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Rents Rising, Homes Elusive: Why Multifamily Still Wins

• David (Viacheslav) Davidenko

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The gap between owning and renting has never been more striking. With median home prices hitting a record $420,000 and mortgage rates hovering in the high 6% range, average monthly mortgage payments now exceed typical rents by a staggering $1,350. This widening affordability divide is reshaping America's housing landscape in unexpected ways.

Our deep dive into the latest Q2 Multifamily National Report reveals a rental market displaying remarkable resilience despite economic uncertainty. Nearly 147,000 apartments were absorbed nationwide last year, driving vacancy rates down to a two-year low of 5.0 percent across 48 of 50 major metro markets. But perhaps most fascinating is how landlords are approaching pricing: existing tenants face 3.7% rent increases when renewing leases, while new tenants actually benefit from a 1.4% decrease. This unusual dynamic suggests property owners recognize the value of tenant retention in today's market.

The construction pipeline is sending equally interesting signals. Apartment completions hit their lowest quarterly total since Q2 2023, with building permits at their lowest level since 2015. With 40 of 50 top markets projected to see fewer new apartments in 2025, and $206 billion in investment capital sitting on the sidelines, we may be witnessing not just a market cycle but a fundamental shift in housing patterns. Could more Americans become lifelong renters? The implications for consumer spending, savings patterns, and urban development could reshape our economy for decades. Subscribe now to explore more insights on how these housing trends affect your financial future.

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Speaker 1:

You know it feels like everyone's talking about the housing market these days. Interest rates, prices it's a lot.

Speaker 2:

It really is.

Speaker 1:

But one area that seems well, almost unexpectedly strong is the apartment rental market. It's showing some real resilience, even with all the economic shifts happening.

Speaker 2:

Absolutely it's holding firm and to really get a handle on why we've been digging into the latest numbers, specifically the Q2 Multifamily National Report from Marcus and Milichap.

Speaker 1:

Right that report, so that's our source for this deep dive.

Speaker 2:

Exactly, it gives a pretty comprehensive picture.

Speaker 1:

Okay, so our aim today, basically, is to unpack what this report is telling us. Whether you're renting, thinking about buying or, honestly, just trying to make sense of the economy, these trends matter.

Speaker 2:

And we want to go beyond just the data points. What does it actually mean? Where might things be heading?

Speaker 1:

Yeah, not just dry numbers, let's get into the insights. So let's start with the recent past. What's the story with apartment leasing? Was there much activity?

Speaker 2:

Oh yeah, the report highlights really significant activity over the last year. We're talking nearly 147,000 units absorbed nationally.

Speaker 1:

Wow, 147,000. That's a lot of apartments filled.

Speaker 2:

It is, and the direct result was a pretty noticeable drop in the national vacancy rate. It fell by 0.9 percentage points, 90 basis points, 90 basis points.

Speaker 1:

Okay, and was that just in certain hotspots or more widespread?

Speaker 2:

That's the interesting part it was really broad based. The report says 48 out of the 50 major metro areas actually saw their vacancy rates decrease 48 out of 50. That's nearly everywhere. Pretty much. It pushed the national vacancy rate down to 5.0 percent as of March 5.0 percent, and how does that compare historically? Well, that's a two year low.

Speaker 1:

Yeah.

Speaker 2:

And it's also below the long-term average. So it suggests demand is, you know, quite solid.

Speaker 1:

Okay, solid demand, but you mentioned the broader economy earlier. Things like tariffs, potential policy changes, are those casting a shadow.

Speaker 2:

They definitely introduce an element of, let's say, uncertainty. That's something the report acknowledges. These things could impact household formation, maybe dampen rental demand a bit as people react.

Speaker 1:

Right.

Speaker 2:

Potential headwinds, yeah, but the key point the report makes is that the multifamily sector is facing this from a well pretty strong starting position.

Speaker 1:

Because of that leasing activity we just talked about.

Speaker 2:

Exactly that solid footing helps. Plus there's this expected pullback in new construction coming.

Speaker 1:

Ah, okay, supply slowing down.

Speaker 2:

Potentially, and if you combine that with continued job creation, especially in sectors where renters often work, it could help keep supply and demand reasonably balanced.

Speaker 1:

Makes sense. Okay, let's pivot to something huge Buying a house. It's tough out there. How's that playing into the rental market?

Speaker 2:

Oh, it's a massive factor. The report really emphasizes this. The difficulty and cost of buying a home are, frankly, keeping more people renting for longer.

Speaker 1:

Can you put some numbers on that difficulty?

Speaker 2:

Sure. So the median price for a single family home hit nearly $420,000 in March. That's a record $420,000. Wow, and that's up 4% from the year before. Then you add in mortgage rates, which were, you know, up in the high 6% range in late April.

Speaker 1:

High sixes Ouch. So what does that mean for monthly payments compared to rent?

Speaker 2:

That's where it gets really stark. The report calculates the gap between a typical mortgage payment and the average rent is now around $3,350 per month $1,350 more per month to own. On average, yes, and that gap is historically very large. It makes renting look well significantly more affordable for a lot of people right now.

Speaker 1:

Yeah, no kidding. So are we seeing people choosing to stay put in their rentals then we are.

Speaker 2:

The data shows rent or retention is definitely up the renewal conversion rate. So the percentage of tenants renewing their lease hit 55.3% in the first quarter 55.3%.

Speaker 1:

How does that compare?

Speaker 2:

That's a jump of 1.6 percentage points, 160 basis points, compared to the same time last year.

Speaker 1:

Okay, so more people are sticking around. Is that across the board or in specific types of apartments?

Speaker 2:

It seems to be happening across all property classes, which is interesting. But Class C properties typically the more affordable older stock. They actually led the way with a renewal rate of 58.7%.

Speaker 1:

So even in the more budget-friendly options, people are renewing.

Speaker 2:

Exactly Suggest. Folks are prioritizing stability, maybe avoiding the costs and hassle of moving, especially with ownership so far out of reach.

Speaker 1:

No, this is where it gets really critical, I think. How do these renewals affect rents?

Speaker 2:

Are landlords arising rents more for renewals and this is a key aha moment in the report. Renewals are the main engine of rent growth right now.

Speaker 1:

Really.

Speaker 2:

Yeah, tenants renewing their leases are seeing an average annual rent increase of 3.7%. But guess what? Rents for new tenants actually drop by 1.4% on average.

Speaker 1:

Whoa Okay. So it's cheaper to sign a new lease than to renew an existing one, on average.

Speaker 2:

Well, the change is negative for new leases, positive for renewals. Landlords are finding more success, it seems, in raising rents on existing tenants who want to stay, rather than trying to push rents higher for vacant units in the current market that's fascinating.

Speaker 1:

So the headline rent numbers might look softer, but if you're staying put, you're likely paying more. That seems to be the dynamic. Okay, let's talk supply. Then what's happening with new apartment construction? Are we still building a lot? The numbers for Q1 2025 show about 116,000 units completed. Now that's still above the long-term average, but it's actually the lowest quarterly number since the second quarter of 2023. So it points towards a downward trend starting.

Speaker 2:

A slowdown in deliveries. Are we expecting that to continue?

Speaker 1:

The projection is yes. The report anticipates that 40 out of the top 50 markets will actually see fewer new apartment openings in 2025 than they did in 2024.

Speaker 2:

40 out of 50. So most major markets are expecting less new supply next year. What about areas like the Sunbelt that saw huge building booms?

Speaker 1:

Yeah, good question. The Sun Belt, especially Texas, definitely have very high completion numbers. Recently the four big Texas markets alone were like 15% of the national total this past year 15%, just from Texas, wow. But even there we're seeing signs of a slowdown now.

Speaker 2:

Oh interesting, what kind of signs.

Speaker 1:

The report specifically notes a significant drop in permit activity, so applications to build in Texas and the southeast overall during the first quarter.

Speaker 2:

Fewer permits being pulled.

Speaker 1:

Exactly and nationally. The number of multifamily permits issued in Q1 2025 was the lowest quarterly total since Well, since at least 2015.

Speaker 2:

Since 2015. That's a pretty strong signal.

Speaker 1:

It is, and you have to remember there's a lag right.

Speaker 2:

Right Between permits and actual finished buildings. How long is that typically?

Speaker 1:

Usually around eight to ten quarters, so two to two and a half years roughly.

Speaker 2:

Okay, so this drop in permits now means we'll likely see fewer new apartments actually opening up down the road a couple of years from now.

Speaker 1:

That's the implication. Yes, it points to a tighter supply pipeline in the medium term.

Speaker 2:

Got it Okay. Shifting gears again. Let's talk investment. Where's the money going in the multifamily space?

Speaker 1:

Well, the report notes a bit of a slowdown in actual deal volume, the number of sales From January to March. That came after three quarters where activity had been picking up.

Speaker 2:

So a pause in transactions.

Speaker 1:

A bit of one, yeah, but what's still very active is the private investor segment. Deals under $5 million made up about three quarters of all sales.

Speaker 2:

Three quarters were smaller deals. Why do you think multifamily is still attractive to those kinds of investors right now?

Speaker 1:

The thinking is, in this kind of uncertain economic climate, maybe with policy shifts and so on, multifamily real estate feels relatively stable. You know, it's a tangible asset, generates income. Seems like a safer bet for some private capital.

Speaker 2:

A bit of a safe harbor perhaps. What about pricing and returns?

Speaker 1:

Over the year ending in March, the average stabilized price per unit held around $200,000. Okay, and the average cap rate the return investors expect based on income hit 6.0%. That's actually the highest it's been since 2013.

Speaker 2:

6.0% cap rate, highest since 2013. That suggests returns are becoming potentially more attractive for buyers, maybe reflecting higher borrowing costs or perceived risk.

Speaker 1:

Could be a mix of factors. Yeah, it reflects the current market dynamics and there's definitely money waiting to be invested.

Speaker 2:

How much are we talking about?

Speaker 1:

A lot. The report mentions dry powder, that's capital committed to funds but not yet spent, targeting North American real estate. In March it was $206 billion $206 billion, wow yeah. And that was actually up $8 billion just from the end of 2024. So the money's there.

Speaker 2:

But it's sitting on the sidelines mostly why?

Speaker 1:

Likely that same economic uncertainty we talked about. It's making some larger investors hesitate. Maybe wait for a clearer picture.

Speaker 2:

Makes sense.

Speaker 1:

That said, the report does note that some bigger deals institutional level stuff over $20 million still happened in Q1. Institutional level stuff over $20 million still happened in Q1. So it's not completely frozen. It suggests some larger players might deploy more capital later in the year if things stabilize.

Speaker 2:

Okay, interesting, so let's try and pull this all together. After diving into this report, what's the main headline for the multifamily market?

Speaker 1:

I think the main takeaway is resilience. The market's proving quite resilient, even as it deals with, you know, a pretty dynamic economic environment. And what's driving that resilience? Primarily, it seems to boil down to strong underlying demand, fueled partly by demographics, but significantly by just how expensive and difficult it's become to buy a home. That's keeping rental demand high.

Speaker 2:

Right, the homeownership barrier is key. So those are the strengths. What are the main things we need to keep an eye on going forward?

Speaker 1:

Definitely need to watch the supply side, how that construction slowdown plays out, also any shifts in economic policy, how they affect renters and the economy generally and, of course, what happens in the capital markets. You know interest rates, investment flows.

Speaker 2:

All those moving parts.

Speaker 1:

Exactly. So maybe a final thought for you, the listener, to chew on.

Speaker 2:

Okay.

Speaker 1:

Given this widening gap between renting and owning and how it's clearly boosting the rental market, could this be more than just a cycle? Might we be seeing a fundamental, longer-term shift in how people approach housing, more people becoming renters for longer, maybe for life?

Speaker 2:

A structural shift. Yeah, becoming renters for longer, maybe for life.

Speaker 1:

A structural shift, yeah, and if so, what kind of unexpected ripple effects could that have on, you know, consumer spending savings? How are cities even develop?

Speaker 2:

That's a really interesting question, definitely food for thought about the future shape of the housing market and maybe even the economy.

Speaker 1:

Something to ponder. Thanks for digging into this with us today.

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David (Viacheslav) Davidenko

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