March 2025
Local Update
We continue to see leasing pick up and empty units fill up compared with the last 90 days of slow leasing. However concessions and value oriented rental rates have helped encourage tenants to move, shop around and negotiate in the last 6 months. It’s my hope that as this year goes on we’ll see the soft, tenant driven negotiations shift to those that involve less concessions and more competition for each available unit. This assumes that the supply of units is outpaced by growing demand, which the data seems to back up.
We have been shopping for a high quality asset to acquire in 2025 and found a relatively new construction building priced around 9M with a motivated seller. We ended up in second place against 2 other competing offers. Our numbers showed solid cash on cash returns and promising upside opportunities. We’ll continue to look for new opportunities in our market and outside of it.
Industry Update
The multifamily housing market is still experiencing a period of uncertainty, primarily due to fluctuating interest rates that are impacting debt costs, property values, and investment returns. Although long-term optimism remains, driven by expectations of stabilizing supply, recovering rents, and strong demand, the market faces immediate challenges.
A significant gap exists between buyer and seller expectations. Sellers, influenced by high treasury yields, are holding firm on prices, while buyers struggle to justify these valuations given increased borrowing costs. This price discrepancy, along with limited inventory, is slowing transaction activity.
Looking ahead in 2025, while higher long-term interest rates are expected to dampen investment, positive economic growth, strong real estate fundamentals, and tight credit spreads should partially offset these effects, potentially leading to a slight increase in investment activity.
Inflation remains a concern, with core CPI rising to 3.3% in January, particularly driven by persistent service sector prices. Although shelter cost increases are moderating, they continue to significantly contribute to overall inflation. Experts anticipate inflation will gradually decline towards, but remain above, the Fed's 2% target in 2025, supported by productivity gains and a slight cooling of the labor market.
Despite the challenges posed by higher interest rates, economic strength and solid real estate fundamentals are expected to support a modest increase in real estate investment this year.
The multifamily sector is preparing to navigate the challenges of 2025 by prioritizing operational efficiency, strategic adaptation, and careful monitoring of evolving market dynamics.
Key trends and predictions include:
Capital Market Adjustments:
Experts foresee a gradual "thawing" of capital markets in the first half of 2025, but acknowledge the necessity for adjustments in current market valuations.
Sellers will need to adapt to lower valuations, and flexible deal-making will be essential.
Supply and Demand Dynamics:
Market absorption is expected to increase in most markets.
The peak of new deliveries is projected to decline, leading to a gradual strengthening of market fundamentals.
Policy and Economic Influences:
Concerns remain regarding tax policy, particularly expiring provisions that could impact the industry.
Immigration policy is being closely monitored due to its potential impact on labor availability.
Economic indicators, especially the potential for interest rate reductions in the latter half of 2025, are being closely watched.
Environmental Concerns:
The increasing frequency of natural disasters and rising insurance costs are significant concerns for multifamily owners.
Industry Outlook:
Industry leaders anticipate 2025 will be a transitional year, with conditions improving compared to 2024.
Strong demand and a slowing of new construction are expected to bolster rent growth in many markets.
