Mid-Tier Multifamily Quietly Takes the Lead
A once one-directional multifamily cycle has splintered into a market where mid-tier assets, overlooked regions and a handful of metros with very specific demand drivers are quietly reclaiming pricing power, even as luxury product still works through a historic wave of supply. For investors, the story going into 2026 is less about generic ?stabilization? and more about the widening performance gap between assets and markets that got supply and demand roughly right?and those that did not.
Luxury?s Oversupply Problem
Grant Montgomery, National Multifamily Director at CoStar, traces the inflection point to the luxury end of the spectrum, where years of capital chasing top-of-the-market deals culminated in a glut of high-end product.
?The luxury category has seen the greatest supply-demand imbalance, and this class makes up nearly 70% of all the units that are under construction,? he told GlobeSt.com, noting that oversupply ?slowed the four- and five-star rent growth the most,? with fourth-quarter rent growth turning slightly negative at about minus 0.2%.
By contrast, mid-priced, three-star properties?where little new stock has been added?posted rent growth of roughly 0.5% in the quarter, outpacing the national average of about 0.3% and underscoring investors? renewed focus on the middle of the market as a source of more durable pricing power.
The mechanics behind that divergence are straightforward but potent for underwriting. Luxury rent growth has stalled because capital and developers piled into the same high-amenity product type at the same time, while more modest assets in the middle of the rent spectrum benefited from constrained new supply and a broad base of renters seeking relative value.
Montgomery framed it as a textbook case of how ?the difference in that [supply-demand] balance [is] reflected in the pricing power of the various strata or quality levels,? with the three-star cohort gaining leverage precisely because it did not sit at the center of the construction boom.
Timing the Pipeline and Pricing Power
That imbalance is not expected to resolve overnight. Montgomery anticipates that the first half of 2026 will largely extend the existing pattern, with mid-tier assets continuing to outperform while the luxury pipeline is still being delivered and absorbed.
?We still have a bit of a ways to go in terms of deliveries of that four- and five-star new product,? he said, adding that only ?by the end of the year, we may start to see more balance in that segment,? and possibly ?a reversal of fortunes? if four- and five-star properties finally regain some pricing power.
The risk case for investors is clear in his framing: any recovery at the top of the market ?really?hinges? on the pipeline coming down while demand ?holds up for that luxury segment to allow that segment to gather pricing power.?
A Cooling Gut Stable Labor Backdrop
Macro conditions will shape how that plays out, but not in the conventional boom-bust way. Montgomery points to a labor market that has cooled without collapsing, with job growth easing ?significantly in the latter half of 2025? and Oxford Economics forecasters expecting ?limited employment growth in 2026.?
Even so, he noted, unemployment is expected to remain low: ?We?re not firing a lot of people. A lot of people aren?t leaving their jobs, but we?re also not creating a lot of jobs,? a backdrop that could support occupancy but may limit the upside for rent growth in markets that rely heavily on net new hiring to fill a wave of new deliveries.
Under those conditions, Montgomery expects performance to become even more market-specific, with employment and sector mix driving a more nuanced map of winners and underperformers. San Francisco, for example, has emerged as a national standout for rent growth, with ?employment growth?quite strong, driven by AI investment,? even as other tech-heavy markets have moved more cautiously.
On the opposite end of the spectrum, Washington, D.C.?a relative outperformer in 2024?has softened as it ?has been at the sort of center of job cuts in the federal government,? dampening demand despite its historically defensive profile.
Market-Level Test Cases: Miami and Beyond
Miami, meanwhile, has become something of an edge case in the Sun Belt narrative that defined the last cycle. While many Sun Belt markets struggled with oversupply, Montgomery notes that Miami ?was the only Sunbelt market to post positive rent growth for 2025?very marginally positive, but positive nonetheless.?
He sees it as ?an interesting market to watch to see if rent growth strengthens there,? especially given that immigration policy and flows ?might? weigh on demand or amplify it, making the metro ?a test case for impact of supply and demand, as well as other factors?in 2026.?
If there is a quiet center of gravity in this reshuffled landscape, it sits in the Midwest and Northeast, where Montgomery sees a more disciplined alignment between construction and demand. Those regions ?had a good 2025? and, in his view, are positioned for another solid year in 2026, largely because ?these are markets where you have supply and demand more in balance.?
For investors, that balance translates into less headline-grabbing volatility but also less exposure to the kind of rent reversals now visible in overbuilt luxury nodes across the country.
Source: GlobeSt/ALM