Multifamily REITs have performed well in 2024, outpacing the broader REIT market. As of Nov. 13, multifamily REITs posted returns of 26.6% versus 10.3% for the FTSE Nareit All Equity REITs Index.
For 2025, fundamentals look solid based on expectations that supply has peaked, which should pave the way for improved pricing power going forward, analysts say.
According to CBRE, the multifamily vacancy rate fell in the third quarter for the first time in more than two years. CBRE also noted that positive net absorption of 153,300 units was one of the strongest third quarters since 1985.
Wes Golladay, senior research analyst at Baird, Jamie Feldman, head of REIT research and lead residential REIT analyst at Wells Fargo, and Haendel St. Juste, senior REIT analyst at Mizuho Securities, share their expectations for the multifamily sector.
How would you characterize performance in the multifamily sector for 2024, and what do you anticipate for 2025?
Jamie Feldman: The group caught a bid once investors felt comfort with visibility on the downside risk from historic levels of supply deliveries this year. We are not as favorable on multifamily outperformance in 2025 overall, but do believe select names should outperform, especially those with above average growth, attractive development pipelines, or prospects for upside earnings surprise.
Wes Golladay: Performance was better than expected, with demand surprisingly strong considering the moderating job growth. Renewal increases were good, turnover was low, but new rent growth was a little softer than expected. Bad debt improved, and cost pressure was less than anticipated. Companies will likely have a below average earn-in (the portion of rent growth in any given year from leasing done throughout the previous year) next year but will likely be more optimistic about the future.
Haendel St. Juste: Multifamily has had a strong performance year, despite concerns about new supply deliveries in some Sunbelt markets. Coastal apartment REITs have outperformed the multifamily subsector on a relative basis year to date, driven by better blended rent growth and same store revenue growth compared with Sunbelt apartment REITs.
Continued economic growth in the U.S., and more visibility into the job growth/unemployment picture shaping up in 2025 post-election, suggests the multifamily sector should have solid demand and same store-revenue growth prospects, supported by earn-ins ranging from flat for the Sunbelt to around 1% for coastal markets, and helped by incremental bad debt improvement and market rent growth in 2025.
How would you describe the supply outlook, and what impact is it having on pricing power?
Golladay: Supply has pressured new lease growth the most, with renewal increases softer but still at healthy levels. Turnover has also been historically low. The heaviest supply markets are some of the highest demand markets, but the demand has been overwhelmed by supply, leading to outsized declines in rent growth for markets such as Austin, Raleigh, and Atlanta. We expect most markets to exhibit improved pricing power over the next few quarters, with some of the high supply-high demand markets taking an additional few quarters to inflect.
The base case is that supply has peaked and now it is all about absorption. We expect revenue growth to be below average next year but new leasing to improve as the year progresses, as long as the strong absorption continues. The rent-to -income ratio has fallen over the past two years, which sets the stage for improved pricing power.
Feldman: The multifamily market is currently working its way through the highest level of new supply in several decades. Supply is heavily concentrated in high growth Sunbelt markets. This has placed the most pressure on new lease pricing and concessions in markets with high levels of supply.
Fortunately, new starts have declined materially in recent quarters and deliveries should peak no later than early 2025, even with construction delays. This should improve operating conditions for landlords in the highest supply markets, assuming tenant demand due to job growth and competition from other forms of residential options remains healthy.
St. Juste: Supply was a clear headwind for the Sunbelt in 2024, but deliveries are falling dramatically into 2025. On the surface, 2025 is shaping up to be a better year from a net absorption standpoint, followed by a better rent growth environment in 2026.
Regionally, Sunbelt new supply will be 2% to 3% of existing stock in 2025, trending approximately 100 basis points higher than coastal markets, which should see a range of 1% to 2% new supply as a percentage of existing stock.
What do you see as some of the main priorities for multifamily REITs today?
Feldman: We are not completely in the clear on supply, so managing both occupancy and rent remains a high priority to deliver on earnings expectations over the next two quarters. REITs will also focus heavily on operating expense efficiencies heading into 2025. Several multifamily REITs reduced top-line revenue outlooks during 2024 but were able to find expense savings to keep their NOI and FFO outlooks on track.
REITs will want a similar cushion for top-line revenue weakness in 2025, making operating expense and corporate G&A savings important. We also expect them to focus on driving other income line items to supplement rental revenue growth.
Golladay: The main priorities are leasing and finding ways to drive more out of the existing portfolio either through redevelopment or technology initiatives, which is what they have been doing. We would also expect them to be more active deploying capital if their cost of capital were to improve.
St. Juste: Increasing operational efficiency. We expect management teams to continue to look at capital allocation (acquisitions/dispositions) to scale submarket portfolio concentrations to benefit from property management/repairs and maintenance synergies, as well as implementing return on investment projects such as building WIFI and smart home systems across portfolios.
Improving bad debt expense in lagging markets (L.A. County, California, N.Y./N.J. Metro) to get back to pre-pandemic normalized levels as eviction moratoriums and court backlogs improve.
We expect multifamily REIT management teams to continue to focus on same store operating expense controls and to appeal real estate tax assessments. The latter are expected to moderate back to a low single digit growth rate from the trailing few years of mid to high single digit growth, as the pace of property appreciation has moderated post-pandemic.
Where do you see multifamily transaction volume heading in the coming months?
St. Juste: Based on third quarter earnings call commentary, we see more transaction activity in 2025 and that could result in better FFO per share growth for REITs if they can accretively source debt and or equity capital to finance portfolio acquisitions to unlock external growth in addition to organic growth.
Certain companies have highlighted their very low levered balance sheets as an “opportunity” to fund acquisitions exclusively with leverage near-term (less all-in cost than equity), which should incrementally help earnings. The sector has also benefitted from pricing clarity (approximately 5% market cap rates), which has incrementally supported deal flow.
Feldman: High visibility on multi-year demand and the availability of capital have kept the multifamily transaction market much more active than many other property types over the past year. The incipient growth in transaction volume suggests demand is beginning to gain momentum, especially once it becomes clearer as to when operating conditions will bottom across each market, and the potential for rent growth to accelerate in 2026 and 2027.
Golladay: Our base case would be that it increases with supply pressure starting to abate, making it easier to underwrite assets. The wild card will be interest rates, which have been volatile and are currently trending higher. REITs have been more selective in their acquisitions given their cost of capital spread versus cap rates, but an improvement in cost of capital would create a better opportunity to acquire.
Do you foresee renting continuing to be an attractive option compared to homeownership?
Feldman: Yes, especially if government spending remains elevated under the Trump administration and places upward pressure on inflation and interest rates. We will watch closely for changes in the tax code, especially SALT (state and local taxes), that could change the formula to calculate the relative cost between owning and renting.
Golladay: I think it will always be more affordable, but the gap is historically high now. The recent cutting of short-term rates has been met with a sharp rise in long-term rates. At this point, it is hard to see the gap closing, absent a decline in housing prices, as rent growth is likely to still be modest over the near-term and mortgage rates are trending higher.
St. Juste: Yes, the key theme in multifamily that we see continuing is “renters for longer.” Single-family home price appreciation has remained strong despite higher mortgage rates, supply shortages in desirable infill suburb markets persists, and 30-year fixed rate mortgages averaging 7%-plus will limit homebuyer purchase price affordability necessary to move out of rental apartments.
Where do you see the biggest opportunities for multifamily REITs ahead?
Golladay: We would like to see them leverage their strengths in the areas of having better access to capital, leasing, and development expertise. We don’t expect any distress opportunities for the quality of properties the REITs are looking to acquire as there is ample capital looking to invest in residential real estate.
However, we do see opportunities for REITs to acquire high quality developments where the developers are struggling. REITs can provide certainty of close and can complete the leasing if needed. We would also like to see the REITs accelerate development starts while others are capital constrained.
St. Juste: The top opportunities ahead are: to capitalize on the higher retention rates to keep renewal lease spreads positive in the mid-single digits in 2025; lower same store operating expenses through portfolio submarket scale and marginal capital allocation (select acquisitions/dispositions); and continuing to implement ROI-enhancing revenue projects (WIFI/smart home) installations throughout their portfolios.
Are there other trends or developments likely to impact the multifamily space that you are monitoring?
Golladay: Rising long-term rates and the potential impact on cap rates is always a concern. The economy is always something we watch since supply is still high. Rent control is always a lingering concern, but post-election results on rent control measures were a positive for the industry.
St. Juste: The bi-annual focus on rent control caps/regulation coinciding with midterm and presidential election years will be a continued topic for investors to monitor.
Feldman: We always keep a close eye on the regulatory front. We believe a Republican sweep in the November election reduces the risk of increased federal oversight. That said, local rent control legislation is always a concern and fixing the housing crisis in America through creating additional supply remains a key priority for many in office. We will also pay close attention to construction and operating costs with changes to tariffs and immigration policy expected in the coming year.