Why Are Multifamily Property Prices Falling?

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Changes in the price of multifamily properties are important to monitor for both economic and financial stability reasons. The multifamily real estate market is one of the largest investor asset classes in the United States: as of mid-2024, multifamily properties have an estimated market capitalization of $4.6 trillion. Moreover, multifamily properties provide collateral on over $2 trillion in outstanding debt which, in turn, makes up a sizable secondary securities market (MBA 2024). Changes in the prices of multifamily buildings may be especially important to monitor in the coming year, as multifamily properties account for more than 40 percent of all commercial real estate loans set to mature through 2025 (Hoffman, Burke, and Jones 2024).

Chart 1 shows that after rising sharply during the pandemic, prices of multifamily buildings have since fallen. Multifamily property prices (solid blue line) rose 27.3 percent from 2020 to 2022 as rocketing shelter demand elevated investors’ outlooks. Since their 2022 peak, however, prices have declined by 16.1 percent and now stand slightly below trend (dashed line).

Chart 1: Multifamily property prices have fallen slightly below trend after sharp pandemic increases

The rapid rise and decline in multifamily property prices was accompanied by similarly rapid swings in market fundamentals. The COVID-19 pandemic led to a sharp increase in demand for housing as social distancing and a higher prevalence of remote work changed preferences for living space and amenities. Chart 2 shows that during this period of rising housing demand and new household formation, vacancy rates for multifamily properties fell at the fastest pace in a decade (blue line), boosting growth in both rents and net operating incomes (green line). At the same time, the stock of multifamily housing became more constrained as the pace of deliveries of new units leveled off (purple line). These factors, combined with low interest rates, all supported higher prices for multifamily properties.

Chart 2: Multifamily property fundamentals have deteriorated in recent quarters

More recently, the fundamentals underlying higher property prices have softened. Construction of new multifamily units has rebounded and even surged to outsized levels in several U.S. regions, leading to many new housing units coming available. The rising supply of multifamily housing has resulted in sharply higher vacancy rates that put downward pressure on rent growth. Higher interest rates have also reduced multifamily property valuations by raising interest expenses. Moreover, higher operating costs, such as increased insurance premiums and larger maintenance bills, have exacerbated the challenges of slowing rent growth, resulting in steep declines in net operating income growth.

However, broad deterioration in housing fundamentals may not fully explain the observed price declines for multifamily properties over the past two years. Chart 3 shows aggregate multifamily price changes (blue line) alongside the average amount of price changes across metro areas that is not explained by fundamental factors (purple line). The unexplained component is derived from a simple model of year-over-year price growth that accounts for net new deliveries, net absorption of new properties, year-over-year net operating income growth, and the change in 10-year Treasury yields by metro area.^_ These factors track contemporaneous supply, demand, and financial conditions, respectively, in metro area multifamily property markets.

Chart 3: Changes in fundamentals do not fully explain market price declines

Although multifamily housing prices typically move in line with market fundamentals, the two have diverged in meaningful ways since the pandemic. The purple line in Chart 3 shows that prior to 2020, market fundamentals explain changes in metro area prices fairly well, as evidenced by the near-zero unexplained pricing component in that time period. However, during 2020 and 2021, prices of multifamily properties increased more than might be explained by improved fundamentals alone, suggesting accelerating rent growth and record low vacancies may have buoyed investor sentiment. Since 2022, the market seems to be exhibiting more cooling than might be expected given changes in fundamentals. That is, across metro areas, prices have declined by about 5 percentage points more, on average, than might be expected based on fundamentals alone.^_

The recent disparity between predicted and realized price declines may suggest that investors and property owners feel more pessimistic about multifamily properties. On one hand, price declines may reflect investor concerns that recent deteriorations in cash flows will persist beyond the near term. On the other hand, these declines may simply reflect an unwinding of the investor optimism that pushed valuations up between 2020 and 2021, especially given the tightening of financial conditions over the past year and the extent of loan maturities looming over the coming year. This distinction is important: in the former case, the softening in multifamily property prices could continue if investors remain risk-averse to the multifamily property segment. In the latter case, growth in multifamily property valuations may normalize to the trends implied by market fundamentals over the near term, meaning property prices may be set to rise modestly.