Apartment Rent Growth Has Slowed, But More Investors Are Buying

The multifamily sector is weathering a storm that has combined a record level of new apartment inventory with profound macroeconomic uncertainty. Still, most owners remain above water, and deal volume is up.

“We've stepped away from the brink, and we're seeing a lot of rebounding in sentiment in the financial markets, which could permeate to the rest of the markets through the rest of the year,” Sam Tenenbaum, who leads multifamily research operations at Cushman & Wakefield, said of the sector.

A construction boom has weighed on multifamily rent growth forecasts since the glut of projects broke ground amid pandemic-era lockdowns. That supply is now peaking, and rent growth has indeed dipped.

But investors with time to spare are still buying, betting on long-term fundamentals.

Multifamily sales totaled $30B in the first quarter, a 35% year-over-year increase, according to Newmark. The spike in activity came despite economic turbulence, including the start of a global trade war by President Donald Trump.

The White House backed off some of the steepest levies it issued on April 2, returning a modicum of positive momentum in capital markets. 

Still, consumer confidence remains shaky, and effective rent growth slid for each of the last two months, which typically mark the height of leasing season, according to rental housing economist Jay Parsons. 

The competition for tenants has become more intense with each new apartment building that delivers, and the wave of new supply crested in March with 576,000 apartments delivered over the prior year. 

Concession packages that are the equivalent of multiple months of rents have become common at new properties as owners push for stabilization. Those discounts eventually trickle into the wider leasing market in the form of cheaper rates, Parsons said. 

“The industry is erring on the side of protecting occupancy over generating rent growth right now,” he said. “We've seen two straight months of rent growth actually backtracking, and I think it's delayed a long-anticipated rent rebound.”

Rents are still rising, but the 0.74% effective rent growth in May was behind March’s 1.05% change, ending six straight months of accelerating rent growth during what is typically peak leasing season, according to Parsons. 

But a steady stream of renters is bolstering the apartment sector and keeping the capital markets humming.

“It's in a lot better place than I thought it would be a couple years ago, and that's really driven by the sheer amount of absorption that we've seen in the market over the last 18 months,” Tenenbaum said.

Multifamily sales accounted for nearly a third of first-quarter commercial real estate transaction volume, the most of any sector and well above historical averages, Newmark found. 

Twice as much capital has been raised since 2020 for residential-focused funds than for any other property type, excluding diversified funds, Tenenbaum said. Berkadia found in a first-quarter survey that more than 8 in 10 multifamily investors planned to purchase assets this year.

A large cohort of those investors is targeting — and has been waiting nearly three years for — distressed assets. But those properties haven’t materialized at scale, and just 2% of owners plan to cut properties from their portfolios this year, limiting the pool of assets for sale, according to the same Berkadia survey. 

Buyers have been waiting for lenders to lose patience with borrowers sitting on maturing debt. But short-term extensions, sometimes with capital infusions to lower the debt load, are commonplace across the market. There are $600B in loan maturities coming due in 2025 just from extensions executed over the last few years.

Other signs of stress are appearing in the CMBS market, where multifamily property delinquencies accelerated in the back half of 2024 and have continued to pile up. Multifamily CMBS delinquencies were nearly 6.6% in April, up 113 basis points from March, according to Trepp. 

Still, Parsons expects most property owners facing a debt dilemma will find willing partners with their lenders. 

“It's not going to show up in terms of foreclosures, but you're going to see some [sales] where the lender or somebody else in the capital stack is just nudging the owner to sell it,” he said.

A popular investment thesis in the multifamily market today predicts that tenants will move into the glut of new properties over the next 18 months while the high cost of debt, labor and materials curtails new development. 

The limited amount of new construction today will lead to rent growth in a couple of years, the thinking goes, boosting property values after a few years of high interest rates and a host of macroeconomic issues have weighed on pricing.

Trump’s trade battles, a Republican budget that will balloon the deficit and volatility driven by vigilante bond investors are clouding U.S. markets while Russia’s war with Ukraine drags on and escalating tit-for-tat attacks in the Middle East threaten to trigger broader conflict. 

And while a recession would impact the entire economy and apartment owners wouldn’t be spared, investors are operating within a profoundly uncertain environment that makes multifamily assets look more attractive. 

Developers in the U.S. would have to add 4.5 million homes to meet current demand, Zillow found in a report last June. Developers pulled permits for 404,000 multifamily units at an annualized rate in March, down from a peak of around 700,000 at the end of 2021. 

A steep economic downturn would likely further cut into new development. That would be bad for renters, but not necessarily landlords, Parsons said.  

“In the grand scheme of things, apartments are probably going to be in a better position than a lot of other assets” in a downturn, he said.

“You would just prolong the supply drought in that scenario.”