Up Next? Stay in the Mix Till ’26
Ben Jackson of the Leste Group on how multifamily investors who hang in there will find smoother sailing after 2025.
High interest rates and rising inventory have made the multifamily market less attractive to investors over the past two years, leading to hesitancy to deploy new capital into the sector. However, with home prices continuing to move higher, according to the Case-Shiller Index, and a recent pullback in new apartment construction, now could be a good time to invest in multifamily.
A few big investors have already begun to bet on the multifamily market making a comeback. One is Blackstone, which recently completed the acquisition of AIR Communities for approximately $10 billion, with plans to invest more than $400 million into the 76-property portfolio.
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Other firms with capital available to deploy are looking to identify properties with attractive pricing and strong fundamentals, particularly in markets with a robust and growing workforce. Investors who are able to acquire attractive assets below replacement cost will better position themselves to benefit from the long-term structural housing shortage in America, while supporting strong investment returns going forward.
Long-term fundamentals
According to recent analysis from Zillow, the shortage of homes in the U.S. grew to 4.5 million in 2022. This long-term trend, which arguably began during the Global Financial Crisis and was exacerbated by the pandemic, remains a positive fundamental for the multifamily sector, even with the record new supply being delivered to the market today.
Additionally, the multifamily development boom that has been prevalent in the Sun Belt states and elsewhere looks to be coming to an end–at least in the near term–due to such factors as rising borrowing costs and an increase in the price of building materials. As a result, absorption rates are expected to begin rising in 2025, leading to higher rents in many markets. Add a stabilizing interest rate environment and expectations of continued low unemployment, and multifamily investment looks well positioned for positive growth.
Long live the Sun Belt
Sun Belt cities and towns led the U.S. in population growth in 2023, according to the U.S. Census Bureau, swelling the region’s population to 335 million or around 50 percent of the entire country. Despite some concerns about climate change affecting the Southern U.S., net absorption is not expected to end any time soon. However, to be successful in today’s market, it is essential for investors to identify specific cities with business-friendly environments, lower costs of living and the expectation of strong job creation going forward.
One city that has defied prevailing market fundamentals is Miami, which boasts a diversifying economy, strong population growth, low unemployment and a favorable tax environment. While new multifamily construction there is outpacing other cities in the Sun Belt and elsewhere, continued domestic and international migration to Miami is expected to continue for the foreseeable future.
Eastern seaboard rising
People are also increasingly moving from the Northeast and other areas of the country to Eastern Seaboard states with more temperate climates, including Georgia, South Carolina, North Carolina, Virginia, Maryland and even Delaware, which was named the best state to retire in 2024 by Bankrate.
Retirees and others are also attracted to the relative affordability of these states compared to where they previously resided. Redfin recently included Greensboro and Charlotte, N.C.; Richmond and Virginia Beach, Va.; and Orlando and Jacksonville, Fla., on its list of the most affordable places to live along the East Coast.
However, the attraction to these cities and states is inevitably contributing to a lack of homes in some areas, resulting in opportunities to invest in new multifamily developments that appeal to the demographic currently relocating there. While the worst housing shortages can still be found in areas of the West Coast, many states along the Eastern Seaboard are facing their own crisis. One of those is Maryland, which has a reported shortage of 96,000 units. While state housing programs are often focused on affordable housing, there is a clear need for the private development of workforce and high-end multifamily projects.
Private credit is key
In addition to focusing on acquisitions and development, there will continue to be opportunities for investors to provide strategic capital to property owners and developers. This is particularly the case for owners of properties with strong fundamentals who are struggling to survive in the current market.
Short-term private loans will help provide a bridge to the improved operating environment expected in 2026, when multifamily supply tapers and positive absorption returns. Until then, many current owners will be faced with the headwinds of new deliveries and competition for leases, leading to continued downward rent pressure and more concessions needing to be offered.
With the multifamily market expected to remain challenged in 2025, there will be a window of opportunity to acquire quality real estate in select markets at favorable prices. Those in a position to take advantage of the current environment, and make smart investment decisions, will be rewarded in 2026 and beyond.
Ben Jackson is director of capital formation at Leste Group, a global independent alternative investment manager offering investors a diverse range of strategies across real estate, real estate credit, private equity, and special situations.
