High financing costs and low cap rates have sidelined many multifamily investors, but the Federal Reserve's approach to lowering interest rates could be key to unlocking deal flow in 2025. According to a new report from Northmarq, the potential for rate cuts by year-end has lifted investor sentiment and could even drive more apartment construction in the future.

Inflation is cooling and unemployment stabilizing which may persuade the Fed to hold rates steady in 2025, said Jeffrey Munoz, VP at Northmarq. However, financing costs for construction and acquisitions are expected to take longer to adjust, which could gradually support a lift in new apartment construction.

"While current rates are at a high watermark over the last 17 years, this is not unprecedented. Over that period, we've experienced the Great Recession, a global debt crisis, and COVID-19—all of which put downward pressure on these indices."