Renovating multifamily apartments in 2025? Read this first.
Sky-high interest rates, persistent inflation, and a shortage of skilled labor are hitting multifamily and commercial property owners across the U.S. hard. What old strategies have thrived in a low-rate, growth-driven market? They’re no longer enough. Every dollar spent on upgrades must be more innovative and impactful.
Investors and operators are asking: Which improvements move the needle? How do we manage ballooning costs without blowing our ROI? And how do we keep projects on track when crews are stretched thin?
In this article, we explain how today’s economic headwinds are transforming renovation strategies and what savvy property owners are doing to adapt. Packed with real-world stats, expert insights, and actionable tips, this is your go-to guide for navigating renovations in a high-stakes, high-cost environment.
Rising Interest Rates Reshape Investment Plans
After a decade of ultra-low rates, the Federal Reserve’s fight against inflation sent interest rates to their highest levels. The Fed’s benchmark rate climbed from near zero in 2020 to over 5% by 2023, dramatically increasing the cost of borrowing for real estate projects. Even as the Fed began cautiously cutting rates in late 2024, long-term borrowing costs remained elevated – the 10-year Treasury yield jumped from ~3.6% in mid-2024 to about 4.8% by January 2025.
Higher yields on Treasuries mean higher mortgage rates and required returns for property investments. As one report noted, apartments now need to provide greater returns to compete with safe bonds, making many projects less financially feasible.
The immediate impact has been a slowdown in deal activity and new developments. By early 2024, multifamily mortgage originations were down 46% compared to 2022, and investment sales plummeted – multifamily transaction volume dropped 45% year-over-year.
Developers and owners hit pause on projects that no longer pencil out under higher debt costs.
According to a Berkadia survey, 93% of multifamily investors said it’s now challenging to underwrite deals given expensive debt. With roughly $600 billion in multifamily mortgages set to mature in 2025, countless property owners face tough refinancing decisions, often opting to delay significant improvements unless necessary.
Yet, interestingly, not all investors are sitting on the sidelines. Many are preparing to re-enter because the market may be near a turning point. In a late-2024 survey, 83% of multifamily investors said they want to make acquisitions in 2025, as capital markets “come unstuck” after two years of rate-driven freeze.
This capital is cautious and calculated, increasingly targeting value-add opportunities – properties where strategic renovations can boost income and value.
Inflation and High Costs Squeeze Renovation Budgets
Sky-high inflation has been another curveball for renovation planning. Construction materials and services costs have surged over the last couple of years, forcing owners to stretch budgets and reconsider the scope of projects. CBRE reported that U.S. construction costs jumped 14.1% in 2022, the largest increase in several decades. This followed an 11.5% cost uptick in 2021, vastly above the historical norm of 2-4% annual increases.
In effect, a renovation that cost $1 million in 2020 could run $1.14 million or more by 2022, due to inflation in labor, lumber, steel, and other inputs.
While inflation has eased from its 9% peak in mid-2022, construction and renovation costs remain elevated. Going into 2024, contractors still expected a further 2% to 4% rise in costs on average.
Even as overall inflation cools, volatility in specific materials (from drywall to diesel fuel) continues to challenge project budgeting. Supply chain disruptions have not fully abated either – lead times for items like electrical switchgear or HVAC equipment became 2-4 times longer than usual during the pandemic and have yet to normalize fully. These delays often translate into higher costs, as contractors price in the risk of waiting for critical components.
The result for property owners is that every renovation now requires far more financial padding. It’s wise to build a 10-15% contingency above initial estimates to cover unexpected cost overruns. Many are also value-engineering their plans: opting for cost-effective materials, refurbishing rather than full replacement where possible, or phasing projects over time.
For example, an owner of a commercial office might upgrade one floor at a time instead of the entire building at once, to spread out expenses. Others are negotiating harder with contractors or seeking bulk purchasing deals on materials.
It’s not just construction materials, either. Property operating costs have risen, which indirectly affects capital improvements. Take insurance: property insurance premiums soared 27.7% year-over-year by January 2024 (especially in disaster-prone regions), doubling per-unit insurance costs since the pandemic began.
When utilities, insurance, and maintenance consume more of the budget due to inflation, owners have less free cash to invest in renovations. This is squeezing net operating income – multifamily NOI growth, for instance, slowed to just 2.8% in early 2024, down from nearly 25% in late 2021.
In such an environment, every renovation dollar needs justification. Owners are focusing on improvements that either protect the asset’s integrity (e.g., unavoidable repairs) or directly drive revenue or savings (e.g., adding amenities that justify rent bumps or energy-efficient upgrades that cut utility bills).
Labor Shortages and Construction Delays
The construction labor shortage continues to be one of the biggest obstacles in the renovation sector. Despite steady demand, the industry struggles to attract enough skilled tradespeople, and retirements are outpacing new entries. As of early 2024, over 450,000 construction jobs remained unfilled, keeping unemployment in the sector low and increasing wages. With other industries like logistics competing for labor, finding and keeping experienced workers is more complex than ever.
This shortage often results in extended timelines and higher labor costs for multifamily property owners. Subcontractors are overbooked, and reliable crews are increasingly selective. Some smaller projects are delayed simply because contractors prioritize larger, more profitable jobs. Wage growth has outpaced the broader economy, rising around 5% annually, and general contractors are building contingencies into their bids to protect against delays.
To manage these challenges, many multifamily owners are adjusting expectations. Renovation timelines are being extended from six months to eight or more. Prefabrication is gaining popularity as a way to reduce on-site labor demands. Others are bundling work across properties or training in-house teams for lighter upgrades. Still, even the best planning doesn’t guarantee smooth execution. A late-2024 NAIOP survey confirmed that construction labor remains the most pessimistic variable in development forecasts.
Shifting Strategies in Multifamily Renovations
Multifamily property owners are facing a different set of pressures. Although rental demand remains strong – over 500,000 new renter households were added in 2023 – new supply is catching up. The 440,000 units projected to be delivered in 2024 have pushed national vacancy rates to 6.5%. Rent growth, once red-hot, has cooled significantly, hovering at just 0.2% early this year.
With limited ability to raise rents, owners of older properties are being squeezed. Competing with new buildings that offer top-tier amenities and move-in specials requires thoughtful renovation, not excessive spending. The emphasis has shifted to value-added strategies with clear ROI.
This means focusing on targeted updates, like installing modern fixtures, swapping out flooring, or adding smart home features. These changes improve the resident experience without requiring a full-scale remodel. Common areas like clubhouses and gyms are also refreshed, but only if they boost retention or tenant satisfaction.
Efficiency upgrades are another area of interest. Smart thermostats, LED lighting, and insulation improvements lower utility costs and support ESG goals. Many of these projects also qualify for tax credits or utility incentives, helping offset the initial investment.
Despite tighter margins, investors still see potential. Value-add acquisitions are especially popular, with 83% of multifamily investors surveyed in late 2024 planning to buy in 2025. But the numbers have to work.
In some cases, owners are choosing to hold off on non-critical projects. A cosmetic upgrade may be pushed to next year if fully leased and a building is stable. However, maturing loans and agency financing often come with capital improvement requirements, forcing some renovations even when cash flow is tight. In those scenarios, managing execution cost-effectively becomes essential, requiring wise vendor choices and tighter project oversight.
Technology Tools: Navigating Renovations in Uncertain Times
Technology has become a critical part of the renovation strategy in this new reality of tighter budgets and greater complexity. Software platforms like RenoQuest are helping multifamily and commercial property owners coordinate renovations more efficiently, especially when teams are stretched thin.
These tools offer real-time project tracking, centralized communication, and streamlined task scheduling across multiple sites. By consolidating everything into one platform, property owners can reduce miscommunication, track budgets more precisely, and hold contractors accountable.
Additionally, digital platforms simplify vendor coordination, document sharing, and milestone reporting, all of which reduce friction and help keep timelines intact. Tech tools aren’t just operational upgrades but essential risk management tools in today’s renovation environment.
Conclusion: Renovating for Resilience
The pressures facing multifamily and commercial real estate are real, but so is the opportunity to respond with more innovative strategies. Property owners can stay competitive even when the market is unpredictable by focusing on high-impact improvements, embracing flexible timelines, and leveraging the right technology.
Resilient renovation planning means having a clear ROI, building buffers for labor shortages, and avoiding overinvestment in uncertain conditions. For investors willing to adapt and optimize, renovations still offer a path to growth, stability, and long-term value.
In short, the smartest players are not backing away — they’re just building differently. In this new era, success favors those who plan with precision and execute with the right tools.
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