Dry Powder, Delayed Allocations: The New Realities of Capital Raising in 2025

Introduction

U.S. real estate capital raising in mid-2025 faces a paradoxical landscape. Fund managers are sitting on record levels of dry powder – undeployed capital raised in prior years – yet new fundraising has slowed dramatically as investors hold back (JLL Global Capital Outlook 2024; Preqin). A confluence of factors is responsible: many limited partners (LPs) find themselves illiquid and over-allocated to real estate, overall risk appetite has diminished, and commitments to new funds are being delayed or downsized. These headwinds come against a complex global backdrop of higher interest rates, shifting capital flows, and geopolitical uncertainty. This article explores the new realities of capital raising in 2025, analyzing the challenges and their implications for fund sponsors and investors, all in the context of a volatile macroeconomic environment.

Fundraising Headwinds: LP Illiquidity, Overallocation & Risk Aversion

After a decade of robust growth, real estate fundraising has entered a markedly challenging phase. LP Illiquidity has become a key constraint: the slowdown in asset sales and IPOs since 2022 means many private real estate funds are struggling to return cash to investors, leaving LPs with less readily available capital (PERE, 2024). High borrowing costs and volatile markets have curtailed exits, so distributions to LPs have fallen well below historical norms, creating a liquidity squeeze. Compounding this is the denominator effect – with public markets down in recent years, many institutional investors became over-allocated to illiquid assets like real estate. In 2023, a majority of LPs found their real estate allocations exceeding policy targets, forcing “tactical maneuvering” to rebalance portfolios (Preqin, 2024). Instead of making new commitments, some have resorted to secondary sales or simply paused new allocations to get back in line.

Risk aversion across the LP community is another drag on fundraising. With economic clouds on the horizon, from inflation to recession fears, investors have grown more cautious about illiquid commitments. Many are conducting extra due diligence and delaying commitments, waiting for clearer signs of market stabilization. As a result, fund managers report longer fundraising cycles and smaller interim closes. The data bear this out: in the first half of 2024, real estate funds globally raised only ~$70 billion, 25% below the average pace of the past five years (Preqin, 2024). By full-year 2024, global closed-end real estate fundraising had declined 28% to just $104 billion – the lowest annual total since 2012 (JLL, 2025). This sharp pullback followed an even more dramatic drop in 2023, when aggregate capital raised plunged over 70% year-on-year amid the market turmoil (PERE, 2024). In short, new capital is harder to come by, even as a large stockpile of previously raised capital remains on the sidelines.

This juxtaposition of abundant dry powder and reluctant new allocations defines the “delayed allocations” trend in 2025. Preqin and industry monitors note that hundreds of real estate funds are currently in market, a record number, as managers extend fundraising periods in hopes of eventually hitting their targets in a tepid environment (Preqin, 2025). Meanwhile, dry powder earmarked for real estate has swelled to unprecedented levels – around $394 billion globally as of August 2024, per JLL (JLL Global Capital Outlook, 2024). Managers are under pressure to deploy this capital, but deployment is slow because attractive opportunities are scarce and financing is expensive. Investors, for their part, are selective about where that “pent-up” capital should go. Even with $300–400 billion of dry powder available, LPs and investment committees are concentrating on fewer deals in proven markets and sectors, and often postponing commitments until pricing adjusts (CBRE, 2024). This standoff has created a more negotiator-friendly climate for LPs and a more arduous one for GPs seeking fresh equity.

Evolving GP–LP Dynamics: Co-Investments and Bespoke Structures

In this capital-constrained climate, the dynamics between general partners (GPs) and limited partners are shifting. LPs have greater leverage to dictate terms and preferences, leading to a rise in co-investments and customized fund structures. Many institutional investors now demand co-investment opportunities alongside fund commitments – allowing them to deploy capital directly into deals with reduced fees and more control. GPs, eager to secure anchor commitments, are accommodating this by offering co-investment rights or sidecar vehicles on flagship deals. According to industry analysis, fund managers are increasingly expanding beyond the traditional blind-pool fund model, tapping alternative capital sources and formats to meet investors’ needs (PERE, 2024). This includes setting up separately managed accounts (SMAs) and club joint ventures for large LPs, creating specialized mandates (for example, a build-to-core venture or a debt strategy carve-out) that align with a particular investor’s goals. Such bespoke structuring has become a competitive advantage in fundraising – GPs who can tailor solutions are more likely to unlock capital from cautious investors.

Another notable trend is the use of GP-led secondary solutions to bridge liquidity gaps. To address LPs’ growing need for flexibility, some GPs have launched continuation funds or extended investment vehicles that allow existing investors to cash out (or rollover) while bringing in new capital (JLL, 2024). By rolling over quality assets into a new vehicle, GPs can offer liquidity to those LPs who can’t wait for a full exit, and simultaneously give fresh investors access to seasoned assets. This kind of creativity helps maintain LP goodwill in an era when many would otherwise be forced sellers on the secondary market.

Fee and incentive arrangements are also evolving under LP pressure. Preferred return hurdles, fee breaks, and even delayed capital calls are on the table as sponsors compete for commitments. In some cases, GPs have reduced target fund sizes or extended fundraising timelines, acknowledging that the old model of a quick fundraise is not realistic in 2025’s environment. Interestingly, smaller and mid-sized funds have proven somewhat easier to raise than mega-funds lately (Preqin, 2025). Large institutional investors are hesitant to write big checks into billion-dollar funds right now, preferring to either wait or invest incrementally through co-investments. This has opened the door for niche and emerging managers who can offer specialized strategies or regional focus – though they too must often provide investor-friendly terms or anchor arrangements to get a foothold.

Overall, GP–LP partnerships have become more collaborative out of necessity. GPs who listen and adapt – be it via offering parallel co-investment vehicles, developing custom portfolio strategies, or accepting more flexible fund structures – are faring better in hitting their fundraising goals. The traditional commingled fund is not dead, but it is being supplemented by a menu of capital-raising approaches. As one industry survey suggests, a growing share of private capital AUM now comes from these non-traditional channels (co-invest, SMA, retail feeders), which have provided a “multitrillion-dollar boost” to private markets AUM (Preqin, 2024). This trend is expected to persist, effectively blurring the lines between direct investments and fund investments as LPs seek the best of both worlds: the diversification of funds and the control and economics of direct deals.

Macro Backdrop: Rates, Global Capital Flows, and Geopolitical Overhang

Underpinning these fundraising challenges is a global macroeconomic and geopolitical backdrop that has made investors more circumspect. The rapid rise in interest rates since 2022 – about 500 basis points of Fed rate hikes in the U.S. – fundamentally altered the real estate investment calculus (Federal Reserve, 2024). An industry accustomed to a decade of cheap debt suddenly had to reckon with a high cost of capital. This interest rate shock slowed dealmaking to a crawl in 2023, as buyers and sellers struggled to agree on values amid falling asset prices and higher financing costs (Bloomberg, 2024). While 2024 brought hints of stabilization (and even an 11% uptick in global real estate deal volume (MSCI, 2024)), capital raising and deployment are still contingent on the interest rate trajectory. Investors are acutely aware that risk-free yields (e.g. 10-year Treasuries) remain elevated, meaning any real estate opportunity must offer correspondingly higher returns to justify the illiquidity and risk (WSJ, 2024). Core real estate strategies that delivered mid-single-digit yields in the low-rate era now struggle to attract capital; many LPs have shifted focus to higher-yielding value-add, opportunistic, or credit strategies that can clear a higher return hurdle (CBRE, 2024).

Central bank policy will heavily influence the pace at which this dry powder is put to work. Interest rate policy in the U.S. and abroad is at a turning point: the Federal Reserve’s actions lead the cycle, and many expect that once U.S. rates clearly peak and start to ease, real estate deployment will accelerate (Federal Reserve, 2024). Already, global investors appear to be positioning ahead of this inflection. According to a Cornell Allocations Monitor survey, North America is the top regional target for institutional capital in 2024 – a striking 91% of Asia-Pacific investors and 71% of EMEA investors plan to allocate to North America strategies (Cornell University, 2024). This reflects a view that the U.S. may navigate the rate cycle and recovery earlier than other parts of the world, drawing capital to its real estate markets. Global capital flows are thus tilting toward the U.S., even as some foreign investors remain cautious due to currency and geopolitical factors. Notably, the strong U.S. dollar and high hedging costs have tempered inbound investment from certain international players (Goldman Sachs, 2024). Foreign investment in U.S. real estate is recovering from pandemic-era lows but is still below historical norms for these reasons (CBRE, 2024). For example, some European and Asian institutions are holding back until hedging costs improve, while others from capital-rich regions (e.g. Middle Eastern sovereign wealth funds) are moving ahead, selectively, to capitalize on softer asset prices.

Geopolitical uncertainty continues to cast a long shadow over investor sentiment. The ongoing war in Eastern Europe, tensions in Asia, and broader fractures in global trade have injected a layer of hesitation into cross-border investment decisions. Investors must weigh not only interest rate risk but also geopolitical risk – from energy price volatility to potential tariffs or sanctions – when allocating capital. The past two years have often been described as a “polycrisis” environment, and real estate has not been immune. In 2022–2023, elevated geopolitical risk contributed to many investors pulling back and reassessing strategies (Brookings Institution, 2024). For instance, fundraising in Asia has lagged other regions due in part to a retreat from China-focused real estate funds amid regulatory crackdowns and U.S.–China decoupling concerns (Brookings, 2024). In Europe, the war-driven energy crisis and economic uncertainties made some global investors more hesitant to commit to new European property funds. These geopolitical factors don’t necessarily override real estate fundamentals, but they raise the risk premium in investors’ minds, often leading to a “wait and see” approach on new allocations.

Despite these headwinds, it’s worth noting that certain pockets of capital remain active. Large sovereign wealth funds and public pensions, with their long-term outlooks, have in some cases stepped up real estate investments even as others pulled back. In 2023, sovereign wealth funds globally invested roughly $14.8 billion directly into real estate – almost 50% more than the prior year – taking advantage of depressed valuations and viewing real estate as an inflation hedge (Sovereign Wealth Fund Institute, 2024). This kind of patient capital can fill some of the void in the market, especially for high-quality assets or sectors (like logistics or multifamily) that align with secular trends. Additionally, global capital movements are not one-way: while some Western investors de-risk, capital from the Middle East and Asia (Japan, Korea, Singapore, etc.) has been seeking opportunities abroad, including in U.S. real estate, albeit carefully. These flows, however, are selective and often structured via joint ventures or platform investments rather than blind-pool funds, reinforcing the bespoke theme discussed earlier.

Conclusion: Navigating the New Capital Raising Reality

As we head into the second half of 2025, real estate fund managers and sponsors must adapt to a new normal in capital raising. The era of easy money and oversubscribed funds has given way to a climate of dry powder and delayed allocations, where patience and creativity are prerequisites for success. For GPs, this means retooling strategies: honing investment theses to be truly compelling against higher return benchmarks, engaging with LPs more transparently on portfolio performance and pipeline, and offering flexible investment structures that align with investors’ current constraints. For LPs, the challenges of illiquidity and overallocation also bring opportunity – an opportunity to negotiate better terms, to access co-investments and targeted ventures, and to recommit capital selectively to those managers best positioned to exploit dislocated markets.

Macroeconomic and geopolitical uncertainties will eventually abate, but interest rates are likely to remain higher than the ultra-low levels of the 2010s, and geopolitical risk is an ongoing reality. In response, the industry is forging a more resilient model of capital raising, one that emphasizes alignment of interest, agility in structuring, and global diversification. Dry powder will not sit idle forever – indeed, first movers in deploying capital during the current trough could achieve outsized gains when markets recover (JLL, 2025). However, timing and selection are everything. In this environment, both investors and managers must balance patience with preparedness: holding back capital until the time is right, yet being ready to act decisively when opportunities arise.

Contact for Consultation:

Looking to navigate today’s real estate market with clarity and discipline? Contact us for a private consultation and discover how we help sponsors, operators, and investors evaluate deals, underwrite opportunities, and structure capital in a repriced environment.

Sources: JLL Global Capital Outlook 2024–2025, Preqin Real Estate Fundraising Reports, PERE (Private Equity Real Estate), CBRE Research, Bloomberg Real Estate, MSCI Real Assets, WSJ Real Estate, Federal Reserve Economic Data (FRED), Cornell Allocations Monitor, Goldman Sachs Research, Brookings Institution – Global Economy & Development, Sovereign Wealth Fund Institute

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. All investing and lending involves risk, and readers should perform their own due diligence or consult with professional advisors before making decisions. The views expressed here are based on market trends and sources as of the date of writing, and future conditions may change