How Interest Rates Impact Apartments
The year 2025 marks a transitional phase for the U.S. economy and multifamily markets. Since 2022, federal interest rate hikes have cooled the investment market, while surging inflation has strained consumer spending and behavior. With clearer signals that interest rates and apartments are now moving into a more favorable alignment—rates trending downward and the 2024 presidential election settled—it’s a valuable time to examine shifts in multifamily market fundamentals and demand drivers during previous periods of economic and political change.
Presidential elections often weigh on consumer sentiment, as heightened polarization and concerns over the potential impacts of the winning party’s policies can create uncertainty for individuals and households. Yet, once election results are in, regardless of which party prevails, consumers generally feel more confident about the economy and their finances. Although this trend may seem counterintuitive, it significantly influences several key demand drivers in commercial real estate and housing, such as consumer spending, household formation, and homebuying—each of which has direct implications for interest rates and apartments.
This uncertainty typically results in more cautious behavior from consumers and investors during election cycles, often leading to slower economic growth compared to postelection years. Although the Federal Reserve operates independently of politics, the convergence of political and economic shifts in late 2024 created conditions similar to previous transition periods, offering investors insight into potential trends over the next year and beyond—especially in how interest rates and apartments are interlinked.
1960–1979 | Rising Interest Rates, Stagflation, and A Homebuilding Boom
In the early 20th century, apartment living was primarily concentrated in the nation’s largest and most densely populated cities. Following World War II, population migration shifted heavily toward suburban areas. This suburban boom in the late 1940s and 1950s spurred extensive single-family home construction. However, by the 1960s, renewed urban population growth made apartment tower development in major urban centers both necessary and profitable. Multifamily construction soared to record levels in the early 1970s, bolstered by low interest rates and rapid urbanization. During this time, wars in the Middle East, Vietnam, and Korea began impacting the domestic economy.
In 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC), the precursor to OPEC, imposed an oil embargo on the United States, causing a supply shock that led to a significant spike in inflation. Under Federal Reserve Chair Paul Volcker, the Fed responded by raising the overnight rate above 12% to combat inflation. Although this sharp rate increase temporarily controlled inflation, the restrictive policy also constrained economic growth. By the time inflation was reined in, the Iranian Revolution triggered a second oil crisis, leaving the economy facing slow growth and persistent inflation at the decade’s end.
Federal Reserve rate hikes during this period also shifted consumer housing preferences. With mortgage rates sometimes exceeding 10%, homeownership became less attainable, driving increased demand for rental housing. This trend reflected how interest rates and apartments were closely connected. Concurrently, many urban areas launched revitalization initiatives, establishing affordable housing projects and introducing some of the nation’s first luxury apartment towers. High construction rates, combined with the prohibitive cost of homeownership, boosted multifamily demand—a trend similar to the vacancy compression seen amid record development in 2021 and 2022.
1980–1989 | Urban Revival and Tax Reform
The early 1980s, marked by Ronald Reagan’s election, saw an economic recession that initially softened rents and led to a rise in unemployment. However, by 1983, inflation had cooled, and the Federal Reserve began lowering the overnight rate to between 5% and 8%. This reduction in rates led to declining mortgage rates at the start of the decade, shifting home construction back toward single-family homes in suburban areas. Limited multifamily construction, paired with urban revival efforts, contributed to a rapid acceleration in rent growth as interest rates and apartments once again aligned to reshape investor and consumer behavior.
As unemployment fell, apartment vacancy rates tightened, and the lack of new development was further restricted by the Tax Reform Act of 1986, which removed tax incentives for real estate developers. This period of falling interest rates and limited new construction significantly benefited existing apartment owners, especially in major cities.
Simultaneously, the 1986 Tax Reform Act triggered the Savings and Loan Crisis, causing a wave of bankruptcies and foreclosures among investors who struggled to secure stable financing without previous tax incentives. This resulted in steadily improving apartment performance as baby boomers reached young adulthood, despite broader economic pressures. Today, similar dynamics are anticipated for the multifamily market in 2025 and 2026, where interest rates and apartments are again poised to play a critical role.
1990–2007 | Further Rate Cuts and Tax Breaks
The Savings and Loan Crisis triggered a minor recession in the early 1990s, but by 1995, interest rates and unemployment were once again declining. As the economy rebounded, employment markets underwent a transformation with the rise of the internet, cell phones, and consumer computers. This tech boom drove high apartment demand in tech-centered markets like Seattle, the Bay Area, and Austin.
Despite the burst of the Dot Com Bubble in the early 2000s, the Federal Reserve continued to cut interest rates. This enhanced borrowing capacity for both consumers and businesses. These reductions underscored how interest rates and apartments moved in tandem to support urban housing markets even during times of sector volatility.
Persistently low interest rates from 2001 to 2004 fueled a rapid increase in housing prices and encouraged extensive borrowing. As home prices surged, the Fed began gradually raising rates to curb market enthusiasm. However, the effort proved insufficient to prevent the housing bubble’s collapse, and by 2008, the Great Financial Crisis had begun.
Post Financial Crisis Recovery and the “Free-Money” Era
In response to the largest U.S. recession since the 1920s, the Federal Reserve cut rates to nearly 0%. These actions stabilized housing markets and provided vital insight into how interest rates and apartments interact during recovery cycles. Developers completed fewer housing units, while millennials extended their time in rentals, contributing to today’s persistent housing shortage.
Even as employment markets rebounded, lending rates stayed historically low, creating a supportive environment for real estate investment. By 2014, confidence returned, and multifamily deal flow surged beyond pre-crisis levels. Additionally, reduced reliance on variable-rate financing helped mitigate financial distress, strengthening interest rates and apartment market fundamentals across the decade.
COVID-19 and Recovery | 2020–2024
Entering the pandemic, apartment fundamentals were exceptionally stable. But in spring 2020, uncertainty and household consolidation drove vacancies higher. As millennials delayed homebuying and construction surged in 2022, markets faced supply lags that hit in 2023 and 2024. Amid inflation and rate hikes, renters grew cautious. Interest rates and apartments once again became tightly intertwined as financial confidence and household formation slowed.
However, with inflation easing and political clarity returning, confidence is expected to rebound in 2025.
Looking Ahead
In 2025, interest rates and apartments will again take center stage. Forecasts suggest the federal funds rate could fall to 3.5% by year-end, a significant drop from recent highs. Lower borrowing costs, combined with post-election optimism, make this year promising for multifamily investors.
CoStar projects tighter vacancy and rent growth near 4%, mirroring pre-COVID stability. As interest rates and apartments realign, transaction volume is expected to recover. While not likely to match the frenzy of 2021–2022, strong fundamentals, combined with institutional interest and a deep housing shortage, point to a bullish outlook.
