Multifamily will likely remain a favored asset class over the long term due to demographic tailwinds, continued economic strength, and the lack of alternative housing options, according to Freddie Mac. However, the sector still has some challenges to overcome.
Despite strong demand, 2024’s record number of new apartment deliveries kept fundamentals muted. In addition, elevated and volatile interest rates put downward pressure on property values and led to a compressed cap rate spread below the long-term average.
In Freddie Mac Multifamily’s 2025 Outlook, even though demand is expected to remain above average, the government-sponsored enterprise (GSE) is predicting modest rent growth of 2.2%—below the long-term average for the year—and a slight increase in vacancy rates to 6.2%. The below-average rent growth and rising vacancy rates is expected to lead to gross rental income growth of 2% for the year.
The GSE also is predicting disparate performance across the nation. However, even the weakest performing markets are forecast to have slightly positive gross rental income growth.
Larger markets in the Sun Belt and Mountain West that have seen an influx in supply are projected to lag. The projected bottom 10 markets for the year are likely to continue to see a high level of unit deliveries. This includes Raleigh/Durham, North Carolina, with estimated gross rental income of 0.4% and a 9.9% vacancy rate, and Austin, Texas, with estimated gross rental income of 0.5% and a 10.4% vacancy rate. Other markets in the bottom 10 include Minneapolis; Nashville, Tennessee; Colorado Springs, Colorado; San Antonio; Richmond, Virginia; Oakland, California; Knoxville, Tennessee; and Orange County, California.
Markets with lower supply levels, such as smaller, secondary, and tertiary locales in the Sun Belt as well as larger coastal and gateway markets, are forecast to see stronger performance. Oklahoma City tops the 2025 list for gross rental income at 4.7% and a vacancy rate of 5.4%, followed by New Orleans, with gross rental income at 4.4% and a vacancy rate of 4.7%. Rounding out the top 10 are Albuquerque, New Mexico; Chicago; Baltimore; San Francisco; Riverside, California; Greensboro/Winston-Salem, North Carolina; Cleveland; and West Palm Beach, Florida.
In addition, despite higher and volatile interest rates, Freddie Mac noted multifamily origination volume was slated to increase to $320 billion 2024 and then increase to $370 to $380 billion this year.
“Overall multifamily demand has been outstanding, but some areas are feeling the impact of the highest level of new supply since the 1980s,” said Sara Hoffmann, senior director of multifamily research at Freddie Mac. “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.”
