Multifamily vs. Retail: Which Asset Class Has Better ROI in 2025?

As we move through 2025, commercial real estate investors in Chicago face a critical decision: Should they put their money into multifamily properties or retail spaces? Both asset classes offer unique advantages, but market conditions, interest rates, and consumer trends are influencing investment outcomes. In this article, we’ll break down the key factors affecting return on investment (ROI) for multifamily and retail properties in 2025.

Multifamily: Strong Demand, Stable Returns

Why Investors Favor Multifamily in 2025

Multifamily properties have long been a preferred asset class due to their stable cash flow and strong tenant demand. Several factors are driving interest in this sector:

• Population Growth & Housing Shortages – Chicago’s rental market remains strong, with demand for apartments continuing to outpace supply in many neighborhoods. Vacancy rates for Class B and Class C apartments are particularly low, ensuring steady occupancy.

• Rising Interest Rates & Home Affordability – As interest rates remain elevated, homeownership is increasingly out of reach for many Chicago residents. This is pushing more people into the rental market, benefiting multifamily landlords.

• Consistent Rent Growth – According to CoStar, Chicago multifamily rents increased by 4.2% year-over-year in 2024, with projections showing continued moderate growth in 2025.

• Recession-Resistant – Even in economic downturns, people still need a place to live. Multifamily properties generally maintain strong occupancy rates, making them a reliable investment.

Challenges for Multifamily Investors

• Property Taxes – Chicago’s recent reassessments have increased property tax burdens, affecting net operating income (NOI). Investors must account for these rising costs when underwriting deals.

• Rent Control Discussions – While Illinois does not currently have rent control, ongoing discussions at the legislative level could introduce new regulations that impact landlords.

• Cap Rate Compression – As more institutional investors target multifamily properties, cap rates remain low. The average cap rate for multifamily properties in Chicago sits around 5.2% as of Q1 2025, making it challenging to find high-yield deals.

Retail: A Resurgence in Key Corridors

Why Retail is Making a Comeback in 2025

Despite challenges in the past decade, Chicago’s retail sector is showing signs of resilience. Several factors are driving investor interest:

• Experiential & Service-Based Retail is Thriving – Neighborhoods like West Loop, River North, and Wicker Park are seeing strong demand for experiential retail (e.g., fitness studios, entertainment venues, and high-end dining).

• E-Commerce & Retail Coexistence – While e-commerce has disrupted traditional retail, many businesses are adopting an omnichannel approach, leading to increased demand for physical storefronts.

• Prime Locations Are in Demand – According to Cushman & Wakefield, retail vacancy rates in Chicago’s best corridors (e.g., Michigan Avenue, Fulton Market, and Lincoln Park) have fallen to 4.5% in 2025, indicating strong demand for well-positioned spaces.

• Higher Cap Rates – Retail assets tend to offer higher cap rates (6.5%–7.5%) compared to multifamily, making them attractive for investors seeking better initial returns.

Challenges for Retail Investors

• Tenant Risk & Turnover – Retail tenants are more vulnerable to economic downturns compared to residential renters, making long-term stability a concern.

• Changing Consumer Behavior – Investors must focus on properties with service-based tenants (e.g., medical offices, boutique gyms, and dining establishments) that are less impacted by e-commerce.

• Retail-Specific Operating Costs – Retail landlords often face higher tenant improvement (TI) costs, longer leasing periods, and potential revenue volatility compared to multifamily landlords.

Which Asset Class Has the Better ROI in 2025?

The answer depends on your investment strategy:

• For investors seeking stability and long-term appreciation, multifamily remains the safer bet. Even with lower cap rates, rent growth and demand for housing make multifamily a predictable and recession-resistant investment.

• For investors looking for higher initial yields and willing to take on more risk, well-located retail properties offer better cash flow and higher cap rates. However, tenant selection and lease structuring are critical for long-term success.

Final Thoughts

Both multifamily and retail present unique opportunities in Chicago’s 2025 real estate market. Multifamily remains a reliable choice due to rising demand and rental growth, while retail offers higher yields in prime locations. Investors should evaluate their risk tolerance, investment timeline, and local market conditions before making a decision.

Want help analyzing a potential investment? Strauss Realty & Management specializes in property management, leasing, and investment advisory to help you make informed decisions. Contact us today to discuss your next commercial real estate deal!