The multifamily real estate sector sends mixed signals as we cross the halfway mark of 2025. Activity has slowed but not stopped, and market conditions are neither recessionary nor red-hot. It’s a year of recalibration, not retreat.

For developers, investors, and capital partners, this is a moment to reassess and not react impulsively but plan strategically for what comes next. While economic uncertainty and capital constraints persist, the long-term outlook for multifamily remains sound. The fundamentals haven’t changed, but the playbook has.

Bryan Lamb, executive vice president, Ryan Companies

Capital Markets: Still the Primary Headwind

The capital markets environment continues to weigh down multifamily deal flow. Elevated interest rates remain the most significant drag on investment and development activity. As of Q1 2025, the average interest rate for permanent multifamily loans hovers around 6.1%, according to Newmark, up from sub-4% just three years ago.

The result is persistent negative leverage, where borrowing costs exceed unlevered yields. This dynamic has discouraged transactions and kept both buyers and sellers sidelined. Buyers aren’t willing to pay premium prices in today’s financing climate, and sellers are reluctant to realize losses after years of cap rate expansion[BL1] .

A related ripple effect is limited liquidity. Many LPs are still waiting for capital to be returned from previous investments before committing to new ones. The development spread, the yield differential between new builds and stabilized asset cap rates, looks relatively more attractive, especially compared to value-add acquisitions, but few are willing to act until the capital bottleneck clears.

Demand Remains Strong, But Supply Can’t Catch Up

Here lies the paradox: demand is not the problem. Demographic and economic conditions continue to support strong demand. Homeownership remains out of reach for many Americans, with mortgage rates above 6.5% and home prices near record highs. Meanwhile, new household formation has increased in many markets, especially among millennials and Gen Z renters.

According to Newmark data, national occupancy rates remain stable at around 94.5%, and effective rents increased slightly in Q1 2025, especially in suburban and Sunbelt markets.

What’s missing is new supply. According to FRED, construction starts remain well below pre-slowdown levels, down more than 30% compared to Q1 2023. While there was an 8% uptick from Q1 2024, it’s more of a modest rebound than a proper recovery. Many projects expected to break ground in early 2025 are still sitting on the sidelines. Permits may be in hand, and designs may be complete, but those developments have been shelved or delayed indefinitely without viable capital structures and unnecessary uncertainty on labor and tariff policy, which can dramatically impact construction costs.  Roughly speaking, labor and materials each represent about 50% of direct construction costs. With both sides of that equation being challenged, construction cost relief would defy basic economic theory. The result? We’re simply not adding enough new inventory to meet long-term housing demand.

Strategic Shifts: Developers Adapt to Meet the Market

The smartest players aren’t standing still. They’re retooling strategies to match the moment.

One major shift is product type. Developers are moving away from urban high-rise luxury towers in favor of suburban, low-to-mid-density wood-frame products. These communities are less expensive to build, faster to deliver, and more aligned with where today’s renters want to live.

There’s also a growing emphasis on attainability, targeting renters earning 80–120% of the area median income (AMI). It’s not “affordable housing” in the regulatory sense, but it is affordable by design: modest unit sizes, practical finishes, and reasonable common-area amenities. States like Florida are leaning into this model with programs like the “Live Local Act,” which offers tax incentives for mixed-income projects built “by right” in commercial zones.

Developers, especially those with integrated architecture and construction teams like ours at Ryan, can use typology and unit prototyping to streamline design, lower costs, and increase construction cost predictability.

Regional Priorities: Where Development Is Still Happening

While many projects are paused, development hasn’t disappeared entirely and remains attractive where fundamentals are strong and capital confidence is higher.

For example:

• Dallas and Tampa continue to attract development interest due to population and job growth, business-friendly climates, and deeper institutional buyer pools.
• San Diego and Seattle remain appealing as high-barrier markets with long-term rent growth potential, even if entry is more difficult.
• Key indicators guiding development decisions include job growth, employment diversity, housing supply pipelines, and infrastructure investment.

The Rest of 2025: What Could Shift the Market

While the current slowdown feels prolonged, most industry leaders see this as a cyclical pause, not a structural decline.

Multifamily’s underlying strengths: short lease durations, dynamic rent pricing, and essential housing utility, make it historically resilient during recessionary times. The market recovered faster than any other asset class post-2008 and during the COVID bounce-back.

What will it take to reignite activity?

• Rate cuts from the Federal Reserve, projected to begin in late 2025, could tip the balance back toward neutral or even positive leverage.
• Geopolitical stability, including easing tensions in the Middle East and more clarity on tariff policies, would also improve market confidence.
• Stabilized inflation and better construction cost predictability could restore underwriting confidence. Thoughtful labor and immigration policy could go a long way on this front. Until then, most developers plan for 2026 as the more likely window for new starts.

Final Thought: Quietly Building for What’s Next

Multifamily may be in neutral, but developers with a long-term vision are not standing still. They’re using this time to assemble land, refine products, optimize cost structures, and deepen relationships with capital.

When the market turns, and it will, those with thoughtful discipline and pre-positioned projects will lead the next growth cycle.

Bryan Lamb is executive vice president – multifamily sector leader with Minneapolis-based Ryan Companies.