off in late 2025 and in 2026. That fact, coupled with a low basis, will allow well-capitalized buyers to achieve phenomenal outcomes.