Multifamily Executive caught up with leaders from across the rental housing industry to find out what surprised them most about 2024 out as well as their priorities and outlooks for 2025. Hear from Bob Hart, president and CEO of TruAmerica Multifamily; Jay Hiemenz, chairman and CEO of Alliance Residential; and Bob Pinnegar, president and CEO of the National Apartment Association.
How did the multifamily sector perform in 2024 compared with your expectations?
Hart: 2024 was another year of lowered expectations since the run-up in values through 2022. Although 2024 was a better year, I think for most people in the real estate investment services and the real estate investment industry, it was still not a robust year by any standard. Transaction volume was off by a very large amount in 2023, and 2024 was off by around 70% from the prior highs. So, the industry is just starting to come out of the doldrums of higher interest rates, when they were focusing on asset management. Now we’re starting to focus a little bit more on portfolio growth as rates have started to normalize on acquisitions. And frankly, sellers are having to get religion around lower values. Until they do, because of cap rate acceleration, sellers are still going to be on the sidelines until they either normalize values with growth or they decide that maybe their properties are worth a little bit less.
Our activity was fairly robust in 2024, both on the buy and the sell side. We transacted a little over $1.2 billion in bulk purchases and sales. So for us, we've done an average on both ends of the spectrum, well over $2 billion a year of both acquisition to sales. So our activity in 2024 was probably off by 40% compared with an average year for us.
Hiemenz: Multifamily sector fundamentals in general performed a little better than expected. We all knew supply was coming, but absorption and demand exceeded our expectations. So while we’ve seen softness in the high relative supply markets which has impacted effective rents, the pace of absorption has been elevated. Demand has been steady and positively impacted by a robust labor market and high cost to buy versus rent.
On the flipside, the multifamily capital markets have performed below expectation given the “higher for longer” interest rate scenario that played out throughout the year. The 10-year Treasury, which had shown a nice downward trajectory in the fall, reversed course with new inflation fears and policy that may not be as accommodating as quickly as we had hoped.
Pinnegar: The performance of the rental housing industry largely met expectations in 2024, though still with notable variation across local markets. Across the board, however, the trends of the past year mirrored initial predictions: Many markets saw record new delivery, demand remained strong, and elevated interest rates, increased expenses, and record-high insurance premiums continued to impact the sector. In many ways, 2024 was a year to endure for the industry with a more positive outlook for the year ahead.
What surprised you most about the industry last year?
Hart: The industry has been very resilient. I think people have adjusted their expectations. People are not in denial that there's a reset going on. Even though there's been a euphoric period, which lasted over 12 years, it's amazing how quick people are to change their point of view and accept the current state of things. People are generally optimistic about the future. They see growth and promise. Most real estate operations are steady, at least on the multifamily side. There are some cities in America like Austin, Texas; Atlanta; and Phoenix that are probably a little bit overbuilt right now. So, multifamily rents are a little softer, particularly in Austin, but they're really planning ahead. Smart money always plays ahead.
Hiemenz: The lack of transactional activity surprised as we headed into 2024. Our expectation was that there would be more deal flow particularly in the latter part of 2024 from lenders and investors looking to pare their exposure. Instead, much of the expirations have been extended, so expectations are now that more transaction activity picks up in ’25 as a response to this as well as the potential for lower interest rates spurring returns that may close the “bid/ask” spread that seems to have been in place throughout later part of ’23 and ’24.
What are your projections for the multifamily sector in 2025?
Hart: I have an optimistic view. I see more absorption taking place on the supply side, which will help support rent growth. I think there'll be rent growth in most major cities of between 3% and 4%. I see a continuation of opportunity there, particularly for the repositioning of assets. On the other hand, they'll still be some debt rebalancing that must occur. I don’t believe we're done with that. I expect that's going to linger for a while in instances where people have been kicking the can down the road, which will create opportunity on the buy side as well. There will likely be a little pain on the sell side, particularly for developers of new buildings that have not stabilized yet. But it's a “time's up” type of situation on debt. So, 2025 will probably be another year of transition, but it'll be a better year than 2024, I think.
Hiemenz: We believe a thawing of the capital markets will begin in the first half of ’25. Fundamentals in many markets will still be impacted by supply overhang into ’25 but will start to firm as peak deliveries decline in varying degrees and timing in each market. Sun Belt markets have the most relative supply but also have the most robust absorption. Development looks attractive as an investment strategy given the cycle timing capturing deflation in construction costs as pipelines are way down and lack of competition delivering in 18 to 36 months.
Pinnegar: Should predictions stay true, 2025 should be a year of transition for multifamily. Record new supply will be absorbed in many markets, and housing starts should begin to slowly increase again, especially as interest rates come down and the industry sees a more measurable impact in the second half of the year.
Insurance premiums and other elevated operational expenses will undoubtedly continue to impact the industry in the year ahead.
What trends are you watching for 2025?
Hart: The trends we have been watching and continue to watch are what's happening on the environmental side in terms of storms, regional activity, earthquakes, and how that affects insurance. It is a very fluid situation as insurance rates have unexpectedly risen very high the last five years. We're hoping to see a normalization of that, provided there is not a continuation of high propensity for natural disasters like there were a number of years ago. We're also definitely keeping a close eye on institutional equity returning to the market in a more fluid basis, which will then create more demand on products and likely more acquisition opportunities. I remain positive, optimistic, and ready to go in 2025.
Hiemenz: We continue to look for ways to reduce cost, both construction cost and opex. We’re applying next-gen product to further capture build efficiencies and drive per unit cost down. We’re exploring new ways to reduce operating expense by virtual leasing and pooled maintenance.
Pinnegar: While record new construction has narrowed the supply/demand imbalance in many markets over the past year, there is still a shortage in many places, and the industry must continue building to meet future demand. With a decline in multifamily permits in 2024—alongside market variation when it comes to absorption—this is something I’ll be monitoring closely in 2025.
Policy is also top of mind in the year ahead. For one, many key tax provisions that help the industry and promote affordability expire, and our efforts will work to get them extended. Additionally, immigration could become a headwind in 2025 should the administration implement stricter immigration policies. With a change in administration, many of the industry’s battles against policies like rent control will also shift to the state and local levels.
