Multifamily Market Remains Resilient Amid Volatility, High Supply

At the beginning of 2024, there was widespread hope that interest rates would stabilize, sparking a resurgence in origination activity. At the same time, the multifamily market was expected to see some of the highest new supply in nearly 40 years, which would put fundamentals to the test.

According to Freddie Mac Multifamily Research Senior Director Sara Hoffmann, “slow but steady” is the defining sentiment for the current market. While there remain headwinds, strong demand fundamentals are insulating the multifamily market. Here are three key takeaways Hoffmann highlighted from Freddie Mac’s midyear outlook report.

Strong Demand for Multifamily

Multifamily properties are enjoying healthy demand for rental housing fueled by a combination of demographic trends, a high barrier-to-entry in the for-sale housing market and an undersupply of housing nationally.

The Gen Z generation is showing a similar preference for apartment living and an urban lifestyle. Meanwhile, population growth and job growth remain healthy, spurring household formation. These demographic trends and preferences continue to support multifamily demand.

“The outlook on the demographic drivers continues to stay positive for multifamily,” says Hoffmann. “These drivers will help support multifamily performance through the near term.”

Challenges Absorbing New Supply

The strong demand had, rightfully, supported record development activity in the last few years, which is now leading to a record number of new units being delivered. According to Hoffmann, this will create a temporary oversupply of apartment units in several markets, which could suppress rent growth and occupancy rates in the second half of the year and into 2025.

The Sun Belt and Mountain West regions, which both saw significant in-migration during the pandemic, are the most exposed to oversupply challenges. However, those areas are also seeing some of the strongest population and job growth trends.  “Supply is very high in these markets and expected to eclipse demand, which is putting pressure on multifamily performance,” says Hoffmann. “While demand is healthy and strong, it’s not enough to match the new supply.”

Stable Pricing

While multifamily demand overall is healthy, investment activity in the first half of the year was derailed by instability in the market, driven by volatile interest rates and misaligned buyer-seller expectations. But even at elevated interest rates levels, the stability of rates is needed for more transaction activity, notes Hoffmann.

“People can start bringing deals to the market without worrying that rates are going to change on them during the process,” says Hoffmann. As a result, Freddie Mac Multifamily expects rates to stabilize resulting in modest growth in originations of $320 billion by the end of 2024, a sign that investment appetite is slowly returning.

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