Future Looks Rosy for Multifamily Housing Investors

The market for office space might be dead, but other commercial real estate ventures are proving to be alive and well.

Take multifamily housing: In early 2023, concern that overdevelopment would crush demand permeated the market. This was particularly pronounced in the South and West regions of the U.S., where new multifamily construction reached record levels in 2023 and 2024. However, the doom scenario has not played out.

Construction has slowed down as monthly starts have declined to levels more than 15% below the 10-year average and nearly half the peak of early 2022. Permit activity for multifamily development has also slowed, indicating that new construction will decelerate considerably in coming years. This is occurring while there remains a shortage of U.S. housing, estimated to be over 3 million units.

Meanwhile, absorption of multifamily units remains apace, even in those markets thought to have been most at risk of overbuilding. Net absorption measures the total of all units that became occupied less the total of all units that became vacant within a specific market and during a specific period. Dallas/Fort Worth, Houston, Austin, Phoenix, and Denver each show up in the top 15 markets for year-to-date net absorption. The South and West have made up more than 70% of net absorption nationally over the past four quarters.

Strong net absorption has allowed for positive rent growth despite high vacancy rates in some of these areas. This trend will likely remain in place as the cost of renting is dramatically lower than the cost of homeownership. With single-family housing prices at all-time highs and 30-year fixed rate mortgages over 6%, the cost of home ownership is more than 30% higher than renting.

Bottom Line: This all paints a picture of a long-term tailwind for investors in multifamily real estate, as demand will likely remain.