The multifamily sector is poised to overcome potential volatility during a period of uncertainty, according to Marcus & Millichap’s second-quarter multifamily national report. Growing concerns over tariffs and policy shifts have weakened both consumer and business sentiment, which could curb household formation, hiring activity and rental demand.
However, multifamily fundamentals have been positive so far this year. Renters absorbed nearly 147,000 net units during the first quarter, capping off a historic year of apartment leasing that ended with national vacancy down 90 basis points to 5%, the lowest point in two years. Even with elevated construction activity, vacancy decreased year-over-year in nearly all major metros and across all three classes, said Marcus & Millichap.
A pullback in construction, as well as job creation in sectors whose workforces historically slot into the renter pool, should continue to aid household formation during a potentially inflationary period, especially amid rising wages. Delayed homeownership among millennials also continues to benefit apartment operators.
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Apartment retention continues to rise, reaching 55.3% during the first quarter, which represents a 160 bps increase year-over-year. Class A and B sectors registered 220 bps and 170 bps improvements in retention, respectively, while Class C properties logged the highest retention at 58.7%. The current period of uncertainty and the rising cost to move will deter any households from moving from their existing residence this year, said Marcus & Millichap.
During the first quarter, developers completed 116,000 units, expanding apartment inventory by 0.6%. This is well above the long-term quarterly average of 54,000 apartments, but is the lowest three-month tally since the second quarter of 2023, according to the report. Permitting also continues to slow, with 54,000 permits pulled during the first quarter, the lowest three-month amount total since at least 2015. This pullback is likely to be compounded by building material tariffs and an expected tightening of immigration rules that could impact construction labor availability. Additionally, insurance costs could impact the multifamily development pipeline. In fact, the average price to insure a unit rose 75% over the four years ending in March.
“Should permit activity become further restricted, additional emphasis will be placed on existing apartments, aiding leasing and potentially reining in concessions usage,” said the report.
Marcus & Millichap expects rising uncertainty to slightly impact multifamily trading. Deal flow from January to March slowed from January to March after trending upward for three straight quarters. Private investors remained active, however, as sub-$5 million trades accounted for three-fourths of all sales.
Average pricing has recently stabilized in the sector, adjusting modestly to roughly $200,000 per unit over the 12 months ending in March. The mean multifamily cap rate, meanwhile, reached 6% during the period, which is the highest recording since 2013, said the report.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
