Multifamily REIT performance has come under pressure so far in 2025, with the tail end of an oversupply cycle and economic growth uncertainty weighing on the sector. At the same time, renewal lease gains remain a bright spot, highlighting the sector’s success in prioritizing property upgrades and improving the resident experience.
While coastal markets have seen stronger performance than the Sun Belt, some analysts are looking to 2026 for those differences to narrow as supply pressures ease further. Meanwhile, with the gulf between the cost of owning and renting remaining persistently stubborn, renters are expected to stay in place for longer, offering a solid tailwind for the sector.
REIT.com spoke to Adam Kramer, vice president of equity research at Morgan Stanley, Rob Stevenson, head of real estate equity research at Janney, and Linda Tsai, senior vice president of equity research at Jefferies LLC, for their thoughts on the outlook for multifamily REITs.
How would you describe performance for the multifamily REIT sector for 2025 so far, and what do you anticipate for 2026?
Adam Kramer: As the multifamily industry continues to contend with a record supply cycle, 2025 is again set to be a year with divergent fundamentals between coastal and Sun Belt-focused REITs. For REITs with primarily coastal portfolios, it has the potential to be a relatively normal, or maybe slightly below normal, year for lease growth and occupancy.
For Sun Belt REITs, 2025 is set to be (another) transition year, as deliveries peaked in late-2024 and then transitioned from above the long-run average to below by year-end. Expectations were well-understood that for these REITs, rent growth would be negative for the full-year on average, and potentially stay negative for the whole year.
Some of the REITs’ mid-quarter updates suggested that it has been an earlier and softer peak leasing season. This potential softness calls into question not only the achievability of 2025 guides/estimates, but also the recovery in fundamentals thereafter.
Rob Stevenson: Disappointing. With supply tailing off, demand still strong, and a healthy U.S. economy, we had expected the multifamily REITs to at least be one of the better relative REIT performers in the first half of 2025. Unfortunately, the multifamily REITs are among the worst performing REIT asset class over the last three months.
Linda Tsai: Multifamily has underperformed REITs and the broader market year to date. Expectations for the year started out well but got weaker in the May /June timeframe as residents stayed put, which weighed on new lease growth rates particularly in oversupplied Sun Belt markets. We saw some of the REITs with greater Sun Belt and Los Angeles exposure lower their same store revenue expectations for 2025 in the second quarter.
What’s been happening on the supply front and how is that impacting rental rate pricing power?
Kramer: The supply story is well-understood and appreciated at this point, as we get to the tail-end of a record supply cycle, felt most acutely in the Sun Belt. Since then, deliveries have been elevated but decelerating.
Interestingly, however, renewal rate growth has held up well, both in coastal markets and especially in the Sun Belt—even with the oversupply. Along similar lines, even with elevated supply, turnover rates have been low, which we view as a testament to the REITs’ resident experience programs and initiatives.
For the Sun Belt, the bull case has been about absorption of supply in 2025 that could lead to robust lease growth and pricing power in 2026 and beyond.
Tsai: In 2025, completions are down roughly 50% from the 2024 peak of 700,000 units and are now at 350,000 to 508,000. In 2026, this should drop further to 327,000 to 371,000. This is the result of elevated interest rates, tighter lending conditions, and construction costs weighing on new starts.
Starting in 2026, new starts will rise again towards the 300,000 range, with the same for 2027 and 2028 but remaining below the 350,000 level.
According to Witten Advisors, demand starts to outstrip supply in 2026 to 2028 as completions ease considerably after 2025. In the second quarter, we saw some very consistent trends with San Francisco, New York, Boston, and Washington, D.C. outperforming in rent growth and Austin, Denver, Phoenix, Atlanta, and Dallas relatively weaker. Los Angeles, due to the slow recovery of the film industry, has lagged on job recovery, something both AvalonBay Communities, Inc. (NYSE: AVB) and Essex Property Trust, Inc. (NYSE: ESS) highlighted on their calls, but they are hopeful that a doubling of the film tax credit will spur the local economy.
Stevenson: Depending on the market (and even submarket), supply peaked in most markets in the second half of 2024 or the first quarter of 2025 and has been tailing off ever since. While several submarkets are still using heavy rental concessions (primarily one or two months’ free rent) in order to complete lease-up (or to compete against those that are in lease-up), we have seen fewer rental concessions since the peak leasing season started in the spring.
And while we are still seeing new lease growth generally in the flat (coastal markets) to -2% (Sun Belt) broadly across the major markets, renewal leases are still clocking in at plus 3% growth or better. We continue to expect to see blended lease growth improve in each of the first three quarters of 2025 before experiencing a normal seasonal slowdown in the fourth quarter.
Geographically, which areas show the strongest opportunities for multifamily REITs?
Tsai: In the second half of 2026, we should continue to see some of the strongest rent gains in coastal markets. This includes Northern California, Southern California, Boston, New York, and South Florida.
Stevenson: If we are talking the remainder of 2025, it’s probably still the major East Coast markets and the non-LA West Coast markets, with the Sun Belt lagging due to all that supply.
If we are talking 2026, we are expecting a strong bounce-back from the Sun Belt as long as the U.S. economy remains strong (especially white-collar employment).
Kramer: Unsurprisingly, oversupplied Sun Belt markets continue to see the weakest rent growth nationally, as new competitive supply pressures pricing and necessitates concession usage. Yet, these oversupplied Sun Belt markets are also the ones that we’ve identified as more likely to have the best job growth and population migrations.
Fundamentals have been significantly stronger in coastal markets in the last few years, and this is likely to continue for the remainder of 2025 and into 2026. We anticipate that coastal and Sun Belt fundamentals converge in 2026, as supply pressures recede.
Are you seeing any notable shifts in multifamily transaction volume?
Kramer: In short, no. There have been relatively consistent transaction market dynamics since the initial rate increases, and with rates still elevated—but still-strong demand that may be preventing distress in some cases—these dynamics persist. On a quarterly basis, first quarter transaction volume of just $31 billion was the lowest quarter since the first quarter of 2024, though cap rates have been steady at 5.5%-5.6% for six quarters.
Until there is more certainty regarding timing of rate cuts, more robust rent growth as deliveries slow, or conversely, a recession where falling demand resets prices lower, it’s difficult to envision any notable shifts in the transactions market.
Stevenson: Maybe a little more willingness in sellers to transact at prices based on today’s debt financing costs (and not what it might be after three or four potential Federal Reserve rate cuts).
It also appears that buyers have become more comfortable building in stronger rental rate growth in 2026 and beyond into their numbers in order to get their IRR calculations to pencil. But overall, deal volume remains below where we expected it to be – especially given all the construction and other mortgage debt expiring and/or resetting in 2024, 2025, and 2026.
We will see how much of an impact the recent sale/liquidation announcement by Elme Communities (NYSE: ELME) has on the group’s valuation, and M&A in general.
Tsai: Transaction volumes are still off from the peaks of 2022 and 2023, but year to date volumes are about 25% higher than the same time last year. Strength is apparent on the West Coast, while the Sun Belt remains weak in terms of transaction volume. This is due to the view that many would-be sellers are waiting out the supply because with demand expected to outstrip supply by the second half of 2026, they do not want to sell prematurely while NOIs are sub-optimal, given supply.
What about multifamily development – how willing are REITs to start new projects today?
Kramer: Over the last few years, REITs have had a range of approaches towards development.
REITs placing a greater emphasis on development shouldn’t come as a surprise: with deliveries set to fall by 30%-40% year-over-year in each of 2025 and 2026, and a further 20% in 2027, there’s a compelling opportunity—for those with the cost of capital—to start development that can deliver in 2027 or 2028 when there will likely be the fewest deliveries (as a percent of inventory) since the GFC.
Tsai: Most apartment REITs are hesitant to start new developments, given higher capital costs and construction. They would rather buy a building because it's still cheaper than replacement costs and can apply their scale, management, and technology acumen to operate newly acquired buildings more efficiently to improve operating margins.
Stevenson: REITs are very willing, as long as expected yields exceed that typical 100, 150, 175 basis point threshold over similar acquisitions that they have been benchmarking to over the last 20 or so years. But it’s hard to make that work on land that you haven’t controlled for a while, and it’s harder to make mid- and high-rise developments work given material and labor prices.
Lower-density suburban assets on legacy land continue to be the easiest developments to get to work financially today (not only for the REITs but also private developers).
On the private side, while we are seeing some new projects break ground, those developers are also dealing with a more hostile lending environment than they have been used to over the last few decades.
What issues do you see, or want to see, multifamily REIT management teams prioritizing today?
Tsai: In a period of rising costs, we are seeing multifamily REITs do a good job of managing these increases, such as pushing back on tax increases from higher assessments, deploying automation tools to operate buildings more efficiently, or leveraging AI for leasing. This has been especially helpful for preserving NOI when the top line has been pressured by supply in some markets.
Stepping back further, operating efficiency has also been helped by lower churn as people rent for longer. If multifamily owners can keep a growing proportion of their renters happy with better service levels, combined with proliferating lifestyle changes (younger generations choosing to remain single and childless), operators can capitalize on a secular/generational tailwind to drive NOI margins even permanently higher, potentially.
Kramer: Operations have been a focus for the multifamily REIT management teams in recent years. With supply headwinds, they have emphasized retention, resident experience, ancillary services, and revenue opportunities, among other items. Many of the REITs have provided helpful disclosure and guides to these ancillary service opportunities and the resulting revenue/NOI contribution. As REITs progress through these opportunities in the next few years, we’ll be interested to see what the subsequent opportunity set—additional operation and innovation items—will look like.
Multifamily REITs do a great job keeping Wall Street up to date on affordability metrics for their portfolios, namely rent to income. However, given data limitations—which are fully understandable—this data is strictly for new move-ins; REITs don’t have a great methodology for tracking affordability on an ongoing basis. Understanding what affordability looks like for REITs’ entire portfolios, particularly as resident turnover continues to fall and renewals growth of 3%-5% persists, would be helpful.
Stevenson: They continue to focus a lot of time and money on squeezing more out of both technology and operations—and for good reason. That’s a lot of the “secret sauce” that allows multifamily REITs to drive higher retention levels and ultimately higher operating margins.
We also continue to see capital flowing into redevelopment projects, especially the shorter duration kitchen and bath and common area upgrades where they can earn 10% IRRs all day long. While not as sexy as acquisitions or developments, this is the “blocking and tackling” that goes on behind the scenes that helps to drive intermediate and longer-term results.
What other trends or themes are you watching in the multifamily REIT space?
Kramer: Each of the multifamily REITs have strong balance sheets; some have leverage well below their own target levels and REIT group average levels. We’ll be looking to see how REITs use their excess balance sheet capacity: whether they (re)engage in development, are able to execute on acquisitions, look to redevelopment, or even share repurchases.
Along similar lines, and with a few small-cap multifamily REITs pursuing strategic alternatives, we’re watching for any M&A/consolidation in the space, which could serve to be another source of external growth for REITs.
Stevenson: The New York City mayoral race is going to be very interesting and could have major implications for AvalonBay, Equity Residential (NYSE: EQR), and UDR, Inc. (NYSE: UDR), and for a number of other REITs in other asset classes as well. And there continue to be a number of markets trying to pass (or expand) various forms of rent control across the country.
We also have a significant interest in what happens to Fannie Mae and Freddie Mac given their positions as two of the biggest lenders in the multifamily space.
We are also closely monitoring the new single-family housing data as well. High mortgage rates and low availability of both new and existing for-sale housing has kept more people as renters for longer. And even if the Fed does begin to cut rates in the second half, we’re not sure there is going to be enough for-sale supply to meet demand – especially given the number of families tied to their current home given a roughly 3% mortgage rate.
Tsai: The backdrop for multifamily is still strong despite some slowing we've seen mid-year due to hesitation around the economy. The key, of course, boils down to employment and whether we see overall employment slow, which we saw in the most recent jobs report. The positive in the face of too much supply is that absorption has been very strong in the most oversupplied markets.
Further, the persistent and wide delta between the cost of renting and owning makes buying a home very difficult, keeping renters in place for longer, which has been the case ever since home prices jumped post-COVID. Prices are not rising now and you're seeing some price cuts in the Sun Belt and inventory rising as well, but home sales still aren't moving. Since June 2019 home prices are up over 100% yet wage growth is only up about 30% on average, which means the math just doesn't pencil for most would-be homebuyers.