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REAL ESTATE MERCHANT BANKING
As we pass the halfway mark of 2025, institutional equity is showing renewed interest, though caution and diligence remain central to decision-making. After several years of low transaction volume, both LPs and co-GPs are prepared to deploy capital when the right opportunities align with the right partners.
This update summarizes insights gathered from recent conversations with dozens of capital providers.
LP Capital Trends
LPs are currently deploying capital in check sizes ranging from $10 million to $100 million. Most groups favor larger transactions or programmatic joint ventures, while smaller one-off deals continue to face challenges in securing funding.
Value-add deals remain highly attractive, and while ground-up development is still on the table, investors are being selective about market, product type, sponsor experience, and cost basis. Across the board, return expectations are consistent: core deals are expected to deliver low double-digit IRRs, core plus investments should achieve low to mid-teens IRRs, and value-add deals must underwrite to mid to high teens. Opportunistic deals are expected to reach IRRs of at least 18 to 20 percent. For ground-up multifamily or residential development, a minimum untrended yield on cost of 6.5 percent is the standard benchmark, with other asset types needing to meet higher thresholds.
Geographically, Sunbelt markets continue to be in high demand, along with major metropolitan areas. Emerging and gateway markets are gaining traction, though investors expect higher returns to compensate for the increased risk associated with smaller markets. California remains a challenge due to ongoing policy concerns.
Multifamily continues to be the preferred product type, with many groups expressing interest in lower-density formats and alternatives such as build-to-rent and manufactured housing. Retail is gaining momentum, particularly grocery-anchored centers. Industrial investment is highly market-dependent following the post-COVID development surge, but investor hesitation is expected to ease as supply is absorbed and leasing activity improves. Build-to-suit industrial projects are attracting capital, while speculative developments are struggling. Some groups are also exploring land, hospitality, office, and senior housing, though these require compelling narratives and elevated return profiles. There is also growing interest in niche sectors such as data and power infrastructure, life sciences, and industrial outdoor storage.
A few additional trends have emerged. Most investors prefer newer assets in the value-add space, with 1970s and 1980s vintage multifamily proving difficult to capitalize. Long-term holds are rare, and the merchant build model is currently favored for ground-up development.
GP Capital Insights
On the GP capital side, minimum check sizes begin at $3 million, with investors aiming to allocate $20 to $30 million per joint venture over several years. Recapitalizing existing deals or portfolios is often a strategic way to initiate relationships and deploy initial capital. These groups are focused on programmatic partnerships with sponsors who have a strong pipeline and proven execution capability.
GP capital is primarily targeting value-add and opportunistic deals, with investors seeking participation in the GP promote. Return expectations mirror those of LPs. While product and geographic preferences are largely consistent with LPs, more GP groups are expressing openness to California opportunities.
Cross-Capital Themes
Several consistent themes have emerged across both LP and GP capital sources. First, sponsor quality is paramount. Investors are placing a premium on track record, operational expertise, and local market knowledge. New firms are not necessarily at a disadvantage if individual sponsors bring relevant experience from prior roles.
Second, there is a clear flight to newer product in the value-add space. Assets from the 1990s and newer are preferred, while older properties requiring extensive renovations and deferred maintenance are falling out of favor.
Third, ground-up development must offer a compelling reason to take on construction risk. With newer assets trading below replacement cost, development projects must demonstrate a low cost basis and deliver outsized returns to justify the risk.
Finally, while multifamily and residential continue to dominate investor attention, there is growing openness to other asset classes. Industrial and grocery-anchored retail are gaining traction, and in select cases, land, senior housing, hospitality, and other niche products are being considered—though typically with higher return thresholds.
Closing Thoughts for Sponsors
Sponsors seeking joint ventures with institutional investors must approach deals from the investor’s perspective. Capital remains selective, and providers are reviewing a high volume of opportunities. It is essential to present a compelling case for both the sponsor and the deal. A 1970s vintage value-add multifamily project in a tertiary market is unlikely to gain traction, nor will a development project with a 6 percent untrended yield on cost. Sponsors should lean into the types of deals that institutional investors are actively seeking.