What if 2025 becomes the year that flips the real estate market upside down?
2025 could be a transformative year for real estate. We’re at a critical juncture with new economic trends, evolving policies, and shifting consumer behaviors that will influence the market in ways we haven’t seen before. So whether you’re a seasoned investor or just getting started, understanding these changes is crucial to your success in the year that lies ahead.
Let’s dive in.
I’m diving deep into my predictions for the 2025 real estate market, from interest rates and multifamily construction to potential policy shifts from a Republican-controlled Congress and the Trump administration, there’s a lot to cover.
Economic Landscape in 2025: A New Era for Growth or a Slowdown?
As we enter 2025, it’s crucial to understand the economic forces at play. The year will begin with a stabilizing economy, thanks in part to the Federal Reserve’s tightening policies. The aggressive interest rate hikes we’ve seen in recent years have already cooled some sectors of the economy, but inflation remains stubbornly above target. The inflation rate is expected to stabilize around 3-4%, which will significantly impact consumer purchasing power, particularly in housing markets.
The job market remains strong, which will provide some economic stability, but overall GDP growth is expected to slow slightly to around 2% in 2025. What does this mean for real estate? The housing market could be subdued due to high mortgage rates, but the multifamily sector will remain a favorite among investors. While rates will stabilize, it’s important to remember that mortgage rates could remain in the 5-6% range, making it harder for homebuyers to jump into the market.
Rental Market Trends
One of the biggest questions for 2025: Are rents going to stabilize, or will they nosedive further?
According to RealPage, rents fell slightly nationwide in 2024, but as of Q4, we’re seeing early signs of stabilization, with vacancy rates hovering around 6.5%.
This shift is due in part to slowing construction starts. Yardi Matrix reports that new multifamily construction starts fell by over 30% in 2024 compared to the previous year, marking a sharp pivot from the construction boom. However, demand remains strong in key markets, particularly the Southeast, where job and population growth outpace supply.
Despite affordability challenges, the Multifamily Housing Council estimates that the U.S. still needs over 4.3 million additional rental units by 2035 to meet demand. This imbalance could lead to modest rent growth in 2025—projected at 2.5% by Berkadia—though this will vary significantly by market.
Housing Supply: Under Construction, But Still Falling Short
Construction slowed drastically in 2024, and 2025 could continue that trend. Marcus & Millichap reports that multifamily completions will decline by 20% this year, as higher interest rates and construction costs force developers to pull back.
While this slowdown eases oversupply concerns, it also deepens the housing shortage. CBRE’s latest forecast shows that construction completions will meet only 70% of projected demand in 2025, widening the existing gap.
According to Marcus & Millichap, an estimated 1.2 million new units are expected to be completed in 2025—still well below the estimated 1.5 million units needed annually.
Markets like Phoenix, Austin, and Charlotte remain hotspots, with developers prioritizing these areas due to robust population growth and job creation. However, affordability concerns could temper these expansions, especially as the cost of capital remains elevated.
At the same time, vacancy rates in multifamily properties are expected to rise slightly, particularly in markets that have seen a construction boom. However, rents are expected to remain relatively stable, increasing by 2-3% on average due to the sustained demand for rental properties. Cities like Austin, Miami, and Nashville will continue to attract new residents, which will increase the pressure on the housing market.
Interest Rates: The Tale of High Rates and Stagnation
Interest rates will likely stabilize in 2025, but at a level that’s still higher than historical averages. If they can keep inflation under control, the Federal Reserve will likely hold interest rates between 5-5.5% for most of the year, which will continue to make homeownership more difficult for buyers, especially first-time buyers.
The Federal Reserve’s recent actions hint at gradual rate cuts in the latter half of the year. As of now, Marcus & Millichap forecasts the 10-year Treasury yield to average 4.25%, a notable drop from its 2024 highs.
While commercial real estate might see a slight cooling off in demand due to high financing costs, the multifamily sector will remain attractive to investors. The cap rates in this sector will likely compress slightly, particularly in prime markets, although secondary markets will remain volatile, especially in cities with less economic growth.
Creative financing solutions, such as assuming existing loans or getting new interest-only loans or floating-rate options, may become more attractive to buyers who are willing to take on some risk in exchange for lower upfront costs.
Borrowing costs will remain above pre-pandemic levels, continuing to challenge developers and buyers alike. Yardi Matrix predicts capital flow to remain tight, pushing investors toward markets with strong cash flow fundamentals.
Commercial Real Estate: Multifamily and Office Market Outlook
The multifamily market is poised to remain strong throughout 2025. Demand will continue to exceed supply, especially in high-growth cities in the Sunbelt.
According to CBRE, vacancy rates in multifamily properties will likely rise slightly as new inventory comes online, but rents will continue to rise due to strong population growth and the increasing number of remote workers seeking rentals in secondary cities.
On the other hand, the office market is expected to face further challenges in 2025. With remote and hybrid work models continuing to dominate, office vacancies in major cities are projected to remain high, hovering around 17% nationally.
However, there’s still opportunity in adaptive reuse projects, where older office buildings are being converted into multifamily housing or mixed-use spaces.
Distressed Mortgages and Opportunities
The financing structure of your real estate investments can have a profound impact on their long-term viability and profitability. Avoid the mistake of accepting suboptimal loan terms or failing to explore alternative financing options. Take the time to shop around and compare offers from different lenders to secure the best possible terms.
Consider factors such as interest rates, loan-to-value ratios, and repayment terms to ensure your financing aligns with your investment goals and your risk tolerance.
You can even consult with a financial advisor or mortgage broker to explore creative financing solutions, such as adjustable-rate mortgages or seller financing, that can help optimize your returns and minimize your risks.
Potential Policy Changes: The Impact of a Republican Congress and Trump’s Presidency Hook
With a Republican-controlled Congress and Donald Trump entering a second term, tax policy changes are likely to be a major focus in 2025. One key potential shift?
The return of bonus depreciation for real estate investments, which could allow investors to deduct 100% of the cost of a property’s non-structural components (like appliances, HVAC systems, and landscaping) in the first year of ownership. This incentive which is currently being phased out over the next 4 years due to its expiration in 2023, is now under discussion for reinstatement. This could be a major boon for multifamily investors who are looking to offset the costs of acquisition and renovation.
In addition, the push to reduce capital gains taxes and property taxes could make it easier for investors to hold properties for longer periods, thus increasing the long-term stability of the market. These tax policies would likely encourage more investment in commercial properties, especially for larger-scale developments and multi-family portfolios.
While these policies would benefit commercial real estate investors, stricter immigration laws could pose challenges, particularly in markets reliant on immigrant labor for construction and property management.
What Should You Do as an Investor in 2025?
If you’re planning to invest in 2025, it’s time to shift your focus toward long-term strategies. Even though we may see a slower housing market, there are still significant opportunities, especially in multifamily properties. Look for markets with strong job growth and population increases.
Success in 2025 comes down to adaptability. Focus on cash-flowing properties in growth markets. RealPage’s latest report highlights metros like Raleigh, Nashville, and Tampa as top performers due to their combination of job growth and affordability.
Cities in the Sunbelt—like Phoenix and Dallas —will continue to see increasing demand for rental housing, while secondary cities that benefit from remote work trends are also worth considering.
Be sure to prioritize strong underwriting, I can’t overestimate the importance of stress-testing deals against higher vacancy rates and slower rent growth. This means conservative projections and flexible financing strategies.
Lastly, keep an eye on public-private partnerships. With infrastructure spending on the rise, collaboration between developers and municipalities could unlock lucrative opportunities in affordable housing and mixed-use developments.
With interest rates stabilizing, now is the time to lock in favorable deals. Additionally, with bonus depreciation potentially back on the table, tax savings could be a huge advantage for investors looking to scale their portfolios in 2025.
But don’t make decisions based on speculation—stay informed, stay flexible, and make sure you have a solid investment strategy.
There you have it—my predictions for the 2025 real estate market. From shifting interest rates to new policy developments, this year will bring both challenges and opportunities.
As we move into 2025, remember to be ready to adapt to the market shifts. Monitor interest rates, construction trends, and policy changes closely, and make sure you’re capitalizing on the opportunities that come your way.
Join me backstage at Picheny Investors Club and together, let’s turn your real estate dreams into reality.