How Interest Rates Are Affecting Different Types of Multifamily Deals in 2025

As we navigate through 2025, elevated interest rates continue to shape the multifamily real estate landscape. At Casoro Group, we are closely monitoring how these rates impact various multifamily investment strategies, from ground-up developments to value-add acquisitions and core assets. Here's an overview of the current market dynamics:

1. Ground-Up Multifamily Development: Navigating Rising Costs 

High interest rates have significantly impacted new multifamily developments. The cost of capital has increased, and construction expenses remain elevated due to supply chain disruptions and labor shortages. According to CBRE, the premium to buy versus rent is expected to ease to 32% by the end of 2025, indicating a narrowing gap that could influence development decisions. 

In markets like Austin, where the cost-to-buy premium remains more than twice as expensive as renting, developers must carefully assess project feasibility. Strategic site selection and innovative financing solutions are key to successful developments in the current environment. 

2. Value-Add Acquisitions: Balancing Risk and Opportunity 

Value-add strategies, involving the renovation and repositioning of existing properties, are experiencing mixed outcomes. While higher interest rates have compressed margins, they have also led to increased availability of properties from owners facing refinancing difficulties. CBRE reports that underwriting assumptions for core assets have remained mostly unchanged, with average going-in cap rates at 4.90% and exit cap rates at 5.05% in Q4 2024. 

Investors with access to capital and operational expertise can capitalize on these opportunities by focusing on assets in high-demand locations where improvements can drive significant value. 

3. Core and Core-Plus Assets: Stability Amid Uncertainty 

Core and core-plus properties, typically newer and well-located assets with stable cash flows, are attracting investors seeking lower-risk investments. In Q1 2025, underwriting assumptions for core assets improved, with cap rates showing slight compression and internal rate of return (IRR) targets decreasing (CBRE). 

Investor sentiment has notably improved, with positive outlooks among buyers of core assets increasing from 44% at the end of 2024 to 65% in early 2025 (GlobeSt). 

Core investments offer resilience in volatile markets. Investors are advised to focus on assets in economically robust regions, such as the Sun Belt, where demand remains strong. 

4. Distressed Opportunities: Emerging Prospects 

The current interest rate environment has led to a rise in distressed multifamily assets. Approximately $598 billion in U.S. commercial real estate debt is set to mature in 2025, with a significant portion in the multifamily sector (GlobeSt). This situation presents opportunities for investors to acquire properties at discounted prices. 

Moreover, the multifamily distress rate increased to 12.9% from December 2024 to January 2025, indicating a growing number of properties facing financial challenges (Multi-Housing News). 

Investors with available capital can explore these distressed opportunities, focusing on assets with strong fundamentals that require restructuring or repositioning. 

Looking Ahead 

While elevated interest rates pose challenges, they also create opportunities for investors. At Casoro Group, we leverage our experience and market insights to identify and capitalize on multifamily investments that align with our strategic objectives. By focusing on resilient markets and employing disciplined investment approaches, we aim to deliver value to our stakeholders in the evolving real estate landscape.