Looking for a Smart Bet in the Market? Multifamily Development Is Your Hedge.

While economic headwinds such as rising interest rates, escalating construction costs and tightening lending rules have slowed real estate investment, the multifamily sector remains promising. In particular, development-focused investment strategies are presenting compelling opportunities for stakeholders. 

Despite the glut of apartment supply that hit the market in the first half of this year, demand remains extremely strong. Unlike other sectors, housing is a necessity, which positions multifamily to face less pressure than other asset classes, such as office and retail, where demand, rents and vacancy rates are more volatile. By concentrating on development, multifamily investors can better navigate current market dynamics, investing now to unlock future benefits.

As multifamily fundamentals strengthen, investors with active developments in the pipeline and a long-term view of the multifamily market will be best positioned for success in 2025 and beyond. 

According to RealPage’s market analytics, the first half of 2024 tallied the second-highest level of net absorption on record. Demand for multifamily housing remains robust due to several key factors. The nation’s sizable housing shortage, the rising costs of homeownership, and shifting lifestyle trends such as the popularity of remote work continue to make renting an attractive option, particularly for young professionals and high-earning millennials.

Current estimates show a housing shortage of approximately 4.5 million units, with this gap expected to widen through 2035. Based on historical trends, there will not be enough supply to satisfy U.S. housing demand for the foreseeable future.

This housing shortage has contributed to single-family home prices hitting an all-time high, with median home prices as of April 2024 up over 50 percent since March 2020, according to the Case-Shiller National Home Price Index. Combined with rising interest rates, the gap between the average monthly mortgage payment and the average monthly rent payment is more than $1,100, according to Newmark’s Q2 2024 U.S. multifamily capital markets report. It is estimated that only 14.5 percent of renter households can currently afford a median-priced home, leaving 38 million renters priced out of the market and further bolstering an already sizable renter pool. 

On top of this, renters are also choosing to rent for longer, valuing the flexibility and amenities that multifamily properties offer. Ongoing suburbanization and the growing preference for community-oriented living spaces further boost the popularity of multifamily residences. This sustained demand provides a solid foundation for multifamily investments, ensuring high occupancy rates and stable rental income — both critical for long-term success.

By constructing assets designed for long-term growth and value appreciation, development-oriented strategies can often shield investors from short-term headwinds, such as oversupply, because they are less dependent on current market conditions as they move through the development and construction process. 

This is particularly relevant in the current environment, where multifamily construction starts are plummeting, and far more projects are completing than starting. According to RealPage’s market analytics, new construction starts in the second quarter of 2024 were down 40 percent year-over-year, with annual starts at their lowest level in over 10 years. This slowdown is mainly due to rising costs and tighter financing conditions, which have made it more challenging for developers to initiate new projects.

The ongoing decline in construction activity will taper further in 2025 and beyond. Investors who focus on development-oriented strategies in the near term will benefit from a much more favorable supply-demand dynamic when those projects complete two to three years from now, marked by low competitive supply, high demand, positive rent growth and lower vacancy rates. 

This shift will result in favorable exit pricing for investors looking to sell their assets, further boosting the appeal of development-focused strategies. Increased demand and limited supply can lead to bidding wars and higher property valuations, providing sellers with substantial returns. Investors with high-quality, well-located properties will attract more buyer interest and potentially secure higher sale prices, solidifying the long-term value of their investments.

Despite the inherent risks of ground-up development, strategic mitigation measures can significantly improve success. It is critical to partner with well-capitalized, best-in-class developers with proven track records. Additionally, negotiating appropriate contingencies and cost overrun clauses in partnership agreements provides investors with some protection against unforeseen expenses. Targeting lower-basis, higher-yielding projects with streamlined construction time frames — such as surface park and wrap developments — can further reduce risks. 

As the supply-demand imbalance shifts to favor increased demand, rent growth and vacancy rates are expected to return to historical averages. 

Additionally, wage growth has outpaced rent growth for the past 18 months, giving tenants more disposable income to cover rent and even upgrade to more premium apartments. This economic environment not only stabilizes rental income for investors but also serves as a hedge against inflation, making multifamily properties a secure and lucrative investment option. The potential for higher rental income can drive up property values, offering investors both steady cash flow and long-term capital appreciation.

Although it may seem to contradict the popular narrative, data suggests now is the ideal time to invest in multifamily development projects to reap future rewards. By leveraging development-focused investment strategies, investors can capitalize on strong demand for multifamily housing, favorable market conditions and long-term value appreciation. 

Therefore, CP Capital views opportunistic multifamily as a compelling and secure investment opportunity for the foreseeable future.

Kristi Nootens is co-head of CP Capital US, a real estate investment manager focused on the multifamily sector.