A new report from London-based research firm Preqin shows private equity real estate funds plan to allocate approximately $93 billion for investment in distressed commercial real estate and debt opportunities in the near future. But with little evidence of transaction activity so far, the big question is: When will funds begin to deploy that money?

That might not happen until the latter part of 2009, because of widespread expectation that commercial real estate prices will continue to fall throughout the year, says Sam Chandan, president and chief economist with New York-based Real Estate Economics LLC. “Investors have every incentive to wait, that’s why we haven’t seen a lot of activity,” says Chandan.

The Preqin report found that funds currently in the market plan to allocate up to 36%, or $92.5 billion, of the $253 billion in capital they seek to distressed real estate opportunities. Of the 425 funds, 93 intend to make investments in distressed assets. The figure shows an increase from last year, when distressed opportunities accounted for 26%, or approximately $30 billion of the total capital raised by private equity real estate funds.

“The debt and distressed real estate market has traditionally been a relatively small part of the closed-end real estate market. However, the credit crunch has resulted in the growth of opportunities focused on this sector as the real estate market faces an increasingly challenging period of time,” said Ignatius Fogarty, a Preqin spokesman.

Real Capital Analytics, a New York-based research firm, estimates there are approximately $117 billion in commercial real estate properties in the U.S. that might be in or approaching distress, including those that are in foreclosure, have defaulted on loans or have financially troubled owners.

So far, funds targeting these assets haven’t had an opportunity to strike because the level of distress has remained relatively low, says Jon Southard, director of forecasting with Boston-based CBRE Torto Wheaton Research. In the CMBS sector, for example, the November delinquency rate stood at 0.8%, or roughly $7 billion, according to Horsham, Pa.-based Realpoint LLC, a credit rating agency.

At this level of distress, potential sellers and their lenders haven’t yet felt the pressure to offer deep discounts. That has forced opportunity funds to remain on the sidelines as they need discounts of at least 40% to deliver target yields in the 20% to 40% range, says Ken Spears, senior vice president with Savills LLC.

But the level of distress is starting to rise — in January, the commercial mortgage-backed security delinquency rate stood at 1.2%, or almost $11 billion. By the end of first quarter, the delinquency rate is projected to rise to 1.5%, or close to $15 billion, Realpoint estimates.

“Where I think things might change in the not-too-distant future is some of these funds may dive into what is currently maturing in the CMBS environment and look for a diamond in the rough,” says Frank Innaurato, managing director for CMBS analytical services with the firm.

Still, the commercial real estate industry is unlikely to see robust activity on the part of distressed opportunity funds until 2010 or 2011, according to industry experts. By then, a large amount of short-term commercial real estate loans will be reaching maturity, commercial property prices might be nearing bottom and investors will have a better idea about how government intervention might affect the stability of the market.

“We are still fairly early in the process,” says Chandan. “Investors are waiting for two things to happen: distress in terms of owners being unable to make their mortgage payments and there is still a lot of uncertainty in how the [government] will handle the banking sector.”