As usual, I like to publish my draft thoughts here to get input from key players in the space and these forums, especially folks like @Brian Burke, to see if I am missing any high level areas, before I get into the weeds and look at the data more deeply and regionally.

Here are the key themes I'm seeing get set up for 2025:

Interest Rates Will be Holding Steady or going up: The yield curve (finally) uninverted this week, when the Fed signalled they will be more cautious about raising rates. But, to normalize, the 10-year will eventually trade at a 100-150 bps spread to the FFR. I am unconvinced that the new administration will meaningfully address the deficit and US credit will continue to erode gradually, contributing to rising rates. Further, long-term upward pressures on inflation remain, and will cause the Fed to be cautious with interest rates.

Supply will be a Tale of Two Halves:

In the multifamily sector, we will see another year of near-record setting supply hit the US. But, this will be front-end weighted and gradually slow towards the back half of the year. Expect another brutal year for investors in the South and Southwest, particularly in Texas and Florida, and particularly in Austin, TX - perhaps the worst positioned market in the United States for returns in year 2025.

In the second half of the year, market by market, the supply will slow to near record lows, which will be a key theme in 2026. Expect YoY rents to stay flat or decline slightly in the first 6-9 months of 2025, and for them to start growing YoY materially in Q4.

2026 will see rents explode - I think they could even grow as much as 10% YoY. We will only see ~240,000 units delivered in 2026, a much more moderated level. If interest rates stay high, and I think they will, we will see huge tailwinds for rent growth - to the point where "the rent is too damn high" people will begin to get extremely disgruntled and rowdy over the course of 2026.

No trigger will materially change demand:

What's notable about the last two and a half years is that rents have largely stayed flat. This is not normal in a rising interest rate environment. When interest rates rise, in a balanced market, rents should rise, as the alternative to renting - buying a home - becomes that much more expensive. We have not seen rents rise because of the above discussion on new construction. Demand for multifamily has been going up. It's just been met, or more than met, by the new construction. When new construction slows, demand will continue to remain strong, and that is what will drive rents up in 2026 and maybe Q4 (possibly Q3 in some markets) in 2025.

Expenses will level off:

Multifamily operators have been plagued by expense increases in the form of taxes and insurance, for the last few years, especially in the south, and especially in Florida and Texas. These increases will likely slow to pace more in line with inflation. Operators who were able to kick the can down the road may see huge increases with this year's insurance renewal or property tax bill, but there's no reason to expect another year of massive surges in operating costs.

So What:

So what do we do with the above, if you agree with my analysis?

If you invested in large multifamily 3-4 years ago via syndication in the South, Southwest, or other boomtown: You are cooked. You've likely seen a 30-40% decline in asset value that could decline another 5-10% by end of year 2025. From the now, much lower, valuation, you have a path to recouping your capital over the next 5-7 years, but this is a disaster. It's also possible that you may be forced to sell by your lender. Buckle up, and prepare for total loss, or an additional capital call or two in 2025. This is especially true for investors in large Texas and Florida markets, with Austin, TX, perhaps being the worst positioned market for 2025 in the country. Consider petitioning your GP to stop their side business of disseminating long-form life, parenting, and fitness advice on Twitter and focus on salvaging what can be salvaged of the current portfolio.

If you are considering buying: Squirm a little longer. Sit on your hands a little longer. The market, if I'm right, may bottom out in Q3 2025. The folks who bought 3-5 years ago, as discussed, are cooked, and the market is likely to be ripe with many, many deals. Cash will be king, and buying in the 2H of 2023, particularly in late Q3 and Q4 has a reasonable shot at being at the bottom, or close to it, of this cycle. There is every reason to believe in strong rent growth in 2026, and those who can stockpile cash and go in with reasonably low leverage have a great shot at seeing high returns in the first year of their hold.

I believe that those who buy multifamily in late 2025 and early 2026 have a chance at amazing returns relative to most other asset classes over the back half of the 2020s.

Let me know what thoughts/reactions you have here, and I will incorporate into my more detailed blog publication coming in a few weeks.

Scott Trench

Podcast Guest on Show #223