Fed Rate Cuts in 2025 Could Unlock Multifamily Deal Flow

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.”

The recent uptick in cap rates above the 10-year treasury yield is also creating attractive risk-adjusted returns for investors, whether they’re borrowing or aiming for long-term ownership of multifamily assets.

Average cap rates on new multifamily properties are currently around 5%, while rates on Class B and C assets in some markets reached between 6% and 8% in October, making returns more favorable relative to treasury yields.

Investors are cautiously optimistic, according to Northmarq, viewing this trend as an opportunity to re-enter the market as financing costs stabilize alongside a potential boost in property values. The rise in cap rates has also made higher borrowing costs more manageable, giving investors a better balance as they consider deals.

Northmarq’s report follows a recent analysis by Yardi Matrix, which found that U.S. multifamily sales volume held steady at roughly $34 billion for the two years ending July 31, 2023. By comparison, the year prior saw $200 billion in sales, highlighting the extent to which high borrowing costs continue to deter investors.