An In-Depth Look at Commercial to Residential Conversions—Part 8

This is the eighth installment in our on-going look at commercial to residential conversions. We hope you’re enjoying the series and find it insightful.

In Part 7, we provided an update on office to residential conversions and shared the latest data available as of late Q2 2025, which showed that the number of office conversions has skyrocketed by 56% over the past two years.

We also looked at one of the main factors driving the increase, the current state of the US office market which, while showing signs of stabilization, is still struggling by and large.

In this post, we look at another reason the number of office to apartment conversions is growing —the current state of the multifamily sector, which has remained resilient over the past few years for the most part.

The Right Market Conditions for Office to Residential Conversions

As we wrote in Part 2 of our series, most office to residential conversions are transformations of older Class B and C office buildings into Class A apartments or, increasingly, a mix of Class A and affordable apartments with a retail component. So, for an office conversion to pencil out financially, the fundamentals for local Class A apartments – namely vacancies, net absorption, asking rents, rent growth and cap rates — must be stronger than the fundamentals for local Class B and C office space. And, in most major US markets right now, that is the case.

Multifamily Occupancy and Vacancy Rates

Based on Avison Young’s data, in Q1 2025, the overall multifamily occupancy rate in the US was 93.2%, which equates to a 6.8% vacancy rate. Stabilized occupancy for Class A apartments in Q1 2025 was 92.3%, or a 7.7% vacancy rate. For Class B and Class C apartments, occupancy was slightly higher and nearly identical—93.7% and 93.6%, respectively, for vacancy rates of 6.3% and 6.4%.

Meanwhile, as we reported in Chapter 7, the overall vacancy rate for US offices in Q1 2025 was 19.0%, nearly 15% higher than the overall multifamily vacancy rate, a sizeable spread.

As of Q4 2024, the vacancy rate for Class B office buildings stood at 19.6%, while the vacancy rate for Class C buildings was 14.5%, both considerably higher than the vacancy rate for prime apartments, which was 7.7%

Looking ahead, Fannie Mae predicts that the overall multifamily vacancy rate will hover around 6.0% in 2026, while Moody’s predicts the overall office vacancy rate will hit 24% in 2026, a considerable difference of 18%.

Multifamily Net Absorption

Multifamily net absorption was positive in Q1 2025 — approximately +140,000 units. For office, net absorption was negative– -10.5 MSF —but a big improvement over the nearly -26 MSF recorded in Q1 2024.

CoStar predicts that total multifamily net absorption in 2025 will be +370,163 units, down significantly from +552,292 units in 2024, but up about 50,000 units from 2023.

In 2026, net absorption is projected to seesaw with new deliveries, dropping precipitously in Q1 to under 50,000 units, before rebounding back to about 150,000 units in Q2, then dropping steeply to -15,000 units in Q3.

Multifamily Rent Growth

Yardi Matrix reports that in May 2025, the average US advertised multifamily rent was $1,761, a $6 increase MOM and 1% YOY. Asking rents for Class A and Class B apartments both grew by .6% YOY, while Class C asking rents grew by 1.5% YOY.

While multifamily rent growth has been minimal, office asking rents have fared even worse. In Q1 2025, the average office asking rent in the US was $38.21 per square foot, about the same as it was in Q4 2024– $38.23 per square foot.

Digging deeper, Fannie Mae estimates that nationally, multifamily rents grew by 1.0% in 2024 and 0.8% in 2023, both a steep drop from 2022’s 4.75% growth. In 2024, annual rent growth for Class A apartments was 1.4%; for Class B, 1.3%; for Class C, 2.6%.

Multifamily rent growth is expected to strengthen by year’s end, barring any significant setbacks to the US economy or job market.

Multifamily Cap Rates and Valuations

According to Colliers, as of May 2025, the average cap rate for US multifamily properties was 5.1%, compared to 7.86% for the average office asset. The 2.76% spread indicates that investors expected a higher rate of return from multifamily assets than from office assets, making multifamily a more attractive investment option.

Looking ahead, Fannie Mae estimates that multifamily cap rates will hover between 5.0% and 5.5% over the next 12-18 months. Valuations are closely tied to cap rates and Metlife expects apartment building valuations to increase by 2% over the next 12 months and office building valuations to increase by .5%, a 1.5% spread.

Multifamily Investment Sales

According to Avison Young, in Q1 2025, multifamily investment sales totaled approximately $9 billion, up 9.7% YOY. Multifamily accounted for 36.1% of all commercial real estate investment sales that quarter, down about 1% from Q1 2024, but still accounting for the largest share of any asset type.

In 2024, sales of multifamily properties valued at $2.5 million or more totaled $131 billion, up from $120 Billion in 2023. Investment sales volume has now grown YOY for 11 consecutive months.

Who’s buying multifamily assets? In Q1 2025, private buyers accounted for the largest share of acquisitions—54.5%– followed by institutional investors at 32% and public entities at 4%.

Fannie Mae projects between $330 billion and $375 billion in multifamily loan originations in 2025, up from the $275 billion to $315 billion that were recorded in 2024.

Supply of Apartments

RealPage and HUD estimate that between 585,000 and 589,000 new multifamily units were delivered in 2024, the most annually in 50 years. Meanwhile, Colliers estimates that between 400,000 and 440,000 units will be delivered in 2025, approximately 150,000 fewer than the year before.

New deliveries are expected to drop off by a steep 33% in 2026 to between 264,000 and 290,000 units. Reasons for the projected sharp decline include an elevated supply, rising construction costs, including for labor and materials, a worsening labor shortage and less equity investment in new multifamily development.

As far as construction starts, the US Census Bureau reports there were 420,000 seasonally adjusted multifamily starts in April 2025, up 29% YOY. Avison Young projects that 66.4% of the new units under construction in Q1 2025 will deliver by the end of the year. Morningstar predicts that annual multifamily starts will increase by 6% in 2025, then fall by approximately 5% in 2026, then grow approximately 1% a year to approximately 400,000 units in 2029.

Multifamily Loan Maturities

$310 billion in multifamily loans are set to mature this year, over three times more than for the industrial sector. A total of $1.1 trillion in multifamily loans is expected to mature through 2029.

Refinancing has been difficult for all asset classes the last few years due to falling property values and elevated interest rates, and the multifamily sector has been no exception, as it saw the most loan extensions of any asset class from 2024 to 2025. According to the Mortgage Bankers Association, an estimated $97 billion in multifamily loans were extended from prior years into 2025, topping even the office sector. Given that multifamily property values remain low and interest rates remain elevated, it’s likely that many multifamily loan maturities will get pushed into 2026 and beyond.

One worrying sign for the sector: despite multifamily’s relative stability, the lending cycle is showing signs of distress. As more loans have been extended or modified, delinquency rates have risen and more multifamily loans are in special servicing. Foreclosure is a last resort, however, one that both borrowers and lenders want to avoid, so it’s likely even more loan extensions and workouts are coming.

Apartment Rent Concessions

Fannie Mae estimates that as of Q4 2024, 19.7% of Class A apartments were offering concessions to help attract tenants, up from 18.1% in Q4 2023. Meanwhile, 20.7% of Class B apartments were offering concessions, up from 18.3% in Q4 2023, and 24.0% of Class C apartments were offering concessions, up from 18.5%. The increases were mainly attributable to the growing inventory of apartments in many markets, which in turn increased competition for tenants. While the percentage of apartments offering concessions increased across all classes, the average amount of concessions remained below one month’s free rent.

Multifamily’s Sustained High Performance

The multifamily sector has been one of commercial real estate’s brightest spots for several years running, for several reasons.

Strong New Household Formation

First, new household formations have been strong. Morningstar reports that 1.2 million new households were formed in 2024, below the 2 million formed in 2023, but still above the 10-year average of 1.1 million.

US Labor Market Remains Strong

One reason household formations have held steady is they’re closely tied to employment and, for the most part, unemployment has remained at or near historical lows for the past five years. After peaking at 14.8% in April 2020, the height of the pandemic, the unemployment rate plunged to 3.9% in December 2021 and has remained below 4.3% ever since. As of May 2025, it sat at 4.2%.

Job growth, also tied closely to household formation, has also been strong. Fannie Mae estimates the US will add 4.5 million new jobs between 2024 and 2026, with job growth projected at 1% in 2025.

In addition, wages have been rising, outpacing both inflation and rent, which expands the pool of potential renters, increasing demand for multifamily units.

Group Most Likely to Rent Apartments Grows

Demographics also factors into the multifamily sector’s consistent performance the past few years. The segment of the US population most likely to rent apartments– 20 – 34-year-olds — is large and growing. As of 2022, there were an estimated 68 million people in that age cohort and the US Census Bureau estimates it could grow by nearly 1.0% by 2032—adding over 670,000 people to the pool of prospective renters. Arbor Realty Trust reports rental households increased at double the rate of owner-occupied homes during the current real estate cycle.

The CMBS Market Bounces Back

Another reason the multifamily sector is on the upswing is the CMBS market is returning, increasing the dollars flowing into the sector. Commercial Mortgage Alert reports that CMBS issuance through late May was $47.1 billion, up an impressive 45% YOY.

Next, the Current US Housing Marketing

Perhaps the biggest reason the multifamily sector has been thriving the last few years is the current state of the US housing market, and housing affordability in particular. In chapter 9 of our series, we’ll take an in-depth look at the US housing market, along with some government economic and social policies that could help or hinder the US multifamily sector.

More Information on Commercial to Residential Conversions

If you’d like more information on commercial to residential conversions, we just added two new infographics to our Library that you might be interested in. One is an update on office to apartment conversions. The other is a current snapshot of the US office market, which is directly related to office conversions. Both provide the latest data available as of early Q3 2025.

In addition, there are the previous chapters in our series on multifamily conversions:

Expert Help With Your Commercial to Residential Conversions

In our 33 years, Realogic has worked with over 20 different types of commercial real estate assets, including office, multifamily, hotels, shopping malls and strip malls, and on numerous adaptive reuse projects, including residential conversions. If you’re undertaking or involved in a commercial to residential conversion of any type, we offer a suite of best-in-class commercial real estate services and solutions that can help you maximize your returns, minimize your costs and leverage our unmatched CRE skills, experience and expertise. Our services and solutions include:

For more information, contact us at info@www.realogicinc.com or 312-782-7325

About the Author

Terry Banike is Vice President of Marketing for Realogic. Over the course of his career, he has worked in marketing, communications, journalism and public relations, and has written news stories and features for newspapers, trade publications, newsletters and blogs. A rabid reader of anything and everything on commercial real estate, Terry follows commercial real estate news and trends closely and frequently posts about real estate on the Realogic Blog. He can be reached at tbanike@www.realogicinc.com.

Sources:

  • Avison Young; US Multifamily Market Report; Q1 2025
  • CBRE; Office Demand Remains Resilient in Q1; US Office; Q1 2025; April 30, 2025
  • Cushman & Wakefield; Marketbeat; United States; Office; Q1 2025
  • JLL; Office Market Dynamics; Research; United States; Q1 2025
  • CommercialEdge; May 2025 Office Market Report; CBD Office Markets Struggle Amid High Vacancies, Discounted Sales and Slowed Development; May 20, 2025
  • Wolf Street; Office Vacancy Rate in the US Worsens to Record 22.6% in Q1 Amid Federal Government Lease Terminations; Wolf Richter; April 25, 2025
  • CRE Daily; $557 B Office Wipeout Reveals Diverging Urban, Suburban Markets; Han Lung; August 27, 2024
  • Fannie Mae; Multifamily Economic and Market Commentary; January 2025; 2025 Multifamily Market Outlook: Clear Skies Ahead
  • Outsource Accelerator; US Office Vacancies to Wipe $250Bn Off Property Values by 2026; Liezel Once; July 3, 2024
  • Colliers; Path to Performance: Fundamentals Strengthen in 2025; US Capital Markets Multifamily Report; June 2025
  • Yardi Matrix National Multifamily Report; May 2025
  • Arbor Realty Trust; US Multifamily Market Snapshot- May 2025; Matt Maison; May 14, 2025
  • NationalCapRates.com
  • Metlife; US Commercial Real Estate Chartbook; June 11, 2025
  • Morningstar; Understanding the US Housing Market in 2025: Mortgage Rates, Affordability, and Growth Trends; Brian Bernard; July 22, 2025
  • USA Facts; What is the unemployment rate in the US right now?; May 2025
  • GlobeSt.; Loan Extensions Reach New Highs At $384B; Kristen Smithberg; March 25, 2025