Rethinking the Pillars of Real Estate Investment
Brian Eisendrath of Institutional Property Advisors on what investors should be prioritizing today.
I’ve been immersed in real estate investing for nearly two decades, navigating seismic shifts ranging from the 2007-2008 Global Financial Crisis to the recent 2022-2025 market correction. As chair of the investment committee for the University of Wisconsin-Madison’s Real Estate Private Equity Track, I’ve had the privilege of guiding students as they evaluate real-world investment opportunities.
Each semester, I kick off the program with a lecture on the fundamentals of real estate investing, posing the question: What’s the most important factor in real estate?
The answer I often hear is “location.” While location matters, my experiences through various market cycles have taught me that the industry must move beyond this oversimplification and rethink the true pillars of successful real estate investment: sponsorship, capital structure and disciplined timing.
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The evolution of real estate’s pillars
The GFC was a defining moment for real estate. Overleveraged deals collapsed under the weight of reckless financing, exposing the fragility of poorly structured investments. I recall a multifamily deal in Phoenix. It was a well-located property with strong fundamentals, but its sponsor had overextended with short-term, high-leverage debt. When the market froze, the deal imploded, wiping out equity. This underscored a lesson I’ve carried forward: Sponsorship is paramount. A strong sponsor—marked by experience, integrity and a track record of navigating downturns—can salvage a mediocre deal, while a weak sponsor can sink even a prime opportunity.
Fast forward to the 2022-2025 correction, driven by rising interest rates and inflation, when another pillar emerged as critical: capital structure. Deals acquired at peak valuations in 2021, often financed with floating-rate debt, now face severe distress as rates soared. Conversely, properties secured with long-term, fixed-rate debt are better weathering the storm and delivering modest returns. For example, a 2022 multifamily acquisition in a Seattle suburb was financed with 10-year fixed-rate debt at 3.5 percent. Despite a valuation dip in 2022, the deal is producing stable cash flow and should preserve capital over the hold period. As Blackstone Co-founder & CEO Stephen A. Schwarzman writes in What It Takes, “Don’t lose money!” That’s a maxim this capital structure directly supports.
Lessons from the past applied today
These cycles reveal that real estate success hinges on three reimagined pillars:
Sponsorship: A sponsor’s ability to execute, adapt and maintain investor trust is non-negotiable. During the GFC, top-tier sponsors renegotiated loans or injected capital to save deals. In 2022, skilled sponsors pivoted to value-add strategies, such as upgrading units to boost rents, offsetting rising debt costs. When evaluating opportunities, I prioritize sponsors with proven resilience over flashy pro formas.
Capital structure: The right financing can make or break a deal. Data shows that multifamily cap rates rose over 150 bps from 2021 to 2024, squeezing returns for overleveraged deals. Fixed-rate debt with longer maturities (seven to 10 years) offers stability in volatile rate environments, while conservative loan-to-value ratios (60 to 65 percent) provide a buffer against valuation declines. Floating-rate debt, while tempting in low-rate periods, can be a trap when rates spike.
Disciplined timing: Timing the market perfectly is elusive, but discipline mitigates risk. In 2022, some investors chased deals at peak pricing, assuming low floating rates would persist. Those who maintained their underwriting standards and conservative capital structures are being rewarded. In the longer term, the investments should fare well, providing both a return of current cash flow and a return of capital seven to 10 years later.
Navigating today’s economic and political climate
As we progress through 2025, the real estate market is at an inflection point. The Federal Reserve’s rate hikes have cooled transaction volumes, but stabilizing rates signal a thawing market. Multifamily, my primary focus, offers compelling opportunities post-reset.
However, risks loom. Political uncertainty, including the expansion of rent control, could impact investor sentiment. Inflation, though moderating, remains a concern, with construction costs up around 30 percent since 2019. To balance risk and return, I advocate a disciplined approach:
Prioritize cash flow: Focus on properties with stable, in-place cash flow (e.g., 4 to 5 percent initial cash-on-cash returns) to weather volatility. Value-add strategies, like repositioning underperforming multifamily assets, can boost yields to 7 to 10 percent.
Stress-test financing: Model deals assuming a 100-150 basis point rate increase. Opt for fixed-rate debt to lock in today’s rates, which are still historically moderate.
Partner with cycle-tested sponsors: Seek operators with at least 10 years of cycle-tested experience. A sponsor’s ability to manage through distress—like the one who saved a 2022 deal by securing fixed-rate debt—can preserve capital.
Diversify geographically: While location isn’t the sole driver, markets with strong job growth and supply constraints offer resilience. Proceed with caution in oversupplied markets, where new deliveries are outpacing demand.
Looking ahead: opportunities in 2025
The reset in multifamily values has created a buyer’s market, with cap rates stabilizing at figures significantly higher than those in 2021. Supply continues to get absorbed in many markets and construction has slowed. Opportunities will likely proliferate in 2025 as lenders continue to tighten terms and force REO and loan sales.
Technology is another game-changer. Proptech tools, like AI-driven rent optimization platforms, are helping sponsors maximize net operating income. A Wisconsin student team recently analyzed a deal where proptech increased rents by 3%, adding $200,000 to annual NOI. Integrating these tools will be critical for staying competitive.
The real estate industry must move beyond the “location, location, location” mantra and embrace a more nuanced framework centered on sponsorship, capital structure and disciplined timing. The GFC taught us the perils of weak operators. The 2021-2022 period highlighted the dangers of reckless financing. As we navigate 2025’s opportunities, investors must prioritize strong sponsors, conservative capital structures and patience to capitalize on the reset market. By anchoring decisions in these pillars, we can achieve not just returns, but resilience—a lesson I share with my students and carry into every deal.
Brian Eisendrath is executive managing director, capital markets, at Institutional Property Advisors.
