- 01The Fed cut rates three times in 2025 — and mortgage rates barely moved, staying above 6.5% all year
- 02Cap rate compression hit multifamily hard: sub-5% caps in Austin and Phoenix priced out cash-flow buyers entirely
- 03Vacancy rates climbed to 6.8% nationally by Q3 — the highest since 2012 — as pandemic-era supply finally delivered
- 04Markets with the death cross pattern (rising supply + falling demand) include Austin, Nashville, and parts of Denver
Show Notes
Show Notes
2025 was supposed to be the year. Rates were going to drop. Inventory would loosen up. Sellers would get realistic. And deals? Deals were supposed to flow.
Some of that happened. Most of it didn't — or at least not the way anyone predicted. Let's close the book on 2025 and talk about what actually went down, what it means for your portfolio, and where the smart money is moving heading into 2026.
The Rate Mirage
The Fed cut the federal funds rate three times in 2025 — September, November, and December. That's 75 basis points of cuts. You'd think mortgage rates would've followed.
They didn't.
The 30-year fixed sat between 6.5% and 7.2% for the entire year. In January, it was 6.62%. By October, it touched 7.22%. After the December cut, it settled around 6.7%.
Why the disconnect? Because mortgage rates track the 10-year Treasury yield, not the Fed Funds rate. And the bond market was pricing in persistent inflation and massive government borrowing. The Treasury kept issuing debt, and bond buyers wanted higher yields to absorb it. The Fed was cutting short-term rates while long-term rates refused to budge.
For investors, here's the lesson: don't underwrite deals based on where you hope rates will be. Underwrite at 6.75% or higher. If rates drop, great — that's upside you didn't need. If they don't, your deal still works.
Cap Rate Compression Squeezed Out Cash-Flow Buyers
Cap rates compressed again in 2025, especially in multifamily. Institutional money kept chasing apartments in Sun Belt markets even as rents softened. The result: cap rate compression that pushed yields below what most individual investors can tolerate.
Here's what that looked like:
- Austin multifamily: 4.3% average cap rate (down from 5.1% in 2023)
- Phoenix multifamily: 4.7% (down from 5.4%)
- Nashville multifamily: 4.9% (down from 5.6%)
- Tampa multifamily: 5.1% (down from 5.8%)
At a 4.3% cap rate in Austin, you're paying $233,000 per unit for an apartment that generates $10,000 in NOI. After financing at 6.75%, your cash flow is negative. You're literally paying to own the property every month.
That trade only works if you believe rents are about to rip higher — or you're buying at a scale where management efficiencies cover the thin margins. For a mom-and-pop investor running 4 to 12 units? It's a money pit.
Where cash-flow buyers found opportunity: Midwest and Southeast secondary markets. Cleveland, Birmingham, Memphis, and Little Rock held cap rates between 7.5% and 9.2%. Not as glamorous. Still cash-flow positive on day one.
The Vacancy Spike
Here's the number that caught people off guard: national vacancy rates hit 6.8% in Q3 2025. That's the highest since 2012.
What happened? A supply wave. All those apartment projects that broke ground in 2021 and 2022 — when rates were at 3% and everyone thought rent growth would run forever — finally delivered. 578,000 new apartment units hit the market in 2025. That's 40% above the 10-year average.
Demand was there, but not enough. Net absorption was roughly 412,000 units. That leaves 166,000 empty new units competing for tenants. In markets like Austin, vacancy in Class A apartments hit 12.3%. Landlords started offering two months free on 14-month leases.
If you own older Class B or C properties, this actually helped — renters priced out of new construction moved down-market. B-class vacancy in the Midwest actually tightened to 4.1% in Q3. The supply glut hit the top of the market, not the bottom.
Death Cross Markets
The death cross is when supply growth outpaces demand growth for two or more consecutive quarters. It's an early warning that rents are about to soften, vacancies are about to climb, and cap rates may finally expand.
Three markets flashed the death cross in 2025:
Austin, TX. Supply growth of 7.2% vs. demand growth of 3.8%. The result: rents fell 4.1% year-over-year in Class A, and concessions became standard. Austin was the poster child for pandemic-era overbuilding.
Nashville, TN. Supply growth of 5.6% vs. demand growth of 3.1%. Nashville added 23,400 units in a metro that absorbed only 15,100. Downtown rents dropped 2.8%.
Denver, CO (suburban). The suburban ring around Denver — Aurora, Lakewood, Thornton — saw a 6.1% supply surge against 2.9% demand growth. Urban Denver held up better because new construction was concentrated in the suburbs.
Not every market is in trouble. Cleveland, Kansas City, Birmingham, and Indianapolis all showed demand outpacing supply. These are the markets where rent growth is real and sustainable — 3% to 5% annually, driven by job growth and low new construction.
What This Means for 2026
Here's my read heading into next year:
Rates stay range-bound. Don't expect 5% mortgages. Plan for 6.25% to 7.25% as the operating range. If you can make a deal work at 7%, it'll be a home run if rates surprise to the downside.
The supply wave crests. Construction starts dropped 18% in 2025. That means fewer deliveries in 2027-2028. The vacancy spike is temporary — but it could last another 12 to 18 months in oversupplied markets.
Cash-flow markets outperform. The Sun Belt appreciation play is on pause. Investors rotating into Midwest and Southeast markets for yield will push cap rates slightly lower there, but the fundamentals are sound.
Distressed deals emerge. Syndicators who bought in 2021-2022 at low cap rates with floating-rate debt are running out of runway. Expect forced sales in multifamily, especially 50+ unit complexes in overbuilt markets. That's where the deals will be.
The Bottom Line
2025 wasn't the year anyone expected. Rates stayed high, supply overwhelmed demand in the hottest markets, and cap rate compression made Sun Belt cash flow nearly impossible. But if you're buying in the right markets — secondary cities with real job growth, limited new supply, and cap rates above 7% — the fundamentals are better than the headlines suggest.
Close the book on 2025. Open a spreadsheet for 2026. The opportunities are shifting, and the investors who see it first win.
Resources Mentioned
- Cap Rate — the yield metric that tells you what you're buying
- Cap Rate Compression — when yields shrink and prices inflate
- Vacancy Rate — the supply-demand signal you can't ignore
- Cash Flow — what survived and what didn't in 2025
- Death Cross — the supply vs. demand warning signal
Cap rate (capitalization rate) is the annual percentage return a property generates based on its net operating income divided by its purchase price or current market value. It strips out financing entirely — showing what you'd earn if you paid all cash — making it one of the fastest ways to compare deals across different markets.
Read definition →Cap Rate Compression is a financial analysis concept that describes a specific aspect of how real estate transactions, analysis, or operations work in the context of real estate investing deals.
Read definition →The percentage of time a rental property sits empty and produces no income, calculated as vacant units divided by total units — the silent profit killer in rental investing.
Read definition →Cash flow is what's left in your pocket after a rental pays all its expenses — including the mortgage. NOI minus debt service. What actually hits your bank account each month or year.
Read definition →A death cross is a bearish chart signal that appears when a short-term moving average (usually the 50-day) crosses below a long-term one (usually the 200-day). It tells you momentum has shifted — recent weakness is overtaking the longer trend.
Read definition →
