Navigating a Shifting Landscape: Slowing Construction, Rebounding Demand, and Tariff Impacts

This month, we explore a pivotal moment for investors: new apartment construction is slowing significantly, yet demand remains historically strong. Compounding this dynamic, looming tariffs threaten to increase construction costs, potentially tightening future supply even further. Together, these forces are setting the stage for a rebound in rent growth, offering compelling opportunities for savvy multifamily investors who can stomach the uncertainty. Let’s dive into the data. 

Key Trends Shaping the Multifamily Market 

Apartment Demand Hits Record Highs Despite Economic Headwinds 

The multifamily sector is demonstrating remarkable resilience. According to a recent report from CRE Daily, Q1 2025 saw over 138,000 units absorbed—the strongest first-quarter performance on record. Markets like Atlanta (7,612 units), Phoenix (7,461 units), and Dallas (7,387 units) led the charge, underscoring robust renter demand even amidst slower job growth and rising inflation. RealPage projects nearly 460,000 units will be absorbed in 2025, signaling that demand continues to outpace economic challenges. 

This strength is driven by structural factors: high home prices and mortgage rates hovering above 6.5% are keeping would-be buyers in the rental market. A December 2024 CBRE estimate notes that buying a home remains roughly 33% more expensive than renting, locking in renter demand for the foreseeable future. 

New Construction Slows, Easing Supply Pressure 

After a historic construction boom that delivered over 1.1 million units in 2023 and 2024, the pipeline is shrinking. CRE Daily reports that 2025 deliveries are expected to drop 26% from 2024, with only 431,000 units projected to come online. The Wall Street Journal highlights that new housing starts, permits, and completions were already down in February 2025 compared to the prior year, a trend exacerbated by high borrowing costs and material prices. 

This slowdown may be a boon for landlords. The glut of new supply in Sunbelt markets like Austin and Nashville had cooled rents, with landlords offering concessions like free months to fill units. However, as the construction pipeline dries up, markets are beginning to stabilize. CoStar projects a sharp decline in completions after 2025, which could tighten supply and boost rents. 

Tariffs Threaten Higher Costs, Further Curbing Supply 

Proposed tariffs on construction materials from Canada, Mexico, and China are poised to reshape the real estate landscape. The National Association of Home Builders (NAHB) estimates that tariffs could increase builder costs by $7,500 to $10,000 per home, with lumber alone accounting for nearly $4,900 of that hike. For multifamily projects, where 35–50% of costs are tied to materials like lumber, steel, and appliances, tariffs could raise total budgets by 3–4%. A Bisnow report adds that construction starts are projected to fall 74% from their 2021 peak by mid-2025, amplifying the supply crunch. Fewer new units mean less competition, setting the stage for rent growth. 

Rent Growth Poised for a Rebound 

After years of muted growth due to oversupply, rents are showing signs of recovery. CRE Daily reports a 0.3% increase in effective asking rents in Q1 2025—the first Q1 gain since 2022—with RealPage forecasting 2.3% growth for the year. CBRE projects even stronger long-term gains, with average multifamily rents expected to rise 3.1% annually over the next five years, outpacing pre-pandemic averages. 

Some property owners are already anticipating 5% annual rent hikes as supply tightens. Markets with balanced fundamentals, like Richmond, are forecast to lead in rent growth, while oversupplied areas like Austin and Phoenix may see temporary softness before rebounding in 2026. 

What This Could Mean for Investors 

The convergence of slowing construction, robust demand, and tariff-driven cost pressures creates a unique window for multifamily investors. With construction starts plummeting, existing properties are trading below replacement cost in some markets. A Berkadia survey found that 83% of multifamily investors plan to expand their portfolios in 2025, eyeing assets in high-demand markets.  Markets with limited new supply and steady demand are poised for above-average rent growth. CBRE notes that Midwest and Northeast markets will outperform Sunbelt regions in the near term due to balanced supply-demand dynamics. 

While tariffs may increase operating costs for repairs and maintenance, their bigger effect is deterring new competition. Investors should stress-test portfolios for potential cost increases but view the supply reduction as a long-term positive. 

High mortgage rates and economic uncertainty are keeping renters in place longer. Offering competitive renewals and maintaining high-quality amenities can maximize occupancy and stabilize cash flows. 

Additional Insights from the Field 

Recent analyses reinforce these trends. A Northmarq report highlights that multifamily fundamentals are stabilizing, with vacancy rates expected to creep up slightly in 2025 but remain supported by strong demand. Freddie Mac’s 2025 Multifamily Outlook echoes this, noting that demographic trends and an expensive for-sale market will sustain renter demand, even if economic growth slows. 

Looking Ahead 

The multifamily market is at an inflection point. While economic uncertainty and tariffs pose risks, the combination of slowing construction and rebounding demand is tilting the scales in favor of landlords. Investors who act strategically—targeting high-demand markets, acquiring undervalued assets, and optimizing operations—can position themselves for significant upside as rents rebound. 

Thanks for reading!

The DXE Team

Sources:   

CRE Daily, “Multifamily Resilience Continues Despite Economic Uncertainty”   

Wall Street Journal, “Apartment Developers Who Overbuilt Luck Out With Tariffs”   

CBRE, “U.S. Real Estate Market Outlook 2025 - Multifamily”   

CoStar via Derivative Logic, “Apartment Construction Is Slowing”   

NAHB, “Tariffs Could Increase Builder Costs”   

Northmarq, “2025 National Multifamily Outlook Report”   

Freddie Mac, “2025 Multifamily Outlook”

This newsletter is for informational purposes only and does not constitute investment advice. Always conduct thorough due diligence before making investment decisions.