Regenerative stromal cell therapy (RSCT) has the potential to become a novel therapy for preventing and treating acute graft-versus-host disease (GVHD) in the allogeneic hematopoietic stem cell transplant (HSCT) recipient. However, enthusiasm for using RSCT in allogeneic HSCT has been tempered by limited clinical data and poorly defined in vivo mechanisms of action. As a result, the full clinical potential of RSCT in supporting hematopoietic reconstitution and as treatment for GVHD remains to be determined. This manuscript reviews the immunomodulatory activity of regenerative stromal cells in preclinical models of allogeneic HSCT, and emphasizes an emerging literature suggesting that microenvironment influences RSC activation and function. Understanding this key finding may ultimately define the proper niche for RSCT in allogeneic HSCT. In particular, mechanistic studies are needed to delineate the in vivo effects of RSCT in response to inflammation and injury associated with allogeneic HSCT, and to define the relevant sites of RSC interaction with immune cells in the transplant recipient. Furthermore, development of in vivo imaging technology to correlate biodistribution patterns, desired RSC effect, and clinical outcome will be crucial to establishing dose-response effects and minimal biologic dose thresholds needed to advance translational treatment strategies for complications like GVHD.