Quick Take: With limited supply and a recovering market, we believe that now is a great time to invest in multifamily real estate. Using three hypothetical scenarios—base case, downside and upside—we show that multifamily real estate has the potential for compelling returns. Public REITs like MAA and CPT have demonstrated the sector’s resilience, signaling that private markets may follow suit.
The past few years have been challenging for real estate investors, but the market is setting up for a strong recovery—and we have higher interest rates to thank for it. While rising rates initially created headwinds, they also put a stop to new development, setting the stage for a long-term supply-demand imbalance.
Looking back, it’s clear that the risk-reward formula did not favor investors in 2021 and 2022. Assets were trading 30% to 40% above replacement cost, and both cap rates and interest rates were at historic lows. The market was operating at peak valuations, leaving little room for upside or margin of safety. At Origin, we avoided much of the carnage produced during that period by investing in debt and ground-up development. And we went more than four years without acquiring another property because of the imbalances we saw in the market. That’s no longer the case as the headwinds of the past few years are quickly changing direction, and we are excited about what we see ahead.
Multifamily Supply Cliff: Opportunities for Investors
For the past few years, rising interest rates have pressured real estate values across nearly every sector. The 10-year Treasury yield climbed from under 1% in 2020 to become range-bound between 3.8% and 4.8% since late 2023. And multifamily cap rates on Class A assets adjusted from 3.5% at the low in 2021 to around 5% today.
This correction was necessary. Investors seek returns that justify their capital risk. Borrowing at 6% to acquire an asset yielding only 3.5% was unsustainable. At some point, though, the problem becomes the solution. With development slowing to a crawl, new supply is shrinking just as demand remains steady.
A real estate recovery begins when developers stop putting shovels in the ground, and that happened more than two years ago when higher borrowing costs made new projects unfeasible. Today, we’re looking at a supply cliff, where new deliveries are set to fall well below historical averages. This shift, coupled with a persistent housing shortage and a stable economy, is setting the stage for strong multifamily returns. Additionally, the affordability gap between renting and homeownership further tilts the risk-reward profile in investors’ favor.
Multifamily Unit Supply by Quarter
Source: Newmark Research/RealPage
The Turning Point: Rents and Occupancy Set to Rebound
In any business, higher revenue solves a lot of problems, and real estate is no exception. Rent growth ultimately translates into the bottom line. In real estate, higher rents can offset much of the capital markets risk posed by higher interest rates and capitalization rates.
As the market absorbs existing supply throughout 2025, rents are likely to stabilize and start to experience significant growth. This is true regardless of where interest rates move—because renters don’t make decisions based on interest rates.
Historically, multifamily rents have grown about 3% annually. Over the next five years, our Multilytics® model projects 4% to 6% growth in our target Sunbelt markets. This forecast is at the city level, but we don’t acquire cities. We acquire land and properties in strategic locations within these cities. We look for sites with the greatest potential for long-term growth. Multilytics is critical in helping us identify these opportunities before the competition does.
Source: Multilytics® as of 12/10/2024.
When we drill down to the potential growth at the property level, the picture becomes even more compelling. The chart below is taken directly from an investment memo for one of our deals in the Dallas area. It shows 2025 growth of 4.1% and 7.8% in 2026, with a five-year compounded annual growth rate of 5.0%.
Source: Multilytics® as of 3/20/2025.
The outlook at a recently approved property in Phoenix (see chart below) is even more compelling, with rent growth of 7.2% in 2025 and 9.3% in 2026. That’s the equivalent of five years of rent growth in two years.
Source: Multilytics® as of 3/20/2025.
The Power of Rent Growth
To illustrate the power of rent growth, we ask the question, what happens to an investment if cap rates stay at 5.25%, rise to 6%, or fall to 4.5%?
In the scenarios below, we assume a hypothetical property is acquired at a 5.25% cap rate for $80 million, we use leverage of 60%, borrow 10-year fixed-rate debt at 6%, and grow rents at 5%, 5%, 5%, 5%, and 3% thereafter. Keep in mind that the forecasted rents in these scenarios are relatively conservative compared with what our models are forecasting. The argument becomes far more compelling when we plug actual forecasts into the model.
The solid line in the chart below illustrates growth of the net operating income (NOI) over the next 10 years. Our NOI starts at $4.2 million ($80 million × 5.25%) and grows to roughly $5.9 million by 2034. We essentially grow into a 7.4% cap rate ($5.9 million/$80 million).
The vertical bars in the lower part of the chart show the cash flow after debt service. Both the NOI and the after-debt service cash flow are the same regardless of where cap rates and interest rates go because of the long-term fixed rate debt. Having fixed debt with growing income is a great recipe for outperformance in any investment.
The reason this works is because debt payments stay fixed at $2.88 million ($48 million of debt x 6% interest rate) per year while the NOI continues to grow from $4.2 million in the first year to $5.9 million by year 10. The cash-on-cash yield grows from a little more than 4% in the early years to close to 10% by year 10, and the equity owner collects roughly $22 million in cash flow over 10 years. This metric is calculated by dividing the after-debt service cash flow with the equity investment of $32 million. Additionally, most or all this income is shielded from taxes through depreciation, which makes it even more compelling. Cash flow is great, but investors also want appreciation, which is where the cap rate analysis comes into play.
If we apply today’s cap rate of 5.25% to the $5.9 million of NOI in year 10, the property would be valued at $113 million ($5.9 million/5.25% cap rate) and the investment would generate a total return of 172%. This includes both $33 million of appreciation and $22 million of cash flow collected over the hold period. Not a bad return for a core stabilized asset.
If cap rates were to expand to 6%, the property would still be worth $98 million ($5.9 million/6% cap rate) and the investment would generate a healthy total return of 128% when factoring in both cash flow and appreciation. Cap rates would have to expand well beyond 7.4% to lose money, because even if we sold the property for our purchase price of $80 million in 10 years, we still would have collected $22 million in cash. Rent growth is the great equalizer to an adverse capital markets environment.
If cap rates were to fall from 5.25% to 4.5%, the investment would gain 230% over our hold period. The combination of rent growth, cash flow and appreciation results in a $73.8 million gain on a $32 million investment. This is the true Goldilocks scenario.
The chart below shows each of the scenarios and the return at the five-year mark. It assumes cap rates adjust the day after we acquire the property for the sake of simplicity. Even if the hold period is shorter than 10 years, the investment returns are still compelling.
The three scenarios above illustrate the asymmetric return opportunity we see today. This is categorically different from 2021 and 2022 when the market was priced to perfection, leaving little margin for error. The biggest thing holding the market back today is the existing supply, and that will eventually get absorbed. Real estate is cyclical, and it won’t be depressed forever.
Public REITs: A Window into the Future
One of the best leading indicators for the private real estate market is the public market equivalent. Publicly traded multifamily real estate investment trusts (REITs) tend to be forward-looking, and their prices adjust much faster than those in the private markets. We closely follow Mid-America Apartment Communities (MAA) and Camden Property Trust (CPT). These REITs invest in Class A multifamily properties in the same markets where we operate.
Both REITs hit two-year lows in October 2023 but have steadily climbed since then. MAA’s price has risen nearly 40% in the past 16 months, from $119 to about $166 today. CPT’s price has increased from around $84 to over $123, a gain of more than 46% over the same period.
This trend suggests institutional capital is already anticipating improving fundamentals, likely driven by the supply-demand dynamics outlined above. Private markets tend to lag public markets by six to 18 months, as fundamentals drive valuations versus daily price discovery with public REITs. The public markets are like a mirror into the future for private markets, giving investors keen insight into their direction.
It’s a Great Time to Invest
It’s important to acknowledge that all forecasts have limitations. While supply constraints and strong rent growth trends point toward a potential bull market, unexpected economic shifts—such as a recession—could impact these projections. Other variables, including employment trends, policy changes and capital markets, can also influence outcomes.
For the past nine months, we’ve been saying it’s time to go on offense, and multiple data points suggest that multifamily real estate is poised for a resurgence and strong performance over the next several years. As we watch the existing supply get absorbed, our conviction only grows stronger. Our Multilytics model was the first to forecast negative rents in 2023 and helped us navigate that period successfully. It is now telling the opposite story. At Origin Investments, we are actively deploying capital in this environment through our IncomePlus Fund, which is designed to capitalize on these dynamics by acquiring high-quality multifamily assets in supply-constrained markets.
If you have a comment about this article or want to learn more about Origin, feel free to schedule a call with our investor relations team.
