As supply-chain disruptions and elevated interest rates continue to challenge the multifamily sector, experts predict that the market will experience stabilization toward the latter half of 2025. This recovery is anticipated as more deals become financially viable, according to economists speaking at the National Association of Home Builders (NAHB) International Builders’ Show in Las Vegas.

In 2024, multifamily construction saw a notable downturn, with new starts plummeting by 25% to a rate of 355,000 units. At the same time, around 1 million apartments were under construction—the largest number since 1973—which dampened the apartment market.

“NAHB is projecting that multifamily construction will decline again in the first half of 2025 before moving back to long-term trends toward the end of the year as the market works through a substantial number of units under construction,” said Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis.

The NAHB forecasts a further 11% decline in multifamily starts this year, bringing the rate down to 317,000, but expects a rebound of 6% in 2026, with starts rising to 336,000.

Mixed Sentiment on Market Confidence

Confidence in the new multifamily housing market showed mixed results, according to the latest NAHB Multifamily Market Survey (MMS). The Multifamily Production Index (MPI) rose seven points to 48, though it remains below the neutral threshold of 50, reflecting cautious optimism about the market’s prospects.

“The MPI is reflecting cautious optimism with the reading of 48, and it is what we would expect given that multifamily starts declined in 2023 and 2024,” said Nanayakkara-Skillington.

Meanwhile, the Multifamily Occupancy Index (MOI) reached 81, increasing by four points year-over-year, which indicates that apartment owners are generally optimistic about occupancy rates in existing properties.

Challenges in the Market Remain

While supply-chain issues and high interest rates continue to impede the sector, Nanayakkara-Skillington also highlighted additional hurdles facing the overall housing market. These include labor shortages, the limited availability of developed lots, and persistently high prices for building materials.

On a brighter note, the industry is benefiting from a low national unemployment rate and the potential for a surge of young adults entering the housing market.

“Currently, the number of young adults ages 25-34 living with their parents is at elevated levels,” said Molly Boesel, senior principal economist at CoreLogic. “Pent-up demand for multifamily housing will continue to build as these young adults move out of their parents’ homes.”

Rental Market Trends and Delinquency Rates

With the national housing market facing significant affordability challenges—exacerbated by the 30-year fixed mortgage rate hovering around 7%—many renters are opting to remain in the rental market. As Boesel explains, "Another factor suppressing trade-up options for renters is that single-family housing inventory remains unseasonably low because most homeowners have mortgage rates below 5% and are electing to stay put."

Despite these pressures, multifamily rents decreased by 1% toward the end of 2024, a trend largely driven by high supply levels. However, as construction starts and completions slow down, vacancy rates are expected to decline, with rents projected to rise once more.

An emerging concern in the multifamily sector is the rise in delinquency rates. Boesel pointed to the higher interest rates, shifting property market fundamentals, and uncertainty regarding property valuations as key factors driving this trend. The combination of these factors has caused some financial strain for multifamily property owners, potentially signaling tighter conditions for investors and developers moving forward.

A Long-Term View: Stabilization on the Horizon

Looking toward the latter half of 2025, economists are cautiously optimistic that the multifamily market will begin to stabilize, thanks to the gradual resolution of current challenges. The sector, while currently navigating a complex landscape, has the potential for growth as demand from young adults continues to build and the construction pipeline works through existing inventory.

Originally reported by Stephanie pagan in NAHB.