Distressed sales are growing across the commercial real estate market, led by a surge in discounted apartment building sales.

The volume of distressed commercial real estate sales rose 26.4% in the first nine months of the year compared with the same period last year, according to a Bisnow analysis of data provided by MSCI.

That increase has been overtaken by a 50.3% increase in nondistressed deal flow that pushed total investment above last year’s volume, but it reflects pressure on owners that bought amid the low-interest rate heyday earlier in the cycle. 

Elevated rates have persisted for roughly three years, and with continued high inflation, there's little chance for relief in sight ahead of the next meeting of the Federal Open Market Committee next week.

The multifamily sector is the only one in which distressed deal volume grew more quickly than nondistressed in the first nine months of 2026. Apartments posted a 62.8% jump in distressed sales in that period.

The pace of distressed sales varies widely by asset class, but the upward trajectory reflects the tightening capital environment as it becomes increasingly costly to refinance existing debt or take on new loans. 

“It's not the market responding to one common shock in the financial markets,” said Jim Costello, head of real estate economics at MSCI. “It's every property sector responding to its own signals on the demand side and, on the financing channels, to a series of shocks.”

Overall transaction volume is up 49.7% in the first three quarters of the year compared to last year at $559.9B, according to MSCI data. There were $13.2B in distressed sales across the first three quarters of the year compared to $10.5B in sales during the same period a year prior. 

While the tide is rising, distressed sales were still just 2.4% of all volume in the first three quarters of the year, and their share of sales dipped in the third quarter to 1.5%, the lowest percentage since the middle of 2024. 

A flood of capital from debt funds has supplanted banks and insurance companies as top sources of debt for commercial real estate, which has kept distressed deals from taking up a bigger proportion of total volume in recent quarters, Costello said. 

“There's just an abundance of debt funds willing to work with people to figure out what's going to happen to their property,” he said. 

Debt funds and private equity are coming into the transactions with a different strategy compared to banks and insurance companies that allows for more aggressive underwriting, Costello said. 

“They're not going to make a loan if they don't think they can make money out of it,” Costello said. ”But the way they make money out of it may not be from the loan paying off. They may make money out of it once it becomes clear that these people are at the end of the rope and it’s time to take the property.” 

There are some signs that the sales market is softening more generally. Total sales volume in August was $107B, boosted by $70B worth of M&A-type sales, without which the total would have been down 21% compared to last year. 

Sales of distressed industrial assets were up 167.6% compared to last year, more than any other sector. But the total distressed dollar volume was just $375M, less than 1% of the $106B in total industrial trades.

Lodging has the highest percentage of distressed deals at 8.9%, followed by office trades, where the $5.1B in distressed deals in the first nine months of the year accounted for 7.8% of the $65B total.

Office distress had been held back by tenants locked into long-term leases, but those deals have started to roll over and weigh on landlords. In the multifamily space, the buyers who bought at the height of the pandemic when prices were high and interest rates low are facing a stark reality when their mortgage resets, Costello said.

“The folks who were buying so aggressively in 2022, and you're paying a 3% cap rate for a Class-B apartment building in the Southeast, you're going to have a bad day," he said. "There's just no fundamental value there at that rate." 

The tick-up in distressed sales aligns with the slow upward march of CMBS distress, which climbed 17 basis points to 8.02% in September, the highest level since November 2020, according to Trepp. 

Around 78% of fixed-rate securitized commercial real estate maturing through 2028 carries an interest rate below the current yield of the 10-year U.S. Treasury bond, Newmark found in a recent analysis. 

Those loans face increased debt costs and potential distress at maturity if there’s no relief on interest rates. But the wide availability of private debt is likely to keep distressed sales depressed in the near term, Costello said. 

There’s an expectation that a resolution to the war in Iran would bring down energy costs, which would pull down inflation and help push down yields. For some owners, the macroeconomic landscape lends itself to continuing the wait-and-see strategy that has defined the last five years.

“I think of it as a big cone of uncertainty, and that cone extends into some lower rates, and so that's also changing people's behavior,” Costello said.