Market Forces Open Opportunities in Multifamily

The asset class offers upside potential and downside protection 
in an uncertain economic climate.

In an era of economic uncertainty, multifamily real estate stands out as a resilient and adaptable asset class. A landscape of market volatility, housing shortages and high mortgage rates creates a unique opportunity for investors to capitalize on long-term growth and potentially generate strong risk-adjusted returns.

Opportunities in Distress

The potential consequences of the 2021-2022 market mania have become clearer in 2025. Buyers priced their deals to perfection as cap rates bottomed out below 4%. It was common to see annual rent growth assumptions in the mid to high single digits, paired with generationally low borrowing rates. Deals were operating under razor-thin margins of error, with no cushion to absorb increases in cap rates, higher borrowing rates or lower rent growth — let alone all three.

The secured overnight financing rate (SOFR) increased 530 basis points from 0.05% to 5.35% between January 2022 and January 2024, and rent growth slowed considerably in 2023 and 2024, even going negative in some markets. Many floating rate borrowers hedged their interest rate risk via rate caps in 2021 and 2022, but most caps expired after two or three years.

Immediately following rate increases in 2022 and throughout 2023 and 2024, numerous lenders showed a willingness to modify loans to avoid widespread distress in their books. This “extend and pretend” attitude was exercised under the assumption that SOFR would come back down by the start of 2025 as inflation was tamed. However, the likelihood of meaningful near-term interest rate reductions has decreased. With more time to build up loss reserves, lenders are now better positioned to absorb losses, and many are signaling a growing unwillingness to keep extending indefinitely.

This combination of factors points to a likely increase in forced sales as lenders begin to honor loan maturities. In partnership with experienced operators, investors can leverage these market forces to secure high-quality assets at significant discounts. By implementing value-add improvements to these properties, such as enhancing amenities or operations, investors can generate alpha and potentially achieve outsized returns.

Drivers of Multifamily Demand

High mortgage rates over the past two-plus years have made homeownership unaffordable for many people. 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. The average 30-year fixed mortgage rate as of Aug. 7 was 6.92% versus 4% in 2019, and insurance and maintenance costs have increased significantly over the past five years.

According to a November 2024 report from Oxford Economics, the annual household income needed to afford a new single-family home nearly doubled between 2019 and 2024, while incomes rose just 29% over the same span. Only one-third of U.S. households earned enough to afford a home in the third quarter of 2024 compared with nearly two-thirds of households five years prior.

In addition, the nationwide housing shortage remains a persistent issue, with the National Multifamily Housing Council reporting that the U.S. needs an additional 4.3 million housing units by 2035 to meet current demand for rental housing.

Given the high barriers to homeownership in the United States, it appears likely that more households will turn to rental housing, further driving multifamily demand. Although markets such as Austin and Nashville have seen apartment construction booms in recent years, the flow of new supply is expected to slow considerably. According to data from CoStar, new multifamily construction starts decreased nationally by 25.2% in 2023 and were down 52.1% in 2024 versus their peak in 2022. As multifamily demand remains strong, declining supply growth in the coming years is likely to act as a tailwind for many owners and investors.  

Multifamily as a Natural Inflation Hedge

Given the inflation runup in recent years, investors are much more focused on the risks that inflation presents to their portfolios. Following a year of larger than typical fluctuations, inflation expectations have jumped in 2025 due to the Trump administration’s volatile trade policy shifts. As a result, the 10-year U.S. Treasury yield has also seen significant volatility, starting the year at around 4.6%, then falling as low as 4.05% before returning to the 4.4% to 4.5% range in June. As of Aug. 7, it stood at 4.2%. Tariff fears place continued downward pressure on new supply, as capital takes a more cautious stance when evaluating new investment opportunities. This limits the likelihood of new supply, which should enhance the competitive position of both existing multifamily properties and new developments in strong locations.  

In addition, multifamily offers a natural hedge against inflation. Unlike fixed-income securities and other real estate types, multifamily leases generally reset annually, allowing for rent increases that at least keep pace with inflation. This dynamic allows multifamily investments to maintain and grow their income streams in inflationary environments and makes multifamily assets an attractive option for preserving purchasing power while generating real returns.

Over the past five years, multifamily rents in high-demand markets such as Austin and Miami increased by double digits, highlighting the sector’s ability to adapt and provide stability for investors in changing economic conditions. It’s important to note, however, that not all markets follow this trend. Local market and submarket forces play a major role in properties’ performance. In San Francisco, for example, rents didn’t reach their pre-COVID high-water mark again until 2024, but green shoots in renter demand and rent growth are now evident.

Finding the Right Partner

Investors must be cautious to avoid the mistakes of the previous cycle. Given the uncertain economic climate, it is critical that investors partner with experienced operators that utilize prudent leverage, focus on generating alpha through operational excellence, and appropriately stress test investments during underwriting to avoid becoming forced sellers themselves. 

Regardless, the combination of market distress, high mortgage rates, housing shortages and inflation protection creates a compelling case to explore investment in today’s multifamily market. By leveraging distressed opportunities and focusing on markets with strong demographic trends, investors can secure assets at a discount with significant upside potential and a degree of downside protection.  

Damian Gancman is chief investment officer and Ryan Graf is director of capital raising and investor relations at Cityview, a vertically integrated real estate investment manager specializing in multifamily projects.

Searching for Trends When identifying demographic trends, it is essential to target markets with both current and future demand for multifamily housing through a combination of quantitative and qualitative analysis. On the quantitative side, historical and projected job growth, the composition of employment by sector, household formation, and median income trends are all critical variables. Qualitatively, secular forces driving economic expansion — such as industry migration, lifestyle shifts and infrastructure investment — often determine whether these dynamics are likely to accelerate or taper off over time.

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• Multifamily Property