The Diverging Trends in U.S. Housing Starts: Why Multi-Family Is Outpacing Single-Family and What It Means for Real Estate Investors

The U.S. housing market is undergoing a profound shift. While single-family home construction continues to struggle under the weight of high mortgage rates and affordability crises, multi-family housing starts have shown surprising resilience. This divergence is reshaping real estate investment strategies, particularly for those allocating capital to real estate investment trusts (REITs) and construction-related equities. For investors, understanding the drivers behind this trend—and the implications for risk-adjusted returns—is critical.

The Housing Starts Divide: Structural Shifts in Demand

In May 2025, U.S. housing starts fell to a seasonally adjusted annual rate of 1.256 million units—a 9.8% drop from April and the lowest level since May 2020. Single-family starts, which account for the majority of residential construction, declined by 4.6% year-over-year to 883,000 units. Meanwhile, multi-family starts (buildings with five or more units) ticked upward, reaching 414,000 units—a 11.1% increase in April after a flat March.

The disconnect stems from structural changes in demand. Single-family housing, long a cornerstone of American homeownership, faces headwinds: elevated mortgage rates (averaging 6.7% in May 2025), rising construction costs, and a demographic shift toward urbanization. Younger buyers, constrained by affordability, are increasingly opting for rentals, while older demographics prioritize downsizing. Multi-family units, particularly in high-growth Sunbelt markets, are filling this gap.

REITs: Multifamily Outperforms, Single-Family Struggles

The performance of real estate investment trusts (REITs) mirrors this trend. As of March 2025, the FTSE Nareit Multifamily REIT Index surged 29.19% year-over-year, outperforming the broader FTSE Nareit All Equity REITs Index (12.62%) and even self-storage REITs (12.44%). This outperformance is not accidental.

Multifamily REITs have capitalized on improving fundamentals: vacancy rates dropped to 6.3% in May 2025 (from 7.2% in early 2024), and net absorption hit 153,300 units in Q3 2024, per CBRE. Strong rent growth (1.7% year-over-year) and declining construction activity (deliveries are expected to fall 15% in 2025) are creating a more balanced supply-demand dynamic. Investors are rewarded with resilience: the Sharpe ratio for REITs as a whole is 0.39, outperforming private real estate's 0.31, and multifamily REITs exhibit volatility in line with historical averages (17.7% over the past decade).

Single-family REITs, by contrast, face a tougher landscape. While they've posted modest returns (3.7% from 2020–2024), their sensitivity to mortgage rates and housing affordability limits growth potential. High 30-year fixed-rate mortgages (7%+) have trapped many renters in the market, reducing the pipeline for homeownership transitions. This makes single-family REITs a less compelling bet in a high-rate environment.

Construction Equities: Volatility and Uncertainty

Construction-related equities, however, tell a different story. While multifamily developers have seen improved absorption, the broader construction sector faces headwinds. Companies in high-supply markets like Austin, Raleigh, and Atlanta report soft demand, exacerbated by rising interest rates and regulatory uncertainty. The cost of capital for REITs—a key determinant of acquisition activity—is trending upward, squeezing margins.

Investors in construction equities must navigate a fragmented landscape. While some firms benefit from pent-up demand in urban cores, others struggle with overbuilding in secondary markets. The sector's Sharpe ratio is lower than multifamily REITs, reflecting higher volatility and less predictable cash flows.

What This Means for Investors

The divergence between multi-family and single-family markets underscores a broader sector rotation in real estate. For risk-adjusted returns, multifamily REITs are the clear winners. Their ability to leverage pricing power in a constrained supply environment, combined with strong rent growth and stable occupancy, offers a compelling risk-reward profile.

1. Allocate to High-Growth Multifamily Markets: Focus on Sunbelt cities like Phoenix, Charlotte, and Dallas, where population growth and absorption rates are outpacing national averages.
2. Diversify Away from Single-Family Exposure: Given their sensitivity to mortgage rates and affordability, single-family REITs should constitute a smaller portion of real estate portfolios.
3. Monitor Construction Equity Volatility: While some construction firms may benefit from multi-family demand, investors should prioritize companies with disciplined land banking and strong balance sheets.

The Long View: A Tectonic Shift in Housing

The U.S. housing market is not just adjusting to temporary headwinds—it's undergoing a structural transformation. For real estate investors, the key is to align with the forces reshaping demand. Multi-family housing is no longer a niche play; it's a core component of a diversified real estate portfolio. As supply normalizes and rent growth stabilizes, the sector's returns are likely to compound over time.

In a world where affordability and demographics reign supreme, multi-family REITs offer a rare combination of resilience and growth. Investors who recognize this shift early will be well-positioned to capitalize on the next phase of the housing market cycle.