Multifamily Construction Starts Collapsed 45% From Peak

Min 1: Supply Peak Hits Now But Future Pipeline Evaporated

Arbor reported 98.6 billion dollars in multifamily sales through the first nine months of 2024, up 6.6% from the prior year. The 12-month average cap rate held at 5.7%, below historical averages and nearly unchanged year-over-year. Investment activity accelerated as debt financing conditions improved and the Federal Reserve cut rates.

The National Multifamily Housing Council's quarterly survey showed construction delays affected 52% of participants in Q3 2024, down significantly from 70% in Q2. Permitting backlogs cleared and labor availability improved. But developers stopped launching new projects. Higher interest rates, uncertain rent growth, and elevated construction costs made new starts economically unviable even as existing projects reached completion.

For investors, this creates the timing window. Current supply deliveries weigh on near-term rent growth but future supply constraint builds pricing power. An operator who acquires a stabilized multifamily asset in Cincinnati at a 6.1% cap today holds through two years of modest rent growth, then captures 5 to 6% annual rent increases as supply dries up and demand continues from employment growth and housing shortage fundamentals.

Min 2: Midwest and Northeast Offer Positive Leverage Now

Cap rates in Midwest and Northeast regions run 25 to 50 basis points higher than elsewhere according to CBRE multifamily analysis. Combined with stronger expected rent growth in 2025, buyers in these regions more easily underwrite positive leverage even with elevated interest rates.

Markets like Kansas City, Cincinnati, and St. Louis saw above-average rent growth through 2024 according to RealPage data. Supply-constrained metros avoided the negative rent growth that hit Austin, Phoenix, and Jacksonville where massive new deliveries exceeded absorption. The performance gap persists because institutional capital chased Sun Belt population growth while ignoring Midwest value fundamentals.

An investor who bought 200 units in Kansas City in early 2024 at a 6.4% cap with 65% loan-to-value agency debt paying 5.8% captured positive leverage immediately. Annual rent growth of 4.2% compounds while new competing supply remains minimal. The same capital deployed in Austin fights negative rent growth and oversupply for another 18 months before fundamentals stabilize.

Min 3: Agency Debt Costs Dropped While Equity Returns Improved

Fannie Mae and Freddie Mac kept liquidity flowing throughout the rate volatility. Agency lending for multifamily properties remained accessible even as bank lending contracted. The spread between agency debt costs and multifamily cap rates widened, improving equity returns for leveraged buyers.

Marcus & Millichap data showed strong multifamily fundamentals despite near-term supply pressure. Rental demand remained positive through 2024 due to stronger-than-expected job growth, wage increases, elevated mortgage rates keeping would-be buyers renting, and an overall housing shortage. The premium for an average monthly mortgage payment versus average rent stayed above 35%, ensuring continued renter demand.

For operators, agency financing provides certainty and competitive pricing unavailable in the private debt markets. A syndicator who secures 75% loan-to-value Freddie Mac financing at 5.6% on a suburban apartment acquisition locks in positive leverage while maintaining cash flow stability through conservative underwriting. The structure survives rent volatility better than floating-rate bridge debt that adjusts with every Fed meeting.

Min 4: Small Balance Loans Target Overlooked Properties

Fannie Mae's Small Balance Loan program provided flexible financing for properties under $7.5 million, a segment often ignored by institutional lenders. These properties represent the majority of multifamily units nationally yet receive less capital competition than large garden-style complexes that attract REIT buyers.

Small multifamily assets in secondary markets offer operational advantages beyond pricing. Property management costs run lower, tenant turnover stays below urban high-rises, and local investors understand neighborhood dynamics better than out-of-state funds. An operator focused on 30 to 75 unit properties in Midwest college towns exploits these advantages while avoiding competition from large platforms.

The model scales through repetition rather than property size. A fund that acquires eight small multifamily properties across different Ohio markets achieves geographic diversification and management efficiency while staying below institutional radar. Each property generates 12 to 15% cash-on-cash returns with modest leverage, compounding wealth through stable income instead of speculative appreciation bets.

Min 5: Rent Control Risks Create Opportunity Through Avoidance

Local regulatory environments including rent control policies became more important for multifamily investors according to CBRE research. Markets with favorable landlord-tenant laws and minimal rent regulation offer better risk-adjusted returns than politically volatile jurisdictions where policy changes threaten cash flows unpredictably.

This reality creates geographic arbitrage. California and New York face expanding rent control and eviction restrictions while Texas and Florida maintain landlord-friendly frameworks. An operator who focuses exclusively on Texas markets avoids regulatory risk entirely while capturing similar rent growth and appreciation as coastal alternatives.

The regulatory divide also impacts valuations directly. Otherwise identical apartment buildings trade 75 to 100 basis points wider in cap rate between jurisdictions with and without rent control. Investors who concentrate capital in landlord-friendly markets buy lower political risk while collecting similar income, creating safer returns even when absolute yields look comparable on paper.

The Takeaway

Multifamily construction starts collapsed 45% from pre-pandemic averages and 70% from 2022 peak levels according to Fannie Mae data, while record deliveries in 2024 pushed vacancy to 5.9% and limited rent growth to just under 1% annually. CBRE tracked 440,000 units delivered in 2024 with 900,000 still under construction, but new project launches dried up as higher rates and construction costs made development uneconomic. Deliveries will fall by half through 2026 per industry forecasts, setting up supply constraint that drives vacancy back below 5% and rent growth above 4% as employment gains and housing shortage fundamentals sustain tenant demand. Arbor data showed investment sales up 6.6% through September 2024 while cap rates held steady at 5.7%, confirming buyers recognized the setup before consensus shifted. Operators who acquired stabilized multifamily assets in supply-constrained Midwest and Northeast markets during 2024 bought into falling future competition and rising rent growth simultaneously, capturing the spread before institutional capital reprices the opportunity in 2025.