Deal flow in the multifamily sector has been stagnant since the Fed began hiking interest rates in 2022, but lower rates may soon unlock some opportunities for investors, according to new research from PwC and the Urban Land Institute.

While the sector is unlikely to reach the record-breaking transactions seen in 2021, reduced rates could allow investors to refinance and pursue acquisitions with less negative leverage. Yields on multifamily assets have hovered around 5% amid a gap between bid and ask prices, with mortgage rates slightly higher at 5.5%, which has pushed recent deals into negative leverage territory in recent year. Still, many investors are betting that rent growth will push yields higher by 2025 or 2026 just as rates are expected to come down.

Distress in the market is anticipated – particularly in loans tied to Class C and B value-add properties and newer developments in the Sunbelt that have struggled with vacancy – as rates remain high.

“There absolutely will be some distressed sales,” a senior researcher at PwC and ULI said. “But overall, because of demographics, job growth, and the limited supply of single-family housing, multifamily is in decent shape.”

The report notes that about 20% of outstanding multifamily debt, or roughly $470 billion, is expected to mature by the end of 2025.

Some sponsors with loans maturing in 2023 and 2024 have secured extensions, but the current interest rate environment has kept many from refinancing, setting the stage for more distress over the next 12 to 18 months. Analysts don’t expect a repeat of 2008, but rising delinquencies are likely in 2025.

The study found that the sector has a significant amount of dry powder ready for deployment, fueling optimism that transaction volume could gain momentum soon. PwC and ULI’s findings came just days after the Fed cut interest rates for the second time this year, lowering the federal funds rate to a range of 4.5%-4.7% following a 50-basis-point reduction in September.

Although investors may face rising distress in the short term, deal flow is likely to increase as borrowing costs ease, allowing more liquidity to enter the market.