Adapted from the April 2025 PREP Newsletter
I was recently on a flight from Cleveland to New York City. About mid-way through the flight we started experiencing some unexpected turbulence. I found myself closely observing the people around me and noticing how they each reacted differently to what was happening.
The woman diagonally across from me was panicking–she grabbed the guy next to her (who I believe was a complete stranger) and screamed/yelped/cursed throughout the ordeal. In contrast, the young guy next to me had his headphones on and slept through the entire experience. A woman across from me on the left tightened her seatbelt, kicked her bag further under the seat in front of her, and breathed deeply through the 9-minute ordeal.
Many of you have probably heard me compare investing in a multifamily real estate syndication to being a passenger on an airplane. Firstly, because you’re not only assessing the type/safety of the plane (ie: investment) itself, but as importantly, the pilot (ie: PREP). And secondly, because I would choose a large and stable Boeing over a small private Cessna aircraft any day of the week (ie: a multifamily property which spreads the risk across its many tenants vs. a smaller 4 family or even a single-tenant property which could hurt you badly if something happens with the one tenant/unit).
But there’s more to the comparison. Real estate investing is often likened to flying on a plane because prices, while in the long term almost always go up (like an airplane) they are constantly rising and falling during this eventual climb. There will likely be some turbulence - ebbs and flows - throughout the course of the investment, as there are during a flight.
And how did I react on this flight during the turbulence? I checked and tightened my seatbelt and focused on my ultimate destination, while taking note on how everyone else was reacting.
The key to getting through the real estate “turbulence” is understanding the key factors that drive these fluctuations, and here are a few:
1. Economic Influences
The health of the overall economy plays a major role in multifamily real estate performance. During economic expansion, when there is low unemployment, rising wages, and increased consumer confidence, demand for rental units typically grows, especially in urban centers. Higher demand can lead to rising rents and property values. In economic downturns, although multifamily properties may remain more resilient than single-family homes, reduced household incomes can pressure rent growth and occupancy rates.
2. Interest Rates and Mortgage Availability
Interest rates directly affect the cost of financing multifamily investments. Low interest rates make it more attractive for investors to acquire multifamily properties, often leading to increased competition and higher prices. Additionally, favorable financing terms can support the development of new multifamily units. When interest rates rise, borrowing becomes more expensive, potentially cooling investor demand and limiting new supply.
3. Housing Supply and Demand
The supply and demand balance in the rental housing market is crucial for multifamily pricing. A shortage of rental units, especially in high-growth urban areas, can drive up both rents and asset values. Conversely, an oversupply of multifamily properties may lead to concessions (e.g., free rent offers) to attract tenants and can place downward pressure on rents and prices.
4. Location, Location, Location
Multifamily property values are heavily influenced by location-specific factors such as proximity to employment hubs, public transit, schools, and lifestyle amenities. High-demand urban areas with job growth and population influx typically see strong rental performance and property appreciation. Meanwhile, areas with declining economic activity or safety concerns may experience weaker occupancy and rent growth.
5. Government Policies and Regulations
Multifamily markets are particularly sensitive to government policies such as rent control, zoning laws, housing subsidies, and tax incentives. Policies that encourage development, like low-income housing tax credits (LIHTC) or relaxed zoning for higher density, can influence supply levels. Rent control or tenant protection laws can limit rent growth and affect investment returns.
6. Demographic Trends
Shifting demographics such as the rise of millennial renters, aging baby boomers downsizing, and increased immigration are shaping demand for multifamily housing. Trends toward urban living, flexible lifestyles, and delayed homeownership have increased the appeal of rental housing, particularly in walkable, amenity-rich neighborhoods. These demographic movements impact both short- and long-term demand for multifamily assets.
Understanding why real estate market prices fluctuate is essential for anyone involved in the real estate market. It's a complex interaction between economic, local, government, and psychological factors that constantly change and shape the real estate landscape. While it's impossible to predict every twist and turn, keeping an eye on these influences can help buyers, sellers, and investors make informed decisions.
Most importantly–real estate is a long-term investment, and market fluctuations are part of the journey. Sometimes a plane experiences turbulence, but that is not an indication that the flight will not be successful. The same goes for real estate. By staying informed and working with knowledgeable professionals, you can ride the real estate roller coaster to your advantage and make the most of your investment.
