Rents Expected to Grow in 2025 on Strong Multifamily Fundamentals

Operational expenses, including the increasing cost of insurance, will continue to have a major impact on the multifamily industry over the next year, according to Colliers’ 2025 Outlook for commercial real estate. Insurance has been a sticking point for the past couple of years. Deals are being repriced as rates fluctuate, and some buyers are walking away from hard deposits, said the firm.

“There are ways to mitigate insurance cost increases through scale, but with 2024’s active hurricane season, these expenses will remain front of mind for buyers and sellers alike,” said the report.

Other operational expenses are also impacting the multifamily sector, including labor, materials and utilities costs, all of which are rising. Net operating income has been under pressure, particularly in Sun Belt markets, due to increased development and a decline in occupancy. However, fundamentals are stabilizing and the tide should begin to turn this year, said Savills.

Finally, falling interest rates will unlock capital, driving sales volume higher, but if rates don’t come down rental demand will continue to swell as housing will remain prohibitively unattainable for many households.

Looking ahead, Savills predicts occupancy will hit bottom in 2025 and begin to recover toward the end of the year. Boom markets have begun to cool, led by rent growth changes in Midwestern and Northeastern markets facing less supply-side pressure. Rent growth should be stronger across the country in 2025, which will set the stage for stronger growth in 2026, said the firm.

“Investors have an opportunity to acquire assets well below replacement costs in high-growth markets throughout the Southeast and Southwest,” said David Goodhue, head of multifamily capital markets at Colliers. “Look for multifamily to once again lead all asset classes in sales volume.”