2025: An Inflection Point for the Multifamily Market

As the Fed began a series of rate hikes in 2022, the apartment market went from one of frenzied growth and optimism to a market characterized by decline, be it declining sales volume, declining occupancy, or declining values. As we near year’s end, stability and even positive momentum have begun to take hold, and there is good reason to expect them to carry into 2025 with the return of large, open-ended funds and an improved debt environment.

The sales market started to thaw after a prolonged period of declining sales volume and pricing, with the Fed kicking off the rate-cutting cycle in September 2024 with a 50 basis-point rate cut, increasing seller acceptance of price reductions from the 2021 peak, surprising fundamentals on the demand side, and a market set to have a large decrease in new supply in the next few years. With multiple large portfolio transactions announced in Q2 this year, sales volume turned positive on a year-over-year basis for the first time since Q2 of 2022, as tracked by Real Capital Analytics. In total, nearly $40 billion of assets traded in the second quarter. Cap rates also held flat for the quarter for the first time since Q2 of 2022.

The NMHC Quarterly Survey of apartment conditions reported, as of July, a second straight quarter of respondents indicating a return to a positive sales environment. This shift was driven by both the reported tightening of fundamentals and a large improvement in the availability of debt financing. A measure above 50 indicates improving conditions and volume: fundamentals registered a 47, which was its highest measure since July 2022; the sales volume index registered 57, its highest measure since January 2022; and debt financing registered a 63, which was only its second positive quarter since July 2021.

From 2017 to 2018, Real Capital Analytics reports an average quarterly apartment transaction volume of $43 billion. Given the changes in market sentiment shared by NMHC, increasing portfolio and transaction volume, and what is highly likely to be an increasingly favorable debt environment, it would be surprising if the market failed to achieve prior late-cycle norms throughout 2025. It is also highly likely that the large open-ended funds on the sidelines due to redemption issues reenter the market in 2025, as those issues are subdued, bringing back another large source of transaction volume.