The long-anticipated wave of distressed commercial real estate (CRE) strategies has not materialised. This is the contrarian conclusion of a new national capital markets report from Avison Young, published on Tuesday, which reveals that capital raising has failed to meet years of predictions for increased investment in distressed properties.
Avison Young's research, shared exclusively with Commercial Observer, indicates that capital raising has shifted away from CRE strategies since 2022. This is attributed to a prolonged environment of elevated interest rates combined with better-than-expected pricing levels for borrowers. Although transaction volumes for distressed assets have increased year-on-year, capital is competing for a limited supply of opportunities, as there have been fewer forced sales than previously assumed, the report states.
Marion Jones, Executive Managing Director of U.S. Capital Markets at Avison Young, told Commercial Observer that persistently high interest rates were a factor, but also a high level of competition, which is shifting prices and returns in favour of the borrower. Capital raised for distressed or opportunistic strategies fell by 38 per cent in 2023 to $51.9 billion, compared to $83.5 billion the previous year. This occurred while the Federal Reserve began aggressively raising interest rates to combat inflation.
After a slight increase to $59.7 billion in 2024, funds for distressed or opportunistic funds fell by 65 per cent in 2025 to $20.9 billion. In the first half of 2026, capital raising for distressed strategies experienced a comeback with $26 billion in funds raised, yet the figures remain well below the 2022 peak.
Jones noted that for the buy-side, participating in distressed opportunities in the market is a compelling strategy. However, the actual pricing and conviction investors had to demonstrate to close these transactions did not necessarily imply that they would be buying at very high cap rates or very low prices per square foot. Capital raising based on a narrative of distress is an attractive strategy, but pricing sometimes did not reflect an exceptional opportunistic discovery.
Funds for value-add strategies saw the largest capital inflow in the first half of 2026, reaching $66.9 billion, after achieving $34.7 billion in 2025. Core or core-plus strategies have seen the largest gains in capital raising in recent years, rising from $20.6 billion in 2022 to $40.8 billion last year, with another $40.8 billion achieved in the first half of 2026.
Alex Ern, Senior Manager in Avison Young's U.S. Capital Markets Group, cited a key factor for the decline in allocations to distressed CRE strategies: lenders are taking more time before repossessing properties. Instead, they are working with borrowers to find solutions. Ern explained that lenders have become creative, bringing in experienced operating partners. There have been some highly leveraged deals, partly with loan-to-cost ratios of up to 99 per cent, where a lender could remain in the deal and involve a preferred operator with very little equity. This allows them to avoid a significant write-down and resolve the situation at a later date.
The Avison Young report also highlighted that institutional investors currently have approximately 9.8 per cent of their capital invested in real estate, compared to a target of 10.7 per cent. This represents one of the largest gaps of the last decade. However, the figures reflect the strength of public equities, which outperformed CRE asset prices, rather than a retreat from the market, the report concluded.
