There is good news ahead for apartment owners in the year ahead as vacancy is slated to come down and with rent growing, while home buying remains out of reach for many, according to CBRE’s multifamily forecast for 2025.
“With continued solid fundamentals, multifamily is the most preferred asset class for commercial real estate investors in 2025,” CBRE declared.
New deliveries of apartment complexes are still on the way – with some markets seeing inventory growth of almost 20% over three years. However, the report said many of these markets — including 10 of the 16 with the largest supply pipelines — have already achieved peak deliveries. This has enabled occupancy rates to begin to recover. The remaining six metros are expected to reach their peaks in 2025. This could spur increased multifamily investment activity, the report said.
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“By mid-2025, multifamily construction starts are expected to be 74% below their 2021 peak and 30% below their pre-pandemic average,” CBRE stated.
As a result, 2025 should see markets that are currently struggling with negative rents turn positive, supported by strong tenant demand. “The average multifamily vacancy rate is expected to end 2025 at 4.9% and average annual rent growth at 2.6%,” CBRE predicted.
“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.”
The harsh disparity between the cost of homeownership and the cost of renting remains difficult to overcome for many would-be buyers, as high home prices and still-high mortgage rates weigh on their decisions. According to CBRE, 80% of current homeowners have mortgage rates below 5% and have little incentive to sell. In many of the largest markets, the average monthly cost of buying a house in 2025 is expected to be two or three times more than the average cost of rent, it said.
Markets in the Midwest, Northeast and a few gateway cities that have not experienced the influx of multifamily construction that flooded some Sunbelt and Mountain regions could see rent growth above 3% in 2025, compared to the national average of 2.6%. Over the next five years, average multifamily rents nationwide are expected to grow by 3.1% a year, compared to 2.7% before the pandemic.
However, the premium homebuyers will pay to buy versus rent could dip, or compress, from 35% to 32% by the end of 2025 if interest rates fall, home prices stabilize and rent growth accelerates.
“The premium is still going to be elevated relative to historical norms for some time, which is going to keep preserving multifamily demand as the premium is still a barrier to entry for new homeowners. However, at least it isn’t going to get wider,” commented Travis Deese, associate director, of multifamily research, at CBRE.
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