Quick Take: Improving market fundamentals such as rising rental demand and stabilizing rent growth make now an ideal time to rebalance client portfolios with multifamily real estate. Diminishing new apartment supply and the growing affordability gap between renting and owning continue to drive demand. Its track record of enhancing portfolio performance and reducing volatility makes multifamily real estate a compelling opportunity for long-term investment returns.
Modern portfolio theory suggests that when an asset class out- or underperforms, investors should take the win or loss and reallocate some or all those funds to assets that may have more upside in coming months or years. Investment professionals typically rebalance clients’ portfolios every six to 12 months. But with elevated equity valuations and volatility in fixed-income yields, now might be a good time for registered investment advisors and high-net-worth investors to consider rebalancing. When considering alternatives to current asset allocations, multifamily real estate presents a compelling opportunity worth considering for portfolio diversification, tax-efficient income and long-term capital appreciation.
Investors rebalance portfolios to keep their investments aligned with their original asset allocation, risk tolerance and financial goals. Over time, certain holdings may outperform or underperform, causing the portfolio to drift from its intended mix. By periodically selling a portion of investments that have grown overweight and reinvesting proceeds in underweight assets, investors can help maintain the portfolio’s target risk profile. This rebalancing process can prevent overexposure to one asset class, capitalize on gains, and ensure the portfolio continues to reflect an investor’s needs and objectives.
Public equity markets just posted their best two-year performance stretch since 1997. Looking ahead, investors face opportunities and challenges in reconciling elevated asset valuations with shifting fiscal and monetary policies. Given current market fundamentals, they may want to consider tapping into private multifamily real estate investment opportunities. The chart below shows the returns of a traditional 60/40 portfolio and one with 20% private real estate.
1) Represents the annual compounded total return from 1/1/2000 to 12/31/2024. 2) Represents standard deviation of historical annual returns from 1/1/2000 to 12/31/2024. 3) Calculated as (historical return – 10-year Treasury yield)/standard deviation.
Sources: S&P 500 Total Return Index; Barclays U.S. Aggregate Total Return Bond Index (Stocks and Bonds), NCREIF – Open End Diversified Core Fund Index (NFI-ODCE) (Private Real Estate)
Why Rebalance with Multifamily Real Estate in 2025?
The multifamily investment landscape has faced numerous challenges over the past several years—elevated interest rates, a 40-year high in new apartment supply, falling rents and little transaction activity. These dynamics have resulted in property valuations falling 30% to 40% compared with their 2021 peak.
Due to recency bias, investors tend to anchor their expectations to the most recent performance data. That means they often favor short-term market trends over long-term fundamentals. In the case of private real estate, investors may be influenced by several years of underperformance, leading to hesitancy despite encouraging forward-looking indicators. This can create mispricing and inefficiencies that investors can exploit. But several signs point to a compelling opportunity in multifamily investing.
Multifamily Fundamentals are Improving
New apartment supply reached a 40-year high by the end of 2024, but robust rental demand has been absorbing deliveries. In fact, 2024 was the second-strongest year for rental demand in history, according to RealPage, which forecasts more than 480,000 new apartment units will be absorbed in 2025. That would be the third-strongest year for rental demand on record. This persistent demand has improved occupancy rates and stabilized rent growth, even amid a wave of new apartment deliveries across most markets.
Source: RealPage Analytics
Diminishing Supply and the Rent-Own Cost Gap
Higher interest rates and limited capital availability have drastically reduced development activity over the past several years. This is expected to result in a significant decline in new multifamily deliveries through at least 2027. Adding to this dynamic, homeownership is even more out of reach for many renters. According to Newmark, renting is currently $1,120 per month cheaper than owning, and that cost gap is nearly three times its long-term average. This affordability advantage is driving more households to choose renting over homeownership, further bolstering demand. Additionally, steady population growth across the Sunbelt region has continued even in a post-pandemic period. We expect this to continue to drive demand in the face of waning supply.
Source: RealPage Analytics
Multifamily Rent Growth on the Rebound
What does this mean for investors? Persistent demand coupled with falling supply means rent growth is expected to return to historical averages of 2.50% or more by year-end, according to RealPage. CBRE and Origin’s Multilytics®️ project similar figures for the year. Historically, markets with consistent rent growth tend to command higher valuation multiples. That’s because as rents increase, net operating income improves, leading investors to accept lower cap rates—effectively boosting prices.
Bottom Line: Multifamily Can Enhance Portfolio Performance
Since 2000, investors with an allocation to private multifamily real estate have increased portfolio performance and reduced volatility. In fact, over this period, multifamily real estate slightly outperformed the S&P 500. The NCREIF Apartment Index, or NPI, which measures the performance of institutional multifamily real estate investments, produced a cumulative total return of 535% (7.8% annualized) versus the S&P, which returned 527% (7.6% annualized).
This was still true even after the NPI APT index logged six straight quarters of negative returns starting in Q4 2022. The last time the index logged six straight quarters of negative returns was from Q3 2008 through Q4 2009. After that, the index went 10 years straight posting consecutive positive returns.
Multifamily real estate has underperformed the broader equity markets over the past several years. But many of the market forces that weighed down on returns are now in the rearview mirror. With property-level fundamentals already showing signs of improvement and rent growth expected to return to historical averages, the multifamily investment landscape is setting up as an attractive option for advisors and individual investors who are considering rebalancing.
