How disciplined sponsors are underwriting longer exits in 2025 without killing investor returns.
Originally published on LinkedIn's Chasing Alpha: CRE newsletter. Materially refreshed for the web.
Key Takeaways
- Average commercial real estate hold periods have extended 12 to 24 months compared to pre-2022 norms, according to MSCI.
- The era of short holds was driven by falling rates and easy refinancing, not by market fundamentals.
- Longer holds expose weak underwriting because they magnify every assumption in the model.
- Disciplined sponsors are letting cash flow carry more of the return, stress testing exits earlier, and building capital structures that can breathe.
- Basis discipline at acquisition becomes more important as holds extend. Entry price is the only assumption that does not move.
Short Exits Were a Product of a Very Specific Market
For most of the last decade, hold periods kept getting shorter.
Three years felt conservative. Five years felt long. Exit assumptions leaned heavily on cap rate compression and cheap refinancing.
That playbook no longer works.
In 2025, longer hold periods are not a choice. They are a reality. Sponsors who have not adjusted their underwriting are finding out the hard way that time cuts both ways.
Compressed hold periods were never normal. They were a function of falling rates, abundant liquidity, and forgiving capital markets. When refinancing was easy and buyers were plentiful, time worked in your favor. Appreciation did the heavy lifting. Cash flow mattered, but it didn't have to carry the deal.
That environment is gone.
Interest rates remain higher than most sponsors underwrote just a few years ago. Liquidity is more selective. Buyers are disciplined. Exits take longer to materialize, even for well located assets.
According to MSCI, average hold periods across several CRE sectors have already extended by 12 to 24 months compared to pre-2022 norms.
The market is recalibrating.
Why Longer Holds Expose Weak Underwriting
Lengthening a hold period does not just delay liquidity. It magnifies every assumption in the model.
Deals that relied on early refinancing, aggressive rent growth, and thin cash flow margins are struggling as timelines stretch. Meanwhile, sponsors who underwrote durability from day one are discovering that longer holds do not have to destroy returns. They just require a different mindset.
The shift is structural, not cyclical. Capital is no longer rewarding sponsors for moving quickly. It is rewarding sponsors who can hold through a full cycle without forced decisions.
How Disciplined Sponsors Underwrite for Longer Holds
The sponsors still raising capital and closing deals in 2025 are underwriting with patience built in. Four principles separate them from the rest.
1. Cash Flow Carries More of the Return
Instead of depending on a single exit event, strong deals are designed to pay investors while they wait.
That means conservative leverage, realistic expense assumptions, and prioritizing in-place yield over future appreciation. Cash on cash returns may look less flashy in year one, but they compound meaningfully over longer holds.
According to CBRE, investors are increasingly favoring deals where a majority of projected returns come from operating cash flow rather than terminal value.
2. Exit Pricing Is Underwritten Earlier, Not Later
Smart underwriting today assumes wider exit cap rates, slower buyer demand, and more friction at sale.
Instead of pushing risk to year five or seven, sponsors are absorbing it upfront. This often results in lower projected IRRs on paper, but far higher confidence in actually delivering them.
Deals that still work under tougher exit assumptions are the ones capital partners trust.
3. Capital Structures Are Built for Time, Not Speed
Longer holds demand capital stacks that can breathe. Sponsors are increasingly using longer duration debt, lower fixed rate leverage, preferred equity with patient capital, and lower refinance dependence.
This reduces forced decision making and allows the business plan to play out without rushing an exit to satisfy the capital stack.
Insurance companies and pension backed lenders, in particular, are supporting this shift with longer term financing structures designed for stability, not velocity.
4. Basis Discipline Becomes the Hedge
Every other variable in a longer hold model can move. Rents shift. Cap rates widen. Refinance windows close.
The one assumption that does not change after closing is your basis.
Buying or building below replacement cost is the most reliable hedge against extended timelines. When you acquire well below the cost to recreate the asset, you have built in a margin of safety that does not rely on market timing or exit demand.
This is why entry price discipline matters more in 2025 than at any point in the last decade. A lower basis allows a longer hold without compounding risk. It also creates optionality. Sponsors with low basis can lease patiently, refinance opportunistically, or sell selectively without being forced into any single outcome.
In a market where time has become a variable instead of a constant, basis is the only hedge that stays put.
How the Investor Conversation Is Changing
Investors are no longer asking, "When do we sell?"
They are asking different questions:
- What happens if we hold longer?
- How are distributions protected?
- How flexible is the exit window?
- What does downside look like over time?
Sponsors who can answer those questions clearly are earning trust, even with longer timelines.
The irony is that longer hold periods often appeal to investors seeking consistency over timing. Predictable cash flow and controlled risk are becoming more valuable than fast liquidity.
The Second-Order Effect on Returns
When structured correctly, longer holds can actually smooth returns.
Instead of one large exit driven payoff, investors receive more total cash distributions, lower volatility, and less sensitivity to market timing. The result is often a more durable realized return, even if headline IRRs appear modest compared to peak cycle projections.
Returns earned over time tend to survive cycles better than returns promised at the end.
The Bottom Line
The market has reset expectations around time.
In 2025, disciplined sponsors are not fighting longer hold periods. They are underwriting for them.
By letting cash flow do more of the work, stress testing exits early, building capital stacks that allow patience, and acquiring at a defensible basis, they are preserving investor returns in a market that no longer rewards speed.
Time is no longer the enemy of returns. Bad assumptions are.
Sponsors who understand that distinction are the ones still getting funded. Learn how VAC partners with investors or submit a deal.
Frequently Asked Questions
Why are commercial real estate hold periods getting longer in 2025?
Hold periods are extending because the conditions that compressed them, falling interest rates, abundant refinancing, and aggressive cap rate compression, no longer exist. Higher rates, more selective capital, and more disciplined buyers mean exits take longer to materialize, even for quality assets.
How long is the average CRE hold period now?
According to MSCI, average hold periods across several commercial real estate sectors have extended by 12 to 24 months compared to pre-2022 norms. Many sponsors are now underwriting seven to ten year holds where five was once standard.
How do sponsors underwrite for longer hold periods?
Disciplined sponsors prioritize in-place cash flow over speculative appreciation, model wider exit cap rates earlier in the underwriting process, structure debt for duration rather than speed, and acquire assets at a defensible basis below replacement cost.
Why does basis matter for longer hold periods?
Most variables in a real estate model can move during a longer hold. Rents change. Cap rates widen. Refinance windows close. Basis is fixed at acquisition. A low basis creates a margin of safety that does not depend on market timing or exit conditions, which is why entry price discipline is the most reliable hedge against extended hold periods.
What replaces cap rate compression as a return driver?
Operating cash flow, in-place yield, and disciplined asset management. CBRE reports that investors are increasingly favoring deals where projected returns come primarily from operating performance rather than terminal sale assumptions.
How does a longer hold affect investor returns?
When structured correctly, longer holds can actually smooth returns by delivering more total cash distributions, lower volatility, and less sensitivity to a single exit event. Headline IRRs may appear lower, but realized returns tend to be more durable across cycles.
Sources
- MSCI, U.S. Capital Trends and Hold Period Analysis
- CBRE, U.S. Real Estate Market Outlook 2025
- Federal Reserve, Interest Rates and Commercial Real Estate Conditions
- JLL, Global Real Estate Perspectives 2025
- Wellington Management, Private Credit and Long-Duration Real Estate Debt
About the Author
Andrew Dunn is a Principal at VAC Development, a commercial real estate investment and operating firm focused on retail and industrial assets across the Southwest and Mountain West. VAC underwrites with basis discipline as its core thesis, acquiring and building below replacement cost in infill markets where supply is constrained and demand drivers are durable.