Monday Morning Scoop - Multifamily to Lead CRE in 2025 Despite Challenges, Colliers Says

Multifamily to Lead CRE in 2025 Despite Challenges, Colliers Says

The multifamily market is poised to remain the most active sector in terms of new investments next year, according to a new report from Colliers. While rising operational costs and the impact of higher interest rates will undoubtedly challenge property owner’s returns, several economic factors are expected to sustain the appeal of multifamily investments through 2025.

Colliers’ investment outlook said that strong demand for rental housing will continue to support the market. Robust household formation, driven by factors such as Gen Z entering the workforce, and the continued impact of high home prices are expected to fuel this demand. Although rent growth may moderate in some areas, the report projects a resurgence in rents next year, as markets with supply shortages are expected to see significant gains.

The pace of new multifamily construction is set to slow in late-2025 as negative rent growth continues to plague areas with lots of new multifamily supply. This reduction in supply-side pressure is expected to pave the way for stronger rent growth in the coming years.

“Investors have an opportunity to acquire assets well below replacement costs in high-growth markets throughout the Southeast and Southwest,” said David Goodhue, the head of multifamily capital markets and an executive managing director at Colliers.

However, the report also acknowledges significant challenges to operational expenses. Colliers said that soaring insurance costs have become a major concern for multifamily property owners, with some deals being repriced or even canceled due to rising premiums. In addition, owners are facing increasing costs for labor, materials, and utilities, impacting profitability.

The movement of interest rates will also play a crucial role in shaping the market as lower interest rates would unlock more capital for investment, while higher rates could dampen activity. But despite these challenges, Colliers believes that the multifamily market will continue to attract significant investor interest.

Properties with strong fundamentals, such as desirable locations, high-quality amenities, or efficient operations, are expected to fare better than others. By carefully assessing market dynamics and implementing proactive risk management strategies, investors can position themselves for success in the evolving multifamily landscape.

Colliers concluded that while challenges in multifamily persist, the long-term fundamentals of the sector remain strong. The continued demand for rental housing, coupled with the potential for improving market conditions, makes the sector an attractive option for investors who can navigate the current environment effectively.

By: Mario Marroquin
Source: GlobeStreet