CRE Fundraising Reflects Distress Cycle That Never Arrived: Report

The long-awaited wave of distressed commercial real estate strategies has not materialized.

That was the contrarian conclusion in a new Avison Young national capital markets brief released Tuesday showing that fundraising has not matched years of predictions for increased investments in distressed properties. 

The Avison Young research— shared exclusively with Commercial Observer — shows fundraising has shifted away from CRE strategies since 2022 from a prolonged elevated interest rate environment coupled with better-than-expected pricing levels for borrowers. While transaction volume is up year-over-year for distressed assets, capital is competing for a limited supply of opportunities due to less forced sales than previously envisioned, according to the report.

‘I think that the higher-for-longer sentiment is a part of it, but it’s also about a high level of competition that continues to push pricing and yield more to the borrower’s favor,” Marion Jones, executive managing director of U.S. Capital Markets at Avison Young, told Commercial Observer. 

Fundraising allocated for distressed or opportunistic strategies dipped 38 percent in 2023 to $51.9 billion from $83.5 billion the previous year, according to Avison Young data, as the Federal Reserve began to aggressively hike interest rates to combat inflation. After rising slightly to $59.7 billion in 2024, capital for distressed or opportunistic funds slid 65 percent to $20.9 billion in 2025. 

Distressed strategy fundraising has experienced a comeback so far in 2026 with $26 billion raised in the first half of the year, but the numbers are still way down from their 2022 peak. 

“It’s a great narrative on the buy side to say we’re participating in distressed opportunities in the marketplace but the actual pricing and conviction that investors have to have in order to consummate these transactions doesn’t necessarily mean that they’re buying them at really high cap rates or really low price per square foot,” Jones said. “Being able to raise money around a distressed narrative is a compelling strategy and yet sometimes the pricing doesn’t really feel like some amazing opportunistic find.”

Funds for value-add strategies saw the biggest capital raised in the first half of 2026 at $66.9 billion after netting $34.7 billion in 2025. 

Core or core-plus strategies have seen the biggest fundraising gains in recent years going from $20.6 billion in 2022 to $40.8 billion last year with $40.8 billion netted in the first half of 2026. 

Alex Ern, senior manager in Avison Young’s U.S. capital markets group, said a big factor in the decline of distressed strategy allocations in CRE has been lenders taking longer before they take back the keys on properties while working with borrowers to seek solutions,

“Lenders have gotten creative and they have brought in somebody they’ve experience with on the operational side,” Ern said. “There have been some highly leveraged trades to the tune of maybe even 99 percent loan-to-cost where a lender can stay in a deal and they can bring in a preferred operator that has very little equity in the deal, but allows them to avoid a material write down and live to fight another day, 

The Avison Young report also highlighted that institutional investors are currently allocated at around 9.8 percent to real estate compared to 10.7 percent target, creating one of the widest gaps of the last decade. The numbers however reflect the strength of public equities outperforming pricing for CRE assets rather than a retreat, according to the report. 

Andrew Coen can be reached at acoen@commercialobserver.com.