
by Sean Burton and Ryan Graf
The multifamily real estate sector presents a particularly interesting opportunity for investors in today’s uncertain economic climate. Current market conditions — characterized by housing shortages, high mortgage rates and market volatility — create an environment for savvy buyers to capitalize on long-term growth, for three key reasons that can potentially generate strong risk-adjusted returns.
THE DEMAND
Across America, the housing shortage remains a persistent issue. According to the National Multifamily Housing Council, the nation still needs an additional 4.3 million housing units by 2035 to meet current demand. This shortfall in housing production was initially triggered by the global financial crisis and amplified throughout the 2010s by rising land and construction costs.
High mortgage rates over the past 24 months have created an additional headwind for potential homebuyers. The average 30-year fixed mortgage rate exceeds 7 percent today, versus 4 percent in 2019. This has occurred largely without relief from purchase prices that continue to rise or remain flat, making homeownership unaffordable for many. In addition, insurance and maintenance costs have increased significantly over the past five years, making homeownership that much further out of reach. According to a November 2024 report from Oxford Economics, the annual household income needed to afford a new single-family home has doubled between third quarter 2019 and third quarter 2024, while incomes have risen 29 percent. Only one-third of U.S. households earned enough to afford a home in third quarter 2024, compared with two-thirds just five years ago.
Impacts from these trends are also evident in recent data on first-time homebuyers. According to the National Association of Realtors’ 2024 Profile of Home Buyers and Sellers report, the median age of a first-time homebuyer reached an all-time high of 38, three years older than in 2023 and 10 years older than in the 1980s.
Given these affordability challenges, households will continue to turn to rental housing. Although some markets such as Austin and Nashville have seen multifamily construction booms in recent years, the flow of new supply is expected to slow considerably starting in the back half of 2025. As multifamily demand remains strong, declining supply growth in the coming years is likely to act as a tailwind for many owners and investors.
DISTRESS AND FORCED SALES
The potential consequences of the market mania from 2021 to 2022 have been apparent for well over a year. Cap rates during this period bottomed out below 4 percent in many markets as buyers priced their deals to perfection. It was common to see annual rent growth assumptions of 4 percent or more coupled with generationally low borrowing rates. Deals purchased during this period were operating under razor-thin margins of error, with no cushion to absorb lower rent growth, higher borrowing rates or increases in cap rates, let alone all three that began to occur in 2022.
From January 2022 to January 2024, SOFR increased 530 basis points, from 0.05 percent to 5.35 percent. In addition, rent growth slowed considerably in 2023 and 2024. While many floating-rate borrowers hedged their interest-rate risk via rate caps during this period, this protection had a limited life, with most caps purchased expiring after two or three years.
To this point, lenders have largely been open to loan modifications to avoid widespread distress on their books. This “extend and pretend” attitude was common in 2023 and even 2024 as many lenders made a bet that SOFR would come back down as inflation was tamed. However, that assumption is now in question. The most recent Federal Reserve meeting in December 2024 indicated an uncertain future for the direction of interest rates in 2025 and beyond. What’s more, lenders have now had ample time to build up their loss reserves and are now more open to absorbing losses.
This confluence of factors points to an increase in forced sales in 2025 as lenders begin to honor loan maturities. Savvy investors can partner with experienced operators to leverage these forced-sale scenarios to secure high-quality assets at significant discounts. In addition, by implementing value-added strategies (such as improving amenities or optimizing operations), investors can enhance property performance and potentially achieve outsized returns.
NATURAL INFLATION HEDGE
While quarter-to-quarter shifts in inflation expectations are usually benign, fourth quarter 2024 saw a significant upward movement. Following a year of instability and larger than typical fluctuations, the 10-year U.S. Treasury yield jumped from 3.79 percent to 4.60 percent during the quarter. After the inflation runup in recent years, investors are much keener to the risks it presents today. However, multifamily real estate offers a natural hedge against this economic challenge. Unlike fixed-income securities and other real estate types (industrial, retail, office, etc.), multifamily leases typically reset annually, allowing landlords to adjust rents to keep pace with inflation. This dynamic allows multifamily investments to maintain and grow their income streams in inflationary environments.
Moreover, inflation tends to drive up the cost of new construction, further limiting housing supply growth. This constraint enhances the competitive position of existing multifamily properties, which benefit from rising rents without incurring additional development costs. Over the long term, these factors make multifamily assets an attractive option for preserving purchasing power and generating real returns.
Consider the inflationary pressures of the past five years, during which multifamily rents in high-demand markets such as Austin and Miami increased by double digits. These gains highlight the sector’s ability to adapt to changing economic conditions while offering investors a degree of stability not found in other asset classes.
THE UPSHOT
Today’s multifamily market offers a compelling case for investment. The combination of housing shortages, high mortgage rates, market distress and inflation protection creates a rare window of opportunity for investors to secure assets at a discount with significant upside potential and a degree of downside protection.
However, investors must be cautious to avoid the same mistakes of the previous cycle. Given the uncertain economic climate, investors should team up with operators focused on generating alpha through operational excellence in high-quality assets located in supply-constrained and/or high-demand markets. Investors should partner with operators that utilize prudent leverage and appropriately stress test investments during the underwriting process to ensure deal resiliency to avoid becoming forced sellers themselves.
By focusing on markets with strong demographic trends and leveraging distressed opportunities, investors can position themselves to potentially obtain near-term outsized returns and long-term success. In an era of economic uncertainty, multifamily real estate stands out as a resilient and adaptable asset class.
Sean Burton is CEO of Cityview, and Ryan Graf is director of capital raising and investor relations at the firm.