SAN FRANCISCO—In a nod to increasing market activity, a number of financial institutions are shopping around portfolios of distressed commercial real estate assets.

Locally based Wells Fargo, according to Bloomberg, is taking offers on up to $1 billion of office and hotel mortgages and properties. Following suit, LNR Property Corp. of Miami Beach, FL is also seeking bids on roughly $1 billion of defaulted loans, according to the published report. What’s more, several loan advisors are bringing more collections of assets to market for financial institutions.

"There is an awareness among all lenders that commercial real estate has repriced," says Mark Grinis, the Distress Services Group leader at Ernst & Young in New York City. "It’s actually a very favorable environment with respect to how much capital is out there. Now is as good a time as any to take a portfolio to market."

Wells Fargo, the leading commercial real estate lender, liquidated some $4.3 billion in loan portfolios in the first quarter of this year, according to its Securities and Exchange Commission quarterly filing. Much of the distressed assets the bank is trying to sell were inherited from its purchase of Wachovia Corp. in October 2008, according to Bloomberg. Wachovia’s loans comprise some 60% of the combined company’s nonperforming assets.

While Wells Fargo’s pending sales certainly speaks to the bank’s desire to strengthen its balance sheet, Ben Thypin, an analyst at Real Capital Analytics, says, "It’s a sign of confidence in the market in the sense that Wells thinks it can secure a good price for its assets."

Thypin notes that the assets that LNR is selling—office, retail and multifamily-backed debt reportedly averaging $3 million—falls in line with bulk of smaller distressed deals that have largely defined market activity to date. Special servicers, like LNR, upping their offerings of B and C class assets for the past quarter.

"They are assets that people do have interest in, but things are still a little uneasy in that no one really wants to seriously dive into those assets, which are both of lesser quality and in less secure markets," Thypin says.

LNR is named the special servicer on about $181 billion of commercial mortgage-backed securities, according to Fitch Ratings. The special servicer has been clearing quite a few assets off its books so far this year, including an office property in Houston earlier this month and an industrial asset in Lansing, MI back in March. As a B-piece investor, LNR has seen many of its holding submerged under water. Earlier in the year, GlobeSt.com reported that the firm enlisted the help of Lazard Ltd. and law firm Dewey LeBoeuf LLP to help restructure nearly $1 billion of debt and prepare for a possible bankruptcy filing.

Meanwhile, some financial institutions are readily employing the services of companies like DebtX to siphon off distressed holdings. The Boston-based firm is selling $364 million of performing and non-performing loans for an unnamed Northeastern regional bank in two separate bids. A bank in the South is using the firm to trade $97 million of non-performing loans, while another financial institution in the same region is selling $39 million in nonperforming debt.

All of this activity is further evidence of the loosening of what has been an unyielding distressed market. "It’s not the tidal wave of activity that one would like or expect," Grinis says. "But is it up 10% to 20% from last year? Yes, that’s probably about right."

Still, sellers are largely holding the best assets close to the vest. Only 10% of distress from a year ago has been resolved, according to RCA. Many deals are in limbo, with short-term forbearance or in the process of foreclosure. Thypin relates that lenders and borrowers remain at a standstill, with neither side willing to absorb losses, particularly on highly over-leveraged deals. "It’s sort of a game of chicken," Thypin says. "If no one wants to force the other to make a move, they can both just wait it out."

Grinis suggests that lenders’ decision on which assets to bring to market is partly based on relationships. "They want to retain relationships with either institutional operators or certain borrowers," he says. "So they may be disposing of some of those relationships that don’t fall into one of those two categories."

The pace of distressed trades may still be a bit anemic—at least compared to market anticipation, but there are workouts—resolutions and restructurings—than during the same period a year ago, Thypin points out. He says people are getting more creative to deal with the limitations of the market.

"There’s not many opportunities available for refinancing or buying property outright," he says. "So people are buying partial stakes or partial recapitalization. That keeps the borrower involved, but releases the pressure and allows the new person to capture a significant portion of the upside down the line."