How “Higher for Longer” Interest Rates Are Shaping U.S. Multifamily Real Estate

Key Takeaways

• The Fed has signaled it won’t lower interest rates soon. The current range is 4.25%–4.5% and may not drop significantly for at least several quarters.
• Borrowing remains expensive, which is reshaping deals, pricing, and returns for apartment investors.
• Success in today’s climate means focusing on steady cash flow, efficient operations, and smart market choices—not fast appreciation.

What’s Really Happening With Rates?

The Federal Reserve kept rates steady at 4.25%–4.5% in May 2025. While inflation is cooling, it’s still stickier than the Fed would like, particularly when it comes to housing costs. Jobs are growing at a slow but steady pace, and unemployment is relatively stable at 4.2%. The bottom line: Don’t expect borrowing costs to fall much in the near future.This “higher for longer” stance means that the cost of taking out a loan for a property isn’t likely to drop significantly anytime soon. This isn’t just a short-term challenge; it’s a shift that requires investors to adjust their plans and expectations for the medium term. Instead of hoping for a quick return to cheap debt, the focus has to be on making deals work with the current reality of financing costs.

How This Impacts Multifamily Real Estate

Current Numbers to Know:

• Cap rates have settled around 5.6%–5.7% (meaning returns are coming more from income than price jumps). This represents an adjustment from the lower cap rates seen when interest rates were near zero.
• Rent growth is slow—just 1.0%–1.7% recently, with forecasts for 2025 in the 2.2%–2.6% range. This is significantly slower than the rapid increases seen in 2021-2022.
• Vacancy rates are rising slightly due to a flood of new units—expect 4.9%–6.3% in 2025. This is particularly true in markets that saw a lot of new construction start when rates were low.
• Transaction volume is slowly rebounding, but not close to pandemic-era peaks. The gap between what buyers are willing to pay based on current financing costs and what sellers expect based on past valuations is keeping many deals from happening.

What To Do: A Practical Playbook

1. Rethink Financing
   • Stick with financing you can hold for the long-term; consider loans you can assume or loans with predictable rates.
   • Pro tip: Stress-test your deals to make sure you can handle higher payments if rates stay high.
   • Explore Loan Assumptions: This means taking over the seller’s existing mortgage. If the seller locked in a low interest rate years ago, assuming that loan can be much cheaper than getting a new one today. Be aware there are fees and lender approvals involved.
   • Consider Seller Financing: In some deals, the seller might act like the bank for part of the purchase price. This can make a deal possible when traditional loans are too expensive or hard to get. It’s a win-win if it helps the buyer close and gives the seller a return on their money.
   • Look at Preferred Equity or Joint Ventures: Bringing in partners who contribute capital can reduce the amount of debt you need from a traditional lender, making the overall financing stack more stable and potentially easier to secure in a high-rate environment.
2. Invest in Operations
   • Focus on maximizing day-to-day income: manage expenses (especially insurance and taxes), reduce vacancies, and keep good tenants.
   • Use new tools to make management more efficient and boost retention.
   • Aggressive Expense Management: Don’t just pay bills. Actively challenge property tax assessments. Shop around for insurance annually – rates have jumped, but shopping can still save money. Look at utility usage and consider simple upgrades like LED lighting or low-flow water fixtures; sometimes utility costs can be billed back to tenants, directly offsetting expenses.
   • Prioritize Tenant Retention: It costs far more to find a new tenant than to keep an existing good one. Focus on providing excellent service, responding quickly to maintenance requests, and fostering a community feel. Happy tenants renew leases, which cuts down on marketing, leasing commissions, cleaning, and repair costs between tenants.
   • Boost Ancillary Income: Explore adding revenue streams beyond base rent. This could include fees for pets, assigned parking spots, storage rentals, or even smart laundry room solutions. Small amounts per unit add up quickly across a property.
3. Choose Markets Carefully
   • Look for local economies with diverse employers and steady population growth.
   • Class B (workforce) housing in growing markets often offers more stable income—even when supply is rising elsewhere.
   • Go Beyond the Metro: Focus on Submarkets. Within a large city, different neighborhoods can perform very differently. Look for submarkets near stable job centers (like hospitals or universities), with good schools, or accessible public transport. These areas often have more consistent demand.
   • Analyze the Local Supply Pipeline. Just because a city has strong growth doesn’t mean every area is safe. Check local planning departments for how many new apartment units are being built or planned specifically in the submarket you are considering. High levels of new construction in a small area can depress rents and increase vacancies.
4. Be Conservative in Underwriting
   • Assume slow rent growth and a bit more turnover or vacancies.
   • Don’t rely on a quick rebound in values—plan for steady income.
   • Buffer for Unexpected Costs: Always include reserves for unexpected repairs or increases in operating expenses. In a less predictable economy, having cash reserves is crucial.
5. Identify Distressed Opportunities
   • Some owners will be forced to sell or refinance at unfavorable terms; act quickly when quality assets become available at attractive prices.
   • Build Relationships: Connect with brokers who specialize in off-market deals or properties facing financial pressure.
   • Monitor Loan Maturities: Many loans taken out years ago with short terms or variable rates are coming due. Owners who can’t refinance might be motivated sellers.

Smart Risk Management

Looking Ahead: What To Expect

• High rates are the new normal—for now. Plan with this in mind.
• Rent growth stays modest, especially where new supply is surging.
• Occupancy remains healthy in most markets, but softens where overbuilding is an issue.
• Investors who focus on strong income, operational improvements, and careful market selection will outperform.
• When rates do eventually fall, those who bought smartly in this cycle will be in the best position to benefit.

Finding Opportunity in the New Landscape: While high rates and market uncertainty present challenges, they also create opportunities for disciplined investors. The market correction means that properties are potentially available at prices that reflect the current, rather than past, economic reality. This environment favors those who can execute a strong business plan centered on improving property operations and cash flow, rather than simply betting on market appreciation. Patience and a focus on fundamental value—buying properties below their intrinsic value and improving them—are key strategies that work regardless of the interest rate environment. The “higher for longer” period is tough for some, but it clears the way for smart capital to acquire quality assets from owners who aren’t prepared for the new rules of the game.

Bottom Line: The era of quick, easy wins in multifamily is paused. Now is the time for discipline, smart asset and market selection, and relentless focus on cash flow. Keep your playbook simple, your numbers realistic, and your eye on long-term value creation—and you’ll be well-positioned, regardless of what the Fed decides next.