Private real estate managers have plenty of dry powder to deploy into attractively priced deals but have largely been kept on the sidelines since the last market cycle entered its denouement. Amid a lack of motivated sellers and a mismatch in pricing expectations, global deal volume fell to its lowest level in a decade last year, per MSCI data.

Expectations of significant distress have characterized the appetite for investing in today’s dislocated market, caused by the rapid escalation of interest rates going into 2023 and the impact of that on property financing. But despite trillions of dollars of outstanding commercial real estate debt in the system, there has been little evidence of troubled assets changing hands since rates peaked.

The latest data from the research firm’s US Distress Tracker, however, is an early indication this may be about to change. The report shows the share of commercial property transaction volume accounted for by distressed sales in the US rose to 3.9 percent in Q1 2024 – the highest level since Q4 2015.

Furthermore, around $1 billion of the $3.2 billion in distressed sales volume in the quarter was attributable to the apartment sector, MSCI wrote, with retail also amounting to around a third of troubled sales in the quarter. Given the office sector represents the vast majority of outstanding distress in the US market, at approximately $38 billion as of quarter end, compared with around $10 billion for apartment and $22 billion for retail, the greater relative momentum of sales in the latter two sectors is notable.

Such spikes are not unique to the US market. In MSCI’s Q1 2014 Capital Trends Europe report, published this week, the proportion of commercial real estate sales in the region resolving a distressed situation rose to 3.2 percent of total deal volume for the quarter – the highest level in 10 years. The retail sector accounted for almost half of total distressed sale volume. Notably, the volume of distressed industrial assets that traded in the region in Q1 alone eclipsed the total for all of 2022 and 2023 combined.

This momentum will help the overall transaction market begin to thaw, with capital ready and waiting to capture opportunities both from the distress and the ensuing market reset.

A prime example of such capital materialized this week when PERE revealed San Francisco-based commercial real estate credit specialist ACORE Capital closed on $1.4 billion for ACORE Credit Partners II. The oversubscribed US-focused debt fund is almost three times the size of its predecessor, which attracted $556 million in 2019, and shares fourth position on the list of the largest private real estate funds closed so far in 2024, according to PERE data.

This fundraising success encapsulates the appeal of the risk-adjusted return on offer from real estate credit investments today as banks retrench from the asset class.

ACORE’s chief executive officer Warren de Haan told us today’s slower transaction market will mean refinancing maturing loans and acquiring performing loans from distressed loan sellers will form a greater proportion of ACP II’s dealflow compared with its predecessor. However, financing new acquisitions will remain a core focus of the fund’s investments. He expects to see new origination opportunities emerge in the multifamily sector in particular, owing to the large volume of loans made against multifamily assets two years ago that will face expiring rate caps in the coming months.

Across the industry, well-capitalized borrowers will be able to shake off the hangover from the rapid rate rises without handing back the keys. But for others – whether owners of offices or other, less existentially troubled property types – the math is starting to bite. And it is that biting that will lead to distress and then, eventually, a reinvigorated private real estate investment market.