The Federal Reserve raised rates by 25 basis points this week, bringing the federal funds target range to 3.75%–4.00%.
At first glance, higher interest rates don’t sound like good news for real estate.
And certainly, higher borrowing costs create challenges.
But there is another side of the equation that may be much more important for owners of existing multifamily properties over the next several years:
Higher rates make it harder to build new apartments.
And when fewer apartments get built, the economics of the apartments already standing can get stronger.
The Supply Cycle Is Beginning to Change
Multifamily went through an enormous construction boom following the pandemic.
Those new apartments created real competition.
When thousands of new units enter a market at once, owners aren’t just competing against the apartment complex down the street. They’re competing against brand-new properties trying to fill hundreds of units—often with aggressive concessions like free rent.
That puts pressure on occupancy and limits landlords’ ability to increase rents.
But development has a long lead time.
And today’s higher cost of capital is making many proposed projects substantially harder to justify.
According to the U.S. Census Bureau, multifamily starts for buildings with five or more units were running at an annualized pace of approximately 344,000 units in August.
The significance isn’t just what happens this year.
Every project that doesn’t start today is a project that won’t be delivering new apartments two or three years from now.
Why That Matters for Existing Multifamily
Think about what happens as the construction pipeline begins to shrink.
1. Fewer new apartments competing for the same renters
If renter demand remains healthy while fewer units are delivered, existing properties have a better opportunity to maintain and improve occupancy.
We’re beginning to see that dynamic nationally.
In the second quarter, apartment demand absorbed approximately 167,000 units, while only about 77,700 new units were completed across the markets tracked by CBRE.
In other words, demand outpaced new supply for the second consecutive quarter.
2. Less Pressure From New-Construction Concessions
One of the biggest challenges during a construction boom isn’t always rent.
It’s concessions.
A newly built apartment community carrying hundreds of vacant units may offer six or eight weeks of free rent to accelerate lease-up.
Existing properties then have to compete with that effective rent—even if their own fundamentals are strong.
As the pipeline of new properties shrinks, that competitive pressure can begin to ease.
Fewer properties in lease-up can mean less discounting needed to maintain occupancy.
3. Occupancy Can Strengthen
The relationship is fairly simple:
Demand + fewer new units = a healthier supply/demand balance.
CBRE reported that multifamily absorption has now exceeded completions for two consecutive quarters, while all 69 markets it tracks recorded positive absorption in Q2.
That’s an encouraging shift after several years in which many markets were trying to absorb a historic amount of new construction.
The benefit doesn’t happen overnight—and some markets still have meaningful supply left to work through.
But the direction of the pipeline matters.
4. Rent Growth Has More Room to Normalize
When properties are fighting to maintain occupancy, aggressive rent increases aren’t usually the priority.
In fact, many operators have spent the last several years prioritizing occupancy over rent growth.
That can change as excess supply gets absorbed.
With fewer new units competing for renters, owners may have more ability to:
- Reduce concessions
- Retain residents
- Improve occupancy
- Gradually increase effective rents
- Grow property income
And for multifamily investors, Net Operating Income matters.
Ultimately, property values are heavily influenced by the income an asset produces.
5. Existing Apartments Become Harder to Replace
There’s another piece of this that we think is especially important.
It is expensive to build apartments today.
Land, labor, materials, financing and insurance all cost considerably more than they did during previous development cycles.
Add higher interest rates to that equation, and the cost of creating a brand-new apartment community can become difficult to justify at rents the market can actually support.
That makes existing multifamily increasingly valuable from a simple economic standpoint:
If you can’t economically build the competing property next door, the existing property becomes harder to replace.
That’s one reason we’re so focused on basis and replacement cost when evaluating acquisitions.
And Higher Rates Continue to Keep Many Households Renting
There’s also the demand side.
For many households, the monthly cost of purchasing a home remains significantly higher than renting.
CBRE estimates the national monthly premium to buy versus rent at roughly 105% in 2026.
That creates another tailwind for apartments: households that might historically have moved from renting into homeownership may remain renters longer.
So while higher interest rates make development more difficult, they can simultaneously help sustain demand for the apartments that already exist.
We’ve Seen This Pattern Before
There is an important historical precedent.
During the Great Financial Crisis, multifamily construction fell dramatically. Rental fundamentals didn’t improve immediately—the recession initially hurt demand, too. But as renter demand recovered, the market was left with very little new supply coming behind it. National rental vacancy subsequently declined for years.
Today’s circumstances are different, but the underlying lesson is worth remembering:
Housing supply can shut down much faster than it can come back.
And that creates another risk investors should watch.
Development takes years. If today’s higher rates suppress construction for too long, and then financing conditions improve while rents and occupancy are strengthening, developers may eventually rush back into the market at the same time.
We recently saw a version of that cycle. Strong rent growth and favorable financing drove multifamily starts sharply higher in 2021 and 2022, while construction delays stretched delivery schedules. The result was a historic amount of new supply arriving within a relatively compressed period.
So fewer starts today can benefit existing apartments as current supply is absorbed—but too little construction for too long can eventually set the stage for the next development cycle.
That’s why we’re not simply watching interest rates. We’re watching the entire pipeline—from starts and units under construction to completions, absorption and concessions.
Follow the Supply, Not Just the Fed
We don’t think an investment thesis should depend on predicting what the Federal Reserve does next.
Rates could go up.
They could eventually come down.
What we can observe is what’s happening on the ground.
Construction is slowing.
The development pipeline is shrinking.
Apartment demand is beginning to outpace new deliveries.
Homeownership remains expensive.
And the historic wave of new apartment supply is gradually being absorbed.
For existing multifamily, that matters.
Because ultimately, the question isn’t simply:
“Are higher rates good or bad for real estate?”
A better question is:
“What do higher rates prevent from being built—and what does that mean for the apartments already standing?”
That’s the part of this Fed decision we’ll be watching most closely.
Sources:
- U.S. Census Bureau — August 2026 New Residential Construction
U.S. Census Bureau — New Residential Construction - CBRE — U.S. Multifamily Figures, Q2 2026
CBRE — U.S. Multifamily Figures Q2 2026 - CBRE — 2026 Multifamily Market Outlook
CBRE — 2026 Multifamily Outlook - Yardi Matrix — Multifamily Completions Forecast
Yardi Matrix — Near-Term Multifamily Completions Forecast