Most signs point to overall improvement in both capital markets and property-level fundamentals in 2026 for multifamily, but the recovery will remain uneven and not without clouds on the horizon. Lower and less volatile interest rates have strengthened capital markets, and economic tailwinds are expected from federal legislation passed in 2025. However, gains are unlikely to be spread evenly across markets or individual households, which presents challenges.
K-Shaped MSA-Level Recovery
The “K-shaped” analogy, most often applied to segments of the economy and/or labor market performing at drastically different levels, also resonates with multifamily in different cities across the country. In simple terms, a “K-shaped” recovery describes an environment where some markets are improving while others continue to fall behind, even as overall conditions appear to be stabilizing. Predictably, the amount of new supply is the main cause of the dispersion between the strong performers and the laggards. What's unexpected, however, is how wide the gap has become between the "have" and "have not" markets. The difference today compared with a couple of years ago is that the performance will be less regional and more localized.
Stated in regional terms, the Sun Belt has for the last few years vastly underperformed the Midwest and, more recently, gateway cities, but that does not tell the whole story. For example, Sun Belt markets even in the same state—Austin and Houston—saw a 5% difference in year-over-year rent growth as of the third quarter of 2025, according to Yardi Matrix. Both cities are success stories in terms of economic growth, but Austin’s multifamily completions as a percentage of existing stock were 5.2% last year compared with 1.7% in Houston, hence the disparity in performance.
Looking ahead, our team is moving away from regional to more market-specific performance. After all, the macroeconomic trends, including migration trends and job growth, still favor the region that has struggled the most, the Sun Belt. For example, 10 of the 15 metropolitan statistical areas (MSAs) in the United States with the highest population growth projection by 2030 are in Texas and Southeastern markets. Excluding outliers like Austin and Huntsville, Alabama, which will continue to move backward due to larger and later arriving supply waves, markets in the Sun Belt should narrow the gap in underperformance compared with the rest of the country.
Some Concerns About Household Formation
With the latest quarterly reading in the third quarter on GDP growth at 4.3%, unemployment at 4.4% as of December, and wages around 4% higher year over year, we would expect apartment demand to be meaningfully more robust than current conditions. However, while overall wage growth has outpaced apartment rent growth for the last few years, lower- and middle-income earners have not kept pace with their higher-wage cohorts. According to the San Francisco Federal Reserve, pandemic-era excess savings from government stimulus were depleted by late 2024, which applies pressure on lower- and middle-income finances. As a result, renter demand continues to be stunted by lower-than-expected household formation.
A silver lining is that many of the economic benefits from the One Big Beautiful Bill, including broad tax cuts and increased deductions, are expected to be realized in 2026, along with a deregulatory environment, which is generally stimulative to the economy at least in the short term. That said, it remains to be seen how much of the “rising tide” from these factors ultimately benefits the households on the lower part of the “K-shaped economy.”
Transaction Volume Expected to Increase; Size of Pipeline Hinges on Property Fundamentals
Recently, the level of transaction volume by MSA is less determined by debt maturities and more by property-level trends. Some of the most highly traded markets either had a more balanced supply/demand situation (much of the Midwest and gateway cities) or experienced “peak supply” in 2024 rather than last year (Houston). Fogelman’s expectation is for transaction volume to continue its upward trajectory this year as markets like Atlanta and the Carolinas MSAs see more trades, despite some of the higher-supply and weak fundamentals markets like Austin and Huntsville staying relatively quiet.
Return of High-Net-Worth Capital?
Much of the capital that flowed out of real estate, including apartments, starting in late 2022 came from high-net-worth individuals and families reallocating to different investment types. In a higher interest rate environment, fixed-income products offer an attractive yield, often higher than cash yield equivalents in real estate investments. Resultingly, the buyer pool consisting of high-net-worth equity syndicators and vehicles like non-traded REITs has been much less active since mid-2022.
Fast-forward, with 175 basis points worth of cuts to the Fed Funds Rate since late 2024, the math for those high-net-worth investors has changed significantly. Now, current yield looks very similar, with real estate having the advantage of the potential for equity growth over the hold. Adding further to the attractiveness of alternatives like real estate, equity markets are reaching all-time highs again. Although we do not expect the syndication of this type of equity to be nearly as prolific as it was near the peak of the last cycle, it is reasonable to assume it will return to a healthier level with the experienced operators being able to access that capital.
Capital flowing back into multifamily, coupled with property-level fundamentals firming up, should lead to more slow and steady improvement for our industry in 2026. However, gains will not be spread evenly across markets and asset classes, so investors must be mindful of localized risks in this type of environment.