The volume of multifamily loans is expected to rise in 2025. But rents are expected to head south, with vacancy rates ticking above their long-term averages, according to Freddie Mac’s new multifamily outlook for the year ahead.
The year 2024 saw market fundamentals muted by record high supply, while property values experienced downward pressure because of “elevated and volatile interest rates,” the report stated. Nevertheless, it predicted that, despite short-term pressures, multifamily would remain “a favored asset class over the long term due to continued economic strength, demographic tailwinds and the lack of alternative housing options.”
According to Sara Hoffmann, senior director of Multifamily Research at Freddie Mac, supply is still the major factor impacting the multifamily market, but it is a short-term factor. She predicted that by 2026 it may abate to levels like those before the pandemic.
“We expect the multifamily market to continue to see subdued but positive growth in 2025, and for origination volume to increase as interest rates continue to stabilize — albeit at a higher level,” said Hoffmann.
For the nation as a whole, rent growth of 2.2% is expected in 2025 -- 60 bps lower than the 2000-to-2023 average of 2.8%, according to RealPage data cited. Vacancy will climb to 6.2% -- in spite of higher demand. The combined effect is a forecast of 2% gross rental income growth in the year ahead.
However, it will be a better story for smaller, secondary and tertiary markets where supply is more limited. These markets, especially in the Sunbelt and larger coastal and gateway markets, are expected to see stronger performance in 2025.
The report also noted that the high interest rates seen in 2024 resulted in a compressed cap rate spread well below the long-term average. The year saw a slower decline in property prices. “Despite higher interest rates, multifamily origination volume is expected to increase in 2024 up to $320 billion and again in 2025 up to $370 billion to $380 billion,” Freddie Mac stated.
However, the report cautioned that prospects could change if the economy weakens significantly. “While it is unlikely that we see a recession in 2025, if economic conditions deteriorate quickly, the multifamily market will likely see significantly weaker performance given the high level of new supply entering the market,” Hoffmann wrote in an article on Freddie Mac’s Viewpoints site.
“If that scenario plays out with high supply and materially lower demand, the multifamily market will likely see significant upward pressure on vacancy rates and downward pressure on rents.”
The report noted other risks that could cause hurt the economy. “Chief among those risks is a reemergence of inflation or a misstep by the Fed, according to Moody’s Analytics. Other risks include an expansion of current or new geopolitical conflicts, a faltering of the banking or financial systems, and a debt limit fiscal standoff,” the report stated.