Rent Spikes are a Thing of the Past—But Investors Can Look Forward to a Stable Multifamily Market Instead

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This article is presented by Connect Invest.

“Predictable” isn’t exactly the most exciting qualifier for a real estate market, but it’s the exact word that investors in the multifamily sector have been longing to hear for years. The era of huge market upheavals brought by the pandemic seems to be finally, truly over, with rent growth and supply-and-demand balance returning to pre-pandemic patterns.

It can be difficult to accept, but the fact is that the 2% rent growth rate by 2027—a prediction from Yardi Matrix executives Jeff Adler and Paul Fiorilla—is in line with normal, pre-pandemic rates. In fact, this is what the real estate market should look like. Here’s why.

Why “Slow But Stable” Isn’t a Bad Thing

The double-digit growth rates of 2021 will not return again; these were a historical anomaly brought about by a singular convergence of factors, namely:

Pent-up demand from people who could not buy a home during lockdowns.

An unprecedented housing shortage caused by people not selling, and a lack of building supplies disrupting new construction.

Brand-new migration patterns creating housing hot spots.

None of these conditions were ever meant to last, but many investors understandably were building their business strategy around these anomalous market spikes. For a few years, an investment plan along the lines of “This metro area has the highest rental growth right now” could deliver impressive short-term results.

What was wrong with this picture? Nothing, on the surface of it, in terms of aligning your strategy with market conditions. But there was another variable aside from rental growth fluctuations that began creating an imbalance: construction.

Construction booms inevitably cooled red-hot markets, most notably Austin’s, which “went from red-hot to best avoided in the blink of an eye,” according to Bloomberg, as a direct result of its post-pandemic-era construction surge.

It seems like there’s nothing positive here, but there is.

We know that new construction lowers the overall cost of housing across a metro area, including old inventory. This kick-starts a game of musical chairs of sorts: An overall fall in home prices means that some existing tenants will move out and become homeowners. Landlords sitting on empty units then often have to lower rents in order to fill vacancies, meaning that lower-income residents can move in. Theoretically, this can continue indefinitely.

To succeed long term, an investor needs a very different landscape: Healthy, steady demand for rental units in areas where the overall ratio of homeowners to renters is unlikely to change dramatically any time soon. To put it simply, you want an area where people are comfortable enough renting and are, say, five to 10 years away from buying a home. This can change much faster in boom-and-bust areas, where a surplus of new construction suddenly makes homes more affordable and increases vacancies at an unusual rate.

Now that construction and demand are coming into alignment, as per the Yardi report, investors can focus on refining more traditional-looking business plans and investing in areas with stable, predictable renter population movements rather than in migratory spikes. You might only be looking at 2% rent growth for the foreseeable future, but you’re also not looking at having to deal with unexpected multiunit vacancies.

What Investors Need to Think About in 2026 and Beyond

According to the Yardi report, as markets return to normal, investors will need to adjust their strategy. What that looks like in practice is an emphasis on cost control in existing markets, as opposed to scouting out new ones.

The biggest challenge investors will face is shrinking margins amid high operational costs, especially insurance. Testing prospective investment locations for stable occupancy rates will be paramount. According to CRE, “Household formation, while soft in the near term, is expected to rebound mid-decade, offering a firmer demand base just as new inventory comes online.”

The questions will be: Where do these newly formed households want to stay until (and if) they are in a position to buy? Where do families renew their leases consistently, instead of passing through and moving on?

In many ways, investors will have to go back to the strategy drawing board, performing meticulous research into each potential lead and assuming that margins will be very tight.

Another Investment Option

Don’t want to deal with all that? You have other options. For example, you can invest in real estate short notes with Connect Invest. Essentially, you’ll be investing in a diversified portfolio of real estate at every stage of construction: no need to worry about picking the right metro area!