Defining the economic factors affecting the rental housing industry. 

Macroeconomic Conditions— 2025 Overview  

Macroeconomic conditions in 2025 were characterized by a solid first half of the year, boosted by consumer spending and business investments, followed by a moderating second half, weighed by the impact of tariffs, sluggish employment and the longest federal government shutdown in history. The timing of the government shutdown meant that much of the economic data produced by federal agencies were absent or noticeably delayed, casting a long shadow over the second half of the year and leaving many forecasters to rely on alternative sources for insights into 2026 trends.

Real gross domestic product (GDP) dropped at an annualized pace of 0.6% in the first quarter but rebounded in the second quarter with a 3.8% gain. Consumers remained the foundation of growth, with spending driving the advance. With third quarter GDP data delayed due to the shutdown, the Federal Reserve Bank of Atlanta estimated that economic output for the third quarter would show a 4.2% increase on an annual basis.

Employment trends reflected broader changes in 2025, with a strong first half of the year, followed by softening in the third quarter. Over the first nine months of the year, employers added a net 684,000 new jobs to payrolls, a noticeable slowdown from the 1.38 million added during the same period in 2024. The unemployment rate ticked up from 4.0% in January to 4.4% by September 2025, a combination of more workers entering the labor force and rising job cuts in the third quarter.  

In addition, the Bureau of Labor Statistics revised the employment data for the March 2024 through March 2025 period, indicating that the economy added 911,000 fewer jobs than initially estimated. Combined with a steady decline in the number of open jobs, underlying data indicated deterioration, including a decrease in the employment-to-population ratio; a drop in the percentage of consumers saying jobs were “plentiful”; and a modest rise in the number of long-term unemployed. In addition, real average hourly earnings—adjusted for inflation—increased only slightly on a yearly basis due to persistent inflation pressures, despite nominal wage gains.    

These trends led to a change in the Federal Reserve’s monetary policy in 2025. At the September meeting, the Federal Open Market Committee (FMOC)—the Fed’s rate-setting body—cut the policy rate by 25 basis points. The FOMC resorted to an additional 25 basis point cut at the October meeting. And in public comments, Fed governors highlighted a potential third rate cut for 2025 at the December meeting, mostly predicated on the significant slowdown in employment. In addition, after a period of cutting back on its balance sheet, the Fed announced at the October meeting that it would curtail its tightening, leaving about $6.6 trillion in assets on its books. The move highlighted the central bank’s concern about the monetary policy’s impact on economic growth.  

The Fed’s moves come at a time of increasing financial pressure for American households. After declining during the first six months of 2025, inflation rebounded starting in June and picked up speed into the third quarter. Both the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) Price Index notched yearly advances. Households spent more on goods and services, including transportation costs, hotels and restaurants, vehicles, gasoline, health care and housing.   

The Federal Reserve has three distinct mandates, prescribed by law: “maximum employment, stable prices and moderate long-term interest rates.” Historically, the central bank has focused on the first two in what is known as the “dual mandate.” In 2025, the Fed worked to manage the push-pull dynamic between rising inflation, which requires monetary tightening, and sliding employment, which requires easing. The rate cuts highlighted that the FOMC considered the threat to economic stability coming from the employment front more concerning to the economy than the worry over escalating prices.  

These shifts were mirrored in the consumer confidence data. The Conference Board’s Consumer Confidence Index registered notable declines in 2025, with a sharp drop by November to an index value of 88.7. Meanwhile, the University of Michigan’s Consumer Sentiment Index also softened in 2025, dropping almost 30% from the prior year in November. Consumers were noticeably more pessimistic about rising prices and weakening job market prospects and wages.  

2026 Outlook: Economic Risks & Uncertainties  

The economy remains on a positive trajectory heading into 2026. However, several indicators point to rising risks and uncertainties for the next 12 months.  

• Trade/Tariffs: International trade renegotiations were a recurring theme in 2025. While many countries reached agreements with the White House, several important ones remained. Tariffs, which have been widely employed as part of these negotiations, have acted as a drag on GDP, while fueling consumer anxiety over price inflation.  
• Labor Market Cooling: While still healthy, slower job gains and moderating wage growth could weaken consumer spending if they continue. Companies have been monitoring consumer spending in 2025 for signs of weakness. With labor costs accounting for the largest share of corporate expenses, companies are likely to resort to further layoffs if the labor market moderates in 2026.  
• Consumer Behavior: The weakening job market and slowing wage gains impact consumer psychology and translate directly into spending. As we move into 2026, further deterioration in consumer confidence could lead to a shaper pullback in retail spending, which would further reinforce companies’ worries and lead to further layoffs. The resulting downward spiral could impact economic output and demand for housing.  
• Monetary Policy: The Fed’s path depends heavily on how inflation evolves relative to growth risk. The 2025 rate cuts were predicated on the perceived risk of economic damage stemming from deteriorating jobs numbers. However, monetary easing could exacerbate inflation in 2026, leaving the Fed in a precarious position.
• Geopolitical Conflict: The Russian war in Ukraine continued unabated in 2025. While negotiations toward peace ebbed and flowed, the conflict remains a risk to global stability. In addition, Central America became a focus of U.S. military activity, adding to potential risks for the economic outlook.  

Multifamily Housing Market — Fundamentals 2025 Overview

The multifamily housing sector in 2025 navigated the late stages of a high-supply cycle while gradually transitioning toward more balanced fundamentals. After several years of near-record construction activity and pandemic-era volatility in rents, demand and occupancy, the industry experienced a period of rebalancing toward a new normal. The data for the first nine months of the year illustrate a story of strong early-year renter demand, slowing but impactful new deliveries, moderating rent growth and widening performance variance across metropolitan areas.  

Demand Rebounds Early, Then Softens into the Third Quarter  

The start of 2025 was marked by an unexpectedly strong rebound in renter demand. Household formation saw a rebound in the first two months of the year, with another bump toward the midpoint. The population numbers show an annualized average of 1.1 million new households during the first half of the year.  

Net absorption surged in the first two quarters, driven by continued job growth, elevated homeownership costs and rebounding household formation. Absorption for the first quarter exceeded 100,000 units nationally, followed by an even stronger second quarter.  

But momentum began to cool as we moved into the second half of the year. By the third quarter, net absorption moderated, reflecting both seasonal patterns and a more cautious consumer environment influenced by softer labor market data and lingering macroeconomic uncertainty. Even so, cumulative year-to-date absorption remained robust through Q3, underscoring the market’s fundamental depth despite the deceleration. Based on CBRE data, net absorption totaled 337,400 units during the first nine months of 2025. Mirroring the positive trend across a slightly longer timeframe, CoStar data reported about 463,000 units absorbed during the 12-month period ending in September 2025.  

This demand pattern—early strength followed by mid-year moderation—highlights a sector transitioning from aggressive post-pandemic growth toward more sustainable long-term equilibrium.  

Supply Continues to Weigh on Markets, But Markets Are Moving Past Peak  

New supply has been one of the defining forces shaping the 2025 multifamily housing landscape. Deliveries remained elevated throughout the year, with more than 400,000 new units completed by the end of Q3, according to various sources. At the going rate, Yardi Matrix expected completions to exceed 500,000 units for the full calendar year. The pace of construction activity continued to place pressure on lease-up absorption and influenced broader market performance, especially in metros with heavy development pipelines.  

However, leading indicators point to a shift ahead. Developers have responded to higher financing costs and compressed operating margins by slowing new starts. As a result, industry forecasts anticipate a meaningful reduction in completions beginning late 2025 and carrying through 2026. The market appears to be approaching the peak of the supply wave, setting the stage for a possible tightening of fundamentals in the next few years.  

Occupancy Remains Healthy but Shows Signs of Softening  

National occupancy levels remained relatively stable through 2025 but trended modestly downward as new communities entered lease-up phases. Early in the year, occupancy was hovering in the low- to mid-90% range, a historically strong level consistent with a well-absorbed market.  

By Q3, occupancy had eased slightly as supply-heavy metros worked through elevated inventory. Nonetheless, occupancy rates generally held within a narrow and healthy band ranging from 92%, according to CoStar data, to 95%, based on CBRE figures. In most markets, demand has been strong enough to keep overall vacancy in check, but not uniformly strong enough to maintain upward pressure on rents in the face of significant new supply. Sun Belt markets, with a heavy influx of new units, experienced downward pressure on rents.  

Rent Growth Moderates Nationally with Strong Geographic Divergence  

Rent growth in 2025 has been characterized by noticeable softness and increasing regional differentiation. National asking and effective rents continued to inch upward, though at a marginal pace compared with prior years. In the first nine months of the year, annual rent growth slowed from about 0.9% in the second quarter to 0.6% in the third quarter, based on CoStar data.

Behind these national averages is a widening gap between outperforming and underperforming regions:  

• Sun Belt Softness: Many Sun Belt metros—beneficiaries of outsized development pipelines—faced downward rent pressure in 2025. Rent declines were reported in markets such as Austin, Texas, Phoenix, Denver, Orlando, Fla., and Dallas. High delivery volumes, rapid inventory expansion and elevated concession packages contributed to the softness.  
• Northeast and Midwest Strength: Conversely, the Northeast and Midwest posted some of the strongest rent gains of the year. Supply constraints, strong job markets and stable demand supported healthy rent appreciation in markets like New York City, Chicago, Columbus, Ohio, and Philadelphia.
• A Market Split by Supply Dynamics: The growing bifurcation between high-supply and supply-constrained metros underscores a key theme of 2025: Rents are no longer uniformly influenced by national forces. Instead, local development cycles, migration patterns and affordability pressures are shaping metro-level outcomes. These factors will continue to define the multifamily market into 2026.  

2026 Outlook: A Transition Year Setting the Stage for Improvement  

Several macro and industry-specific trends are expected to shape the 2026 multifamily housing environment:  

The End of the Supply Wave Will Rebalance Pricing Power  

With a slowdown in construction starts underway, supply is expected to taper in 2026. As completions ease, markets can anticipate improved rent growth and tighter occupancy conditions, particularly in metros where overbuilding was cyclical rather than structural.  

In addition, as high mortgage costs continue to push would-be buyers into rentals, demand for apartments will remain solid and outpace new deliveries. However, the absorption surge of early 2025 is unlikely to be repeated. Absorption is expected to run in the 350,000–400,000 units for the year.  

After a flat 2024–2025 rent environment, pricing power is projected to return in 2026 and strengthen into 2027. Rent growth is projected to move toward 2.0% on a yearly basis.  

Economic Uncertainty Introduces Short-Term Risk  

Moderating job growth and sliding consumer confidence injected uncertainty into the second half of 2025. While not enough to materially disrupt fundamentals, these trends contributed to the slowdown in absorption toward the end of the year. Looking to 2026, consumer confidence will be a key indicator to watch, especially tied to the evolution of the jobs market.  

Class and Geographic Differentiation Widens  

Class A properties in high-supply metros encountered the greatest lease-up pressure, while stabilized Class B communities generally maintained stronger occupancy and steadier rent performance. As 2026 unfolds, we can expect continued divergence between markets with significant new products, in both urban cores and suburban nodes.  

Regionally, multifamily performance will favor strong metro economies with tight supply.   

• Sun Belt: Gradual Recovery After a 2025 with negative to near-zero rent growth and occupancy in the low 92%–94% range, stabilization is poised to define markets in 2026 as supply moderates. Rent growth is likely to return to 1%–2% growth.  
• Northeast: Tight & High-Performing The region was marked by limited new supply in 2025, which led to above-average rent growth. The trend is projected to continue in 2026, leading to rent growth in the 4%–5% annually.  
•  Midwest: Consistent Outperformance The region provided the best balance of affordability, low construction levels and stable demand in 2025. These characteristics will continue to shape market dynamics in 2026, keeping rent growth on a healthy 3%–4.5% path.  
• West Coast: Improving After Slow 2023–24 Supply was on the upswing in several urban markets in 2025. However, in keeping with broader trends, coastal constraints support tightening into 2026, pushing rent growth closer to the 2%–3% in 2026.

Investors and Operators Favor Resilient, Supply-Constrained Markets  

Capital is increasingly gravitating toward metros with regulatory or geographic construction limits, stable employment bases and balanced pipelines. Investor underwriting assumptions have become more conservative in Sun Belt markets while emphasizing operational efficiency and submarket selection.  

The outlook for the multifamily housing market in 2026 points to a year of transition and recovery, as the sector is working through the final phase of an unusually intense supply cycle while accommodating a more normalized pace of demand and rent growth. As supply begins to slow and demand stabilizes, underlying conditions are likely to shift toward a gradual strengthening of fundamentals. With strong long-term demand and tighter supply, the multifamily housing sector is poised for renewed momentum after a year of recalibration. Markets are expected to see positive rent growth, tightening vacancies, along with increasing investor confidence.  

 

George Ratiu is NAA’s Vice President of Research.