The value of distressed commercial properties – encompassing both financially troubled assets and those taken back by lenders – reached $102.6 billion at the end of the third quarter. During the three months, new inflows to distress outpaced workouts between property owners and lenders by $4.3 billion, according to an MSCI report.

While the balance of distress in the commercial property market grew for the quarter, the rate of growth was the slowest it has been in two years, the report said. Higher lending rates have impacted property pricing and deal-making since 2022, particularly the office sector which is facing the challenges of diminished demand for workspaces in the wake of the pandemic.

Office properties made up about half of the market distress at $50.2 billion, as of the end of September. New inflows of troubled office properties were lower during the third quarter than they have been since the end of 2022. The report noted few resolutions occurred during the quarter, which led to a net addition of office distress.

Outstanding retail property distress followed office at $20.2 billion, and multifamily distress came in third at $14.2 billion. In both retail and apartment markets, more distress was resolved than added during the quarter.

Potential distress, which may precede full-blown financial trouble, stood at $260.9 billion at the end of the third quarter, according to MSCI. That is more than double the value of the pool of distress. However, the value of potential trouble declined in the second quarter.

The apartment market represented $75.9 billion of potential distress, more than office, which had $65 billion, according to the report.

Last month, Reuters reported that the office market may have hit its bottom following a series of stressed property sales at discounted rates, which have set a new pricing benchmark. Seven properties sold at a discount of more than $100 million during the first quarter, compared with two during all of 2023. These include the sale of a Midtown Manhattan office building that went for a 97% discount of its original price, accounting for a $276.5 million loss, according to Moody's data.

Investors have been raising capital with an eye toward distressed asset sales. In September, Waterton raised $1.73 billion from its latest funding round and plans to take advantage of a slow multifamily market. The new funding will target traditional value-added properties and distressed opportunities.

It isn't unusual to see private capital turn to struggling market sectors. During times of economic turbulence, investors historically seek market distress in search of better returns — even at a higher risk.