The multifamily housing market has faced significant challenges in recent years, primarily due to supply-chain disruptions and high interest rates. Economists at the National Association of Home Builders (NAHB) International Builders’ Show in Las Vegas projected that these factors will continue to impede the multifamily sector through the first half of 2025. However, they also forecast that the market will stabilize later in the year as more deals come through and as the market adapts.
Multifamily Construction Faces Decline in 2024
In 2024, multifamily construction saw a 25% decline, with starts falling to a rate of 355,000 units. This marks a significant downturn, especially considering that there were about one million apartments under construction—an all-time high since 1973. This large volume of units under construction placed additional pressure on the apartment market.
Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis, stated that the multifamily market is expected to experience another decline in the first half of 2025, with an 11% drop in starts, bringing the total to 317,000 units. However, a rebound is expected as the market stabilizes and adjusts, with an anticipated 6% increase in starts in 2026 to 336,000 units.
Cautious Optimism in the Multifamily Sector
The most recent NAHB Multifamily Market Survey reflects a mixed outlook, with the Multifamily Production Index (MPI) showing cautious optimism. The MPI rose by seven points, reaching a year-over-year reading of 48, which still remains below the break-even point of 50. According to Nanayakkara-Skillington, this figure suggests that while there is some positive sentiment, the market remains cautious due to previous declines in multifamily starts in 2023 and 2024.
On the other hand, the Multifamily Occupancy Index showed a more positive outlook, with an increase of four points, reaching 81. This indicates that existing apartment owners are more optimistic about occupancy rates, signaling a stable demand for rental properties despite market challenges.
Challenges and Opportunities Ahead
The multifamily sector continues to struggle with supply-chain issues, high interest rates, and a labor shortage, all of which contribute to rising building material prices. Furthermore, the market is facing obstacles in securing developed lots, which are increasingly difficult to obtain due to high demand.
However, there are also signs of opportunity. According to Molly Boesel, senior principal economist at CoreLogic, the market is being supported by low unemployment rates and an emerging wave of young adults entering the housing market. Boesel noted that the number of young adults aged 25-34 living with their parents is at elevated levels, contributing to a growing pent-up demand for multifamily housing as these individuals begin to move out on their own.
Additionally, the high mortgage rates—currently near 7% for a 30-year fixed mortgage—have led many renters to remain in the rental market. As home affordability remains a challenge, single-family housing inventory continues to be low, with many homeowners opting to stay put due to lower mortgage rates locked in during previous years.
Rents and Delinquencies: What to Expect
In 2024, high supply in the multifamily market led to a 1% decrease in multifamily rents. However, as the pace of new construction slows, vacancy rates are expected to decrease, and rents are anticipated to rise in the near future.
Delinquency rates in the multifamily sector have been climbing due to the ongoing interest rate hikes, changes in property market fundamentals, and uncertainty about property valuations. These factors have added further pressure on both investors and developers.
Conclusion: Looking Toward Stabilization
The multifamily market is navigating through a challenging period, with supply-chain issues, high interest rates, and labor shortages affecting short-term performance. However, there is optimism that the market will begin to stabilize toward the end of 2025 as more deals are finalized and the market adjusts to the challenges faced in the past few years.
With growing demand from young adults and continued interest in rental properties, the multifamily sector remains a vital part of the housing landscape. Installers, builders, and developers who can adapt to the evolving market conditions, while focusing on operational efficiency and strategic growth, will be in the best position to thrive in the years ahead.
Source: Data News, as published on March 4, 2025.