Rescue Equity in Commercial Real Estate Plays by Some New Rules

For real estate rainmakers, opportunity presents itself in offbeat ways. It could be a stray tip, an offhand comment, or a shrewd strategy paying off. For S2 Capital, a Dallas-based multifamily investment platform that has transacted more than $11 billion in deals in the last dozen years, one signal that’s paid off lately has been taking note of apartment buildings with unsightly lawns. 

S2 founder Scott Everett explained that he can find distress in many ways — check for year-over-year rent decline, analyze the parts of loan pools that are underperforming, or track owners with approaching loan maturities with negative cash flow. Sometimes, it’s as simple as seeing unkempt yards as a sign that vendors have been cut, cash flow is drying up, and a new deal is possible. 

A few years ago, at the height of pandemic-era uncertainty, an expectation that distressed assets would start to pile up made some assume a tsunami of rescue capital was about to sweep through CRE, opportunistic investors would be tripping over chances to make deals, and  epic negotiations for rescue equity were set to kick off. Funds began forming: Dwight Capital and Denholtz out of New Jersey launched rescue-focused funds in 2023; Peebles Corporation launched a private credit arm, Willowbrook Partners, last year; Lightstone announced a $500 million fund in March 2024

“It’s a wonderful kind of transaction,” said Andrew Weiner, partner at law firm Pillsbury Winthrop Shaw Pittman, an experienced negotiator for these kinds of transactions. “It is the greatest sport you can have in negotiating.”

But the reality has played out much less dramatically, and required a lot more shrewd, patient strategy. The kind of significant workout that rescue equity requires — a meeting of multiple parties, from incumbent and co-lenders to operating partners and limited partners to manifest a totally new funding structure — is never very appealing, but it’s less so when valuations remain uncertain. Weiner argues these kinds of complex rescue deals remain less attractive for devalued, increasingly vacant office assets, especially in a high interest rate environment.

In many ways, it’s an inability to chart a path forward in a period of volatility, said Matt Drummond, senior managing director and head of high-yield strategies for Acore, which launched a $1 billion rescue fund for hotels in 2021 and closed a $1.4 billion debt fund last year. When all constituents within an existing capital stack can’t agree on a path forward, it’s hard for creative rescue capital to come in and help solve a problem.

Until recently, it was hard to collectively define a way out of a real estate problem. Now, with lenders being able to more clearly see the value of an asset, they’re more willing to justify a discounted payoff. 

In January, S2 deployed $60 million in rescue capital to acquire a portfolio of underperforming multifamily assets in Dallas, Nashville and Knoxville, Tenn. It was complicated. S2 took over original owner GVA Property Management and secured $170 million in senior loan funding from Acore via a joint venture with Trinity Investors, which has common equity. But, S2 expects a 21 percent internal rate of return.

“What we’ve seen is, instead of this wall, or this cliff, where everybody’s getting hit at the same time, they’ve been able to slow roll it,” said Joe Biasi, Newmark’s commercial capital markets head of research.

There hasn’t necessarily been a decline in rescue capital and equity investment opportunities. For instance, GreenBarn, an investment firm led by David Schonbraun and David Welsh that focuses on rescue opportunities, just co-led a $36 million preferred equity investment for 1166 Avenue of the Americas in Midtown Manhattan in early October that helped extend a loan.

But the pace of these deals hasn’t exploded like so many people expected. Creative debt financing has been the story. For many office properties, there have been short sales by owners, or lenders or operators buying up their partners at a set basis. They’re opportunities, but not strictly rescue capital plays.

One important shift has been that many observers expected banks to back out this year. Instead, according to Biasi, they’ve been very interested in debt and senior loan opportunities. Debt funds are up 67 percent year-over-year, he said, and lending volume in CRE across the first three quarters of 2025 has already beaten out the full-year volume from 2024. Even office transaction volume in 2025 thus far is up 25 percent year-over-year. 

To be clear, banks aren’t looking for incredibly distressed properties, and instead are focusing on stabilized multifamily opportunities or good retail properties like grocery-anchored retail. That’s pushing private lenders into construction lending and mezzanine lending — riskier territory, but territory where they can out-compete the big banks. 

That’s not to say there aren’t opportunities to turn distress into new deals. Biasi said that with CMBS delinquency rates for office at 14 percent, and at 5 percent for apartments, there is capital waiting in the wings. Acore’s Drummond also sees additional select opportunities in industrial, in particular recently finished large warehouses built on spec that have suffered through a few quarters of lower-than-expected leasing volume. 

S2 saw a multifamily opportunity with distressed older properties and raised a $373 million fund earlier this year, Fund II. It solicited investment from a mix of U.S. and European global asset managers, public pensions, multifamily offices and wealth management firms to create its first rescue capital vehicle for the multifamily space. Everett said most of it has been deployed, and he sees an opportunity to launch another fund next year and find similar opportunities well into 2026.

Despite the oncoming rate cuts, which should slightly open the capital spigot and create more transactions, there’s still pain to be had for many, said Everett. The value of properties has been cut and equity has been wiped. He said he sees a lot more players forced into action toward the end of the year. 

While there is opportunity out there, as S2’s example shows, it exists in specific pockets of the market. First, consider the deal volume in 2021 and 2022, which was three times the historical average, Everett said, and in a lot of cases, highly leveraged with bridge loans on three-year terms. 

“When you go all in at the wrong time, then you’re going to kind of start to burn down the house a bit,” he said. “That’s why I think there’s just a lot of opportunity and interest right now.”

Then, factor in how the multifamily market remains bifurcated, with buildings from the 1990s, 2000s or younger still going for mid- to high 4 percent cap rates. That part of the market remains liquid, isn’t prone to a lot of distress, and can still attract renters despite a relative flood of new supply. 

But start looking at more vintage buildings from the 1970s or `80s — with mom-and-pop or regional operators that aren’t well managed and with cap rates having expanded, creating valuation issues, and borrowing costs stubbornly higher — and the only solution can be selling at a distressed price or getting creative. For example, in one case S2 stepped in as the preferred equity, effectively proceeding like common equity, rolled properties into a master joint venture with S2 as the controlling partner, and took over all management to start getting things back on track. 

“You can get good pricing, you can get a good entry point, and you can find some interesting opportunities,” said Everett. “But it’s more of the ‘get your hands dirty and roll up your sleeves’ kind of deal, not the easy layup that investors may be wanting right now.”  

Acore also sees opportunity in multifamily. The firm is looking to come in as a 50 percent to 70 percent of value lender alongside new equity, or come in as an alternative to equity to provide an 80 percent to 85 percent solution that allows them to recap that asset. 

If the economy continues to bump along as it has, Biasi surmises, there will continue to be a slow roll of distress and debt, and a slow deployment of rescue capital. He sees that as a positive sign overall for commercial real estate. With solid momentum in terms of transaction and lending volume, there will be fewer opportunities to get to really distressed-level pricing. Unless the economy crashes, the wave of distress will just be more of a series of ripples. 

For S2’s Everett, the moment now mirrors the environment S2 came up in when it started in 2012, working out troubled apartments in the long wake of the Global Financial Crisis. He sees S2’s relatively small size to be perfect, able to hit a small, fleeting target with a precise rifle shot, as opposed to going out guns blazing. 

“Our fund size is perfect for this type of opportunity,” he said, “because it’s not falling out of the sky where there’s billions and billions of dollars to just gobble up at super distressed pricing.”