Bye, bye ’25, hello ‘26!

There’s a lot of optimism as we head into a fresh year, especially as it relates to real estate. I decided to break out the ol’ crystal ball and take a shot at predicting how the next year may play out.

1. Finance Markets Continue to Improve

Capital flows, including access to debt, are one of the most important drivers of multifamily values and transaction activity. In 2026, financing conditions should continue to recover, leading to a healthier market. That should bring investors off the sidelines and help support an increase in values.

In 2026, short-term interest rates should continue their downward trend after the three 25-basis point cuts the Federal Reserve delivered in 2025. The Fed is expected to cut two or more times in 2026, which would bring the Fed Funds rate to 3.00%-3.25%. This should help floating rate borrowers move off the sidelines and actively pursue acquisitions.

Regarding longer-term rates, the ten-year treasury hit a 2025 high of 4.82% in mid-January and is ending in the 4.14% range, close to a 70-basis point reduction. In 2026, we should see longer-term rates stay somewhat flat, but if we see another big down swing, it’s off to the races! Stability in the long bond market will also be key, as big swings in treasury rates make many uneasy.

In terms of market liquidity, it is important to note that the Federal Housing Finance Agency has increased the 2026 government-sponsored entities’ (Fannie Mae and Freddie Mac) multifamily loan allocation ceilings by $15 billion each, 20% above 2025 levels. For many borrowers, agency loans continue to be the most attractive financing option given their combination of term, leverage, fixed/floating rate alternatives, and certainty of close, especially as compared to more constrained banks and debt funds.

While I don’t expect us to return to a period of ultra-low rates like we had following the pandemic, modestly lower rates and a generally more stable financing environment are positive signs for real estate capital markets.

2. Apartment Investment Sales Volume Ticks Up as Capital Returns

Transaction volume has been subdued as the excess new multifamily supply from the post-Covid building boom gets absorbed, and real estate investors learn to navigate a higher interest rate environment. As financing becomes more predictable and liquidity returns to the market, 2026 should see:

• Institutions returning to the market: Pension funds, insurance companies, private equity funds, and other large allocators that were on the sidelines are expected to re-enter the market as they gain confidence in pricing and market conditions.
• Private buyers and syndicators re-engaging: High-net-worth investors and syndication groups, many of whom took a breather as the waters got choppy, are likely to resume acquisitions as deals begin to “pencil” again.

In 2025, multifamily transaction volume likely ends up in the $150 billion range, still a long way off from 2021’s record of $354 billion. Deal volume may not immediately return to peak levels, but as participants return to the market, a meaningful uptick in closed transactions is likely as bid-ask spreads narrow and owners who deferred selling finally test the market.

3. Operating Expense Inflation Eases, Slightly

Okay, this is a contrarian view. Everyone in the industry knows that the past few years have been painful with sharp increases in operating costs, which have compressed profit margins even in properties with decent revenue growth. In 2026, the picture may improve modestly, but not evenly across different expense line items.

Some line items – like payroll and utilities – will likely remain stubbornly elevated:

• Payroll: The longer I’m in this business, the more I recognize how important onsite staff are to the success of an apartment project.  Wage pressure remains, driven by tight labor markets for on-site property managers and skilled maintenance workers. Retention and recruitment will continue to require competitive (even above market) pay and benefits.
• Utilities: Increases for utilities show no sign of reversing in a meaningful way; owners will still need to lean on conservation measures and technology to hunt for savings.

There are early signs of relief, or at least stability, in two of the biggest apartment operating expenses:

• Property taxes: In the Pathfinder portfolio, many of our properties’ 2026 tax assessments have come in flat or even with slight reductions compared with 2025. With values under pressure and transaction sales comparables lower, property assessors may find it difficult to justify increases.  That’s right, property tax appeals are back!
• Insurance: After several years of double-digit percentage increases, property insurance cost growth may finally slow. While it may be too optimistic to broadly expect actual premium declines, even moderate increases would be a relief from the past few years. Premiums for a particular property will still vary significantly by region (i.e. Florida with hurricanes, California with fires) and by loss history.

Managing expense growth has become critical for being a successful apartment operator, more so over the past few years. In 2026, we’ll see a little relief with expense growth, which will hopefully make the task more manageable.

4. Excess Supply is Absorbed and a New Cycle Begins

The post-Covid building boom that was fueled by ultra-low interest rates delivered a surge of new apartment units, particularly in the Sun Belt and other high-growth markets. In many areas, this wave of supply has weighed on rents, increased the use of concessions from owners fighting for tenants, and pressured occupancy. It has been a tenants’ market for the past few years, but the tide may be turning.

Several dynamics drive this shift:

• Absorption of new product: In 2026, the tail end of the excess supply wave is expected to be fully absorbed, which should set the stage for increased rental growth.
• Slowing new construction starts: Higher labor and material costs, tighter construction financing, higher interest rates, and a more cautious capital environment have already curtailed new project starts. The result is a much smaller future pipeline of new apartment units.
• Demand growth: Population growth, household formation, and the continuing gap between the cost of renting and owning support ongoing renter demand, especially in high employment-growth markets with elevated housing costs.

As the supply/demand picture reverts to a more balanced market, the stage should be set for an inflection point marked by reduced use of concessions, higher occupancy rates and the ability for owners to increase rents.

5. Technology and AI Become More Embedded in Operations

Technology and artificial intelligence will be more of a standard operating tool set in 2026, and the winners will be those who embrace the tools and learn to implement them thoughtfully. 2026 will see incremental, but meaningful integration in several key areas:

• Leasing and marketing: AI-driven chatbots manage more inbound leads, answer prospects’ questions 24/7, and schedule tours.
• Maintenance and operations: Predictive maintenance software uses historical work order and equipment data to anticipate failures, improving efficiency and reducing emergency repairs.
• Revenue and expense management: Owners increasingly rely on data dashboards, portfolio analytics, and AI-assisted tools to identify underperforming assets and make asset management decisions.
• Resident experience: Smart locks, self-guided tours, online portals, and app-based communication continue to spread, improving convenience and responsiveness for residents.

Technology and AI seem to be taking over the world, and the apartment market is no different.  It is changing the way we do business.

Conclusion

Hopefully my crystal ball is clear, and I have a good idea of what 2026 has in store. If so, 2026 looks to be a transition year, moving from a tenant’s market characterized by excess supply, higher concessions, lower occupancy rates and rents, and depressed property values, to a property owner’s market, marked by improving market fundamentals and increased property values, setting the stage for the start of another up cycle in the apartment market over the next few years.

Scot Eisendrath is Managing Director of Pathfinder Partners. He is actively involved with the firm’s financial analysis and underwriting and has spent more than 20 years in the commercial real estate industry with leading firms. He can be reached at seisendrath@pathfinderfunds.com.