As the office sector continues to grapple with rising vacancies and declining property values, concerns are surfacing about the future of urban multifamily investments. Investors are wary that shrinking office demand in city centers might dampen the appetite for rental housing near vacant workspaces. These concerns, though understandable, may not tell the full story of what’s happening in urban real estate markets today.
The multifamily market in dense, urban locations has proven resilient in the face of office sector struggles, and the shifting dynamics of downtown living present new opportunities for investors willing to adjust their strategies.
The Pandemic’s Impact on Urban Multifamily
At the onset of the COVID-19 pandemic, urban apartments faced a sudden and dramatic drop in demand. With businesses forced to close, the need for proximity to the office vanished. Remote work became the norm for millions of white-collar employees, eroding the location-based advantage of downtown living. Urban renters who once prioritized the convenience of a short office commute, along with access to restaurants, bars, theaters, and cultural attractions, found themselves in shuttered neighborhoods.
Freed from their downtown routines, many households relocated to suburban areas, seeking more space, lower rents, and greater affordability. Urban multifamily vacancies spiked, and investors questioned whether downtown markets would bounce back.
A Rapid Rebound in Urban Demand
Despite the initial exodus, urban multifamily demand rebounded far quicker than many expected. By early 2021, as the economy reopened, renters returned to downtown locations, attracted by the lifestyle and amenities that cities had to offer, even if they didn’t need to be in the office every day. The concept of live-work-play—where convenience, culture, and proximity meet—reemerged as a powerful driver of rental demand.
Recent data shows that while office vacancies have surged dramatically, multifamily vacancies have remained stable. In 15 major U.S. markets, office vacancy rates jumped from 10.3% at the end of 2019 to 21.3% by mid-2024. In contrast, multifamily vacancies only increased modestly by 40 basis points, settling at 9.2%. After a brief peak in the third quarter of 2020, when multifamily vacancy hit 13.5%, the market quickly stabilized. This resilience has left many investors wondering why demand for urban multifamily has remained strong even as downtown office spaces sit empty.
Why Urban Multifamily Demand Persists
There are several key reasons why the demand for urban multifamily properties has continued to flourish. First, despite the shift to remote and hybrid work models, many renters still want access to the vibrant amenities and lifestyle options that only city centers can offer. While daily office commutes may no longer be a necessity, the appeal of walkable neighborhoods filled with restaurants, shops, and cultural events remains a powerful draw. For many urban dwellers, proximity to entertainment and lifestyle offerings outweighs the convenience of office access.
Additionally, many workers are still required to come into the office on a hybrid or part-time basis. For these individuals, the balance of working from home and commuting on occasion makes urban living attractive. The live-work-play model continues to support higher rental rates, even in the face of ongoing changes to how and where people work.
Rent Growth: Urban vs. Suburban Markets
Perhaps one of the most telling trends for multifamily investors is the convergence of rent growth between urban and suburban markets. At the start of 2021, suburban multifamily rent growth was outpacing its urban counterpart by over 400 basis points, largely due to the pandemic-induced migration from city centers to suburban areas. However, this gap has been narrowing ever since.
By mid-2021, the difference in rent growth had halved, and by August 2024, the gap had nearly closed. As of the latest data, the rent-growth spread between urban and suburban locations sits just above 10 basis points. The return of renters to downtown areas has not only bolstered occupancy but also helped stabilize rents, creating more parity between urban and suburban multifamily performance.
The Path Forward for Investors
For multifamily investors looking to navigate the post-pandemic landscape, understanding these shifts is crucial. The office sector’s challenges—rising vacancies, slow leasing, and declining property valuations—are real. However, they do not necessarily translate into a decline in urban multifamily performance. In fact, the resilience of downtown rental markets shows that demand for urban living remains robust, especially in markets where the live-work-play concept thrives.
Investors should focus on urban multifamily properties located in vibrant, amenity-rich areas that offer more than just proximity to offices. Downtown neighborhoods with strong cultural, dining, and lifestyle offerings continue to attract renters, even as the need for office commutes declines. The key is to identify locations that provide renters with the urban experience they crave, regardless of their work arrangements.
Additionally, with rent growth in urban markets closing the gap with suburban areas, now is an opportune time to invest in city-center properties. As more renters return to downtown locations, investors stand to benefit from both stable occupancy rates and steady rent growth.
Seizing the Urban Opportunity
While the office sector’s struggles have raised concerns about urban multifamily properties, the data tells a different story. Urban multifamily demand has proven remarkably resilient, buoyed by renters’ continued desire for the live-work-play lifestyle that cities offer. As rent growth in downtown markets catches up to the suburbs, multifamily investors have a unique opportunity to capitalize on the shifting dynamics of urban real estate.
By focusing on amenity-rich downtown areas and properties that offer more than just proximity to the office, investors can navigate the evolving landscape and find success in urban multifamily investments. Despite the challenges in the office sector, urban living continues to thrive—and so too can the multifamily properties that cater to it.
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