The Commercial Real Estate Alpha Site

By: Kim Betancourt – Economic and Strategic Research – Vice President

By: Tim Komosa – Multifamily Economics and Market Research- Senior Manager

Based on preliminary third-party data, multifamily rental growth is estimated to have turned negative during the fourth quarter of 2024, after having been positive earlier in the year.

Our prediction of instability in the multifamily market last year was correct, but we do expect it to start improving in most places in 2025. Rental demand in 2024 differed depending on the metro: Those with a lot of new supply, such as Austin, Phoenix, San Antonio, and Raleigh, have seen negative rent growth over the past year. In contrast, metros that are supply-constrained, such as Chicago, Cleveland, Cincinnati, and Louisville, have seen above-average rent growth, according to data from RealPage.

At a national level, rental demand remained positive for much of 2024, due to ongoing job growth and rising wages, with elevated mortgage rates and continued higher single-family housing prices keeping many tenants renting. We expect positive economic growth in 2025, with gross domestic product to increase by an estimated 2.2% by year end. We estimate that between 550,000 and 600,000 new multifamily rental units were completed in 2024, bringing the total number of new units underway to about 875,000. Combined with expected job growth of 1.0% in 2025, as well as positive demographic trends, we expect rent growth to increase slightly in 2025 to a range of 2.0% to 2.5%, compared to an estimated increase of just 1.0% in 2024.

The national multifamily vacancy rate is expected to rise to 6.25% early in the year, most likely in the first quarter of 2025, but then decline to 6.0% before year end. The pace of absorption is expected to remain positive despite the amount of new supply that has recently entered the market, but that may increase the percentage of units offering concessions in some oversupplied markets.

Projected Demand for multifamily rental units has remained robust over the past year, after starting slow in early 2024 and picking up during the second and third quarters, but then slowing down during the last three months of the year. According to data from CoStar, annualized multifamily absorption was estimated at a whopping 552,292 units at the end of 2024, compared to 327,682 units at the end of 2023. In addition, CoStar is anticipating that absorption will slow but remain positive in 2025, ending the year with an annualized 370,163 units, primarily due to fewer new units expected to complete this year.

Multifamily Economic and Market Commentary Vacancy Expected to Increase Briefly The national multifamily vacancy rate is estimated to have stayed flat all last year at 6.0%, despite the elevated level of new supply that is estimated to have delivered in 2024. As a result, we expect that the national multifamily vacancy rate will increase in the early part of the year because of the excess amount of supply that delivered late in 2024. Much of this new supply consists of more expensive, Class A units in many places, which should help improve the pace of filtering down the existing multifamily housing stock, resulting in a larger number of less expensive Class B units. As a result, we expect that the amount of new supply completing over the short term will push the national vacancy rate up to 6.25% in the first quarter of 2025. This elevated level is expected to be short-lived and is expected to drop back down to 6.0% by mid- to late 2025, as seen in the chart on the previous page.

A vacancy level of 6.0% to 6.25% is not that much higher than the long-term average of 5.75% from 2005 through 2022.

Multifamily ESR National rent growth was positive in 2024, estimated at 1.0%, despite turning negative at the end of the year. Last year’s annualized rent increase is up slightly from 2023’s estimated rent growth of about 0.8%, but still well below 2022’s estimated 4.75% rent growth. We expect rent growth to start the year flat but then turn positive during the second and third quarters, and then moderate again in the fourth quarter, resulting in an annualized range between 2.0% and 2.5%. Our expectations for higher rent increases are based on projected job growth along with positive demographic trends for the age 20- to 34-year-old segment of the population, which is the cohort most likely to rent multifamily units.

Coupled with still-elevated mortgage rates and housing prices, as well as fewer new single-family home completions and home sales overall, we believe that many tenants will keep renting their multifamily units over the next few years.

Multifamily Economic and Market Commentary Demand for all classes of multifamily units remained stable for 2024. Although quarter-over-quarter rent growth was negative as of the fourth quarter of 2024, annualized rent growth remained positive for all classes, according to data from RealPage.

Annual rent growth for Class A in 2024 was an estimated 1.4%, and 1.3% for Class B. Class C annual rent growth was estimated to have been higher, at 2.6%.

We believe that the slowing rent growth across all classes late in the year was the result of new supply entering many local markets, despite ongoing demand and absorption. Source: RealPage, Inc.

The number of units offering concessions increased throughout much of last year, but then declined in the fourth quarter of 2024, as seen in the chart below on the right. As of the fourth quarter of 2024, an estimated 19.7% of Class A units were offering concessions, up from 18.1% a year ago. Class B units offering concessions increased to 20.7% from 18.3% in fourth quarter 2023, as did Class C units, which reached an estimated 24.0% as of the fourth quarter of 2024, compared to 18.5% a year ago. Although the percentage of units offering concessions has been increasing for a while, the concession levels themselves remained below one month’s free rent, or 8.3%, as seen in the chart below on the left.

Nevertheless, both the value of concessions and the number of units offering them may increase in early 2025, primarily in oversupplied metros.

Multifamily Economic and Market Commentary New Multifamily Completions Likely Reached a New Peak in 2024 According to preliminary data from Dodge Data & Analytics Real Estate Analyzer, which distinguishes between multifamily properties consisting of apartment and condominium units, between 550,000 and 600,000 apartment units were likely completed in 2024, as compared with 2023’s estimated 563,000 units — the most recent peak year for new deliveries. Although Dodge Data & Analytics is currently tracking more than 632,000 multifamily rental units slated for completion in 2025, we believe it is very unlikely that all those units will be completed before year end, due primarily to ongoing labor shortages and construction delays, notably permitting delays.

According to the National Multifamily Housing Council’s Construction Survey, as of December 2024, 78% of respondents reported construction delays, with 95% stating the delays were caused by permitting requirements. Of those experiencing delays getting their projects started, 68% said it was due to economic feasibility, and 42% said it was due to economic uncertainty. Construction costs remain a concern for most respondents.

Although the majority, 69%, expect that construction costs will remain stable over the next three months, 54% said they expect construction costs will increase over the next six to 12 months. One bright spot in the survey was that the same majority of respondents said they believed there will be more availability of equity financing available over the next six to 12 months.