The Macro Backdrop: A Market in Transition (2025)

To underwrite effectively in 2025, one must first grasp the fundamental shifts in the market. The "higher for longer" interest rate environment remains the dominant force, creating a persistent bid-ask spread and slowing transaction velocity. This is coupled with a return to normalized growth after the unprecedented boom of the early 2020s. Here are the key trends shaping the current macroeconomic landscape.

Moderating Rent Growth and Rising Vacancy

After years of double-digit increases, rent growth has decelerated to more sustainable, low single-digit levels. This moderation is a direct result of two factors: a historic wave of new apartment deliveries peaking in 2024 and growing affordability constraints for renters. According to the Yardi Matrix supply forecast, the influx of new units, particularly in Sun Belt markets, has created a more competitive leasing environment. This has pushed vacancy rates up and put downward pressure on rents.

While the national picture shows moderation, regional variations are significant. The Midwest and Northeast are demonstrating more resilience due to limited new supply, whereas Sun Belt and Mountain West submarkets are experiencing flat or even negative rent growth.

Cap Rate Dynamics and Price Discovery

Reflecting the higher cost of debt and increased investor uncertainty, cap rates have expanded significantly from their historic lows in 2021-2022. The "price discovery" phase continues, but there are signs of stabilization. CBRE's 2025 Outlook notes that while cap rates are expected to remain largely unchanged, some modest compression is possible if interest rates ease in late 2025.

• Class A (Prime Markets): 4.0% - 6.0%
• Class B/C (Secondary Markets): 6.0% - 8.0%
• High-Risk / Value-Add: 8.0%+

A key trend is the widening spread between going-in and exit cap rates in underwriting models, signaling that investors are no longer banking on short-term appreciation and are instead focusing on long-term cash flow.

Core Underwriting Inputs to Revisit: Moving Beyond the Pro Forma

The seller's pro forma is a marketing document. In 2025, disciplined underwriting requires a forensic examination of every assumption. Relying on outdated heuristics is a recipe for disaster. Instead, analysts must build their models from the ground up with conservative, hyper-local, and verifiable data. This is where modern tools can provide a significant edge. For instance, an AI-powered platform like Cactus can automate the parsing of rent rolls and operating statements, allowing analysts to spend less time on data entry and more time scrutinizing these critical inputs.

Terminal (Exit) Cap Rate

The assumption of **cap rate compression multifamily 2025** models once relied on is now one of the biggest risks. In a high-rate world, assuming your exit cap rate will be lower than your going-in rate is highly speculative. A more prudent, defensive approach is to underwrite a flat or even expanding exit cap rate. A common rule of thumb today is to add 10-15 basis points to the cap rate for each year of the hold period. For a 5-year hold, this means your exit cap rate would be 50-75 basis points higher than your acquisition cap rate, building a significant cushion into your projections.

Rent Comps and Growth Assumptions

Using stale rent comps is a critical error. Underwriters must use recent (last 3-6 months), truly comparable properties and be wary of "headline" or "face" rents that don't account for concessions. Your **rent growth assumptions 2025 multifamily** models should be in the low single digits, aligned with forecasts from sources like the Freddie Mac 2025 Multifamily Outlook. For submarkets with a heavy new supply pipeline, it's wise to underwrite flat or even slightly negative rent growth for the first 12-24 months to account for increased competition.

Concession Assumptions

Concessions are no longer an anomaly; they are a standard operating procedure in many markets. The average concession is now around one month of free rent, but in oversupplied submarkets, it can be as high as four to six weeks. This directly impacts Gross Potential Rent (GPR) and must be modeled as a deduction to arrive at effective rental income. Failing to budget for concessions on both new leases and renewals will lead to a significant overstatement of cash flow.

Expense Inflation: The Silent Killer

Applying a generic 2-3% inflation factor across all operating expenses is a dangerous shortcut. Key expense line items are rising much faster.

• Insurance: Premiums in many regions, especially those exposed to climate events, are skyrocketing by 30-50% or more annually. Always get a current, bindable quote from a reputable insurance broker for your underwriting.
• Property Taxes: A sale often triggers a reassessment of the property's value, leading to a substantial jump in property taxes in the year following acquisition. Model this reassessment based on your purchase price, not the seller's historical tax bill.
• Repairs & Maintenance (R&M): Rising labor and material costs mean R&M budgets need to be scrutinized. For older properties, a higher per-unit R&M reserve is essential.

Stress-Test Scenarios: How to Model for Uncertainty

Stress testing is no longer an academic exercise; it is a critical component of risk management. The goal is to understand a property's resilience to adverse conditions and identify its "breaking points"—the point at which it can no longer service its debt or meet return hurdles. As one expert notes in a Forbes article on stress testing, the process is about understanding the impact of changes on NOI and property value. Modeling **multifamily stress test scenarios** is essential for any serious investor.

The Three Must-Run Scenarios

1. Base Case: This is your most realistic projection, built on the conservative, well-researched assumptions discussed above. It should reflect the current market reality, not a best-case fantasy.
2. Downside Case: This scenario models a moderate economic downturn. Key assumptions could include:
   • Flat or slightly negative rent growth (0% to -2%).
   • Vacancy increasing by 150-200 basis points above the base case.
   • Expense growth 3-5% higher than the base case.
3. Severe Downside Case: This models a significant recession. Assumptions might include:
   • A 5-10% decline in effective rents.
   • Vacancy increasing by 300-500 basis points above the base case.
   • A major spike in a key expense item like insurance or taxes.

Sensitivity Analysis Table

A sensitivity table is a powerful tool to visualize the impact of changing variables. By modeling how key return metrics like IRR and Equity Multiple change with fluctuations in Net Operating Income (NOI) and the Exit Cap Rate, you can quickly assess the deal's risk profile. Manually building these tables can be tedious, which is why platforms like Cactus that automate sensitivity analysis are becoming indispensable for modern CRE teams.

Handling Loan Maturities and Refinance Sensitivity

The ability to refinance a property at loan maturity can no longer be taken for granted. A significant volume of commercial real estate loans is set to mature in the coming years, creating a "maturity wall" that poses a substantial risk. According to data from CRED iQ, tens of billions in multifamily loans are scheduled to mature in 2025 and 2026. Many of these loans were originated in a low-rate environment, and borrowers now face a painful reality check.

The Refinance Sensitivity Analysis: A Step-by-Step Guide

Every underwriting model must include a detailed refinance sensitivity analysis. This involves calculating the potential new loan amount and identifying any potential equity shortfall.

Understanding the potential size of this cash-in refinance is critical for assessing the true risk of a deal. For a deeper dive into building this type of analysis into a pro forma, this video on building sensitivity into your model is a valuable resource.

Case Study: Underwriting a 50-Unit Property in a High-Rate World

Let's walk through a practical example. An investor is looking at "The Oakwood Apartments," a 50-unit, 1980s-vintage Class B property in a secondary market. The seller has presented an optimistic pro forma. Our job is to re-underwrite it with 2025 realities in mind.

The Seller's Pro Forma vs. Realistic Underwriting

The seller's model shows 5% annual rent growth, a 35% expense ratio, and an exit cap rate 50 basis points lower than the going-in rate. This is a classic example of an aggressive, pre-2022 underwriting style. Our revised underwriting will adjust these assumptions to be more conservative.

The Impact on Returns

The impact of these adjustments is dramatic. The seller's pro forma might show a 17% IRR, making the deal look like a home run. However, our more realistic underwriting, which also includes a downside scenario, reveals a much different picture. The base case IRR drops to 12.5%, and the downside case shows an IRR below 10%, highlighting the risk that was hidden by the aggressive assumptions. This disciplined approach, while time-consuming, is essential for capital preservation. It's a process that can be made 10x faster with an AI underwriting co-pilot like Cactus, which can instantly flag unrealistic assumptions and run multiple scenarios in seconds.

The Ultimate Multifamily Underwriting Checklist & Red Flags for 2025

Use this comprehensive **multifamily underwriting checklist** to ensure you've covered all your bases before committing to a deal.

Income Checklist

• Have you verified all rent comps against properties leased in the last 3-6 months?
• Have you analyzed the current rent roll for concessions, delinquencies, and lease expiration dates?
• Is your loss-to-lease calculation based on achievable market rents, not aspirational ones?
• Is your other income (laundry, parking, pet fees) supported by the last 12 months of operating statements (T12)?

Expense Checklist

• Is your insurance quote current, bindable, and from a reputable broker?
• Have you modeled a property tax increase based on the purchase price and local assessment methodology?
• Are your per-unit reserves for R&M and capital expenditures appropriate for the age and condition of the property? ($300-$500/unit/year is a common range).
• Are your utility expense assumptions based on historicals and adjusted for any planned conservation measures?

Financing & Market Checklist

• Have you run a full refinance sensitivity analysis, including a "cash-in" scenario?
• Does your loan quote include an interest rate floor? Have you modeled its impact?
• What is the new supply pipeline in the submarket for the next 24-36 months?
• Are there any major employers moving into or out of the area?

Key Red Flags to Watch For

Frequently Asked Questions (FAQs)

What is a good DSCR for a multifamily loan in 2025?

In 2025, most lenders (including banks, debt funds, and agencies) are requiring a minimum Debt Service Coverage Ratio (DSCR) of 1.25x to 1.35x. For deals perceived as higher risk (e.g., heavy value-add, tertiary markets), lenders may require a DSCR of 1.40x or higher. This is a significant increase from the 1.15x-1.20x DSCRs that were common in the low-rate environment.

How do I underwrite for rising insurance costs?

Do not rely on the seller's historical insurance costs or a simple inflation factor. The only reliable method is to engage an insurance broker who specializes in commercial real estate in your target market. Provide them with the property details and get a formal, bindable quote for year one. For future years, underwrite a high inflation rate for this specific line item (e.g., 10-20% per year), especially in coastal or high-risk regions.

Is it still possible to find good multifamily deals in 2025?

Yes, but the definition of a "good deal" has changed. The focus has shifted from speculative appreciation to sustainable cash flow and capital preservation. Opportunities exist with sellers who are motivated due to maturing debt, operational challenges, or a need for liquidity. The key is to have a disciplined underwriting process that can quickly and accurately analyze a high volume of deals to find the few that meet conservative return thresholds. This is where efficiency becomes a competitive advantage.

Conclusion: A New Era of Discipline

Underwriting multifamily properties in 2025 demands a paradigm shift. The era of easy money and guaranteed appreciation has been replaced by a market that rewards discipline, conservatism, and a granular understanding of risk. By rigorously stress-testing assumptions, focusing on data-driven inputs, and meticulously analyzing refinance risk, investors can successfully navigate the challenges of this high-rate world. In the 2025 multifamily market, the best defense is a good offense, and a good offense starts with bulletproof underwriting.

Sources and Further Reading

• Freddie Mac 2025 Multifamily Outlook - Freddie Mac
• U.S. Real Estate Market Outlook 2025: Multifamily - CBRE
• Yardi Matrix National Multifamily Supply Forecast - Yardi Matrix
• Maturity Wall Grows With $440 Billion Coming Due - CRED iQ
• Three Ways To Stress-Test Your Multifamily Underwriting - Forbes Business Council
• 20% of Commercial and Multifamily Mortgage Balances Mature in 2025 - Multi-Housing News