Manhattan real estate—a poster child of the excess that led to the last downturn—appears oddly sturdy, despite last week’s turmoil.

The boroughs commercial real estate market, which many feared would enter a prolonged depression following the collapse of Lehman Brothers, recently passed a key milestone: The total dollar amount of assets classified as distressed has been cut in half.

Since 2008, $30.6 billion of assets in Manhattan have been in foreclosure, bankruptcy or in the process of having its loans modified. The figure now stands at $15.2 billion, and a third of that amount is tied to one apartment complex, Stuyvesant Town/Peter Cooper Village.

“This happened faster than we would have imagined,” said Dan Fasulo, managing director of Real Capital Analytics.

The market is in a better position to weather whatever storms result from the latest upheavals.

Behind its progress are scores of individual transactions—buildings sold, refinanced or with restructured loans. Many once-troubled properties are now owned by experienced, deep-pocketed firms that can withstand hard times and that have poured money into their new holdings. For example, Vornado Realty Trust, one of Manhattan’s largest landlords, bought three of the eight large distressed assets sold in the first half of 2011.

The improvement dovetails with a renewed investor appetite for commercial real estate in Manhattan. Last year, $13.9 billion worth of commercial properties were sold, nearly four times the amount recorded in 2009. The demand is seen as a reflection of the standout performance of the city’s economy in general, and of its office and residential markets in particular. Lackluster returns on government bonds also helped push banks back into making loans to landlords, as those deals offer higher yields.

Further strengthening the market is that buyers must have more skin in the game. Gone are the days when a buyer could finance 95% of a purchase.

“These deals are a lot safer than those done in 2007,” said Mark Edelstein, head of the real estate practice at law firm Morrison & Forester.

Despite the gains in the market, plenty of risk remains. An estimated $5 billion to $10 billion worth of real estate is close to falling into distress. Massey Knakal Realty Services calculates that investors have lost $4.6 billion in equity over the past 18 months as they sold notes.

Pickier lenders seen

Double-dip jitters are likely to push lenders to be even more selective about to whom and how much they lend. The turmoil is expected to slow the comeback of the commercial mortgage-backed securities market, once worth $400 billion, and a source of real estate financing in the boom and of enormous losses in the bust.

“I think the CMBS market will move in fits and starts for a long time,” said Mr. Edelstein. He has not seen traditional lenders back out of any deal he is working on.

The Federal Reserve’s decision to maintain low interest rates should also help the rebound continue, according to Robert Knakal, chairman of Massey Knakal. “When rates go up, owners of properties that are underwater face a double-whammy,” he added.

Low rates have the added benefit of keeping insurers, banks and pension funds in the real estate lending business because they don’t want to be committed to low-yielding government and corporate debt.

“Mortgages still offer better values [than government bonds],” said Melissa Farrell, a managing director at Prudential Mortgage Capital Co. “And Manhattan is the strongest market in the country.”

Among the most active buyers of distressed assets is New York-based investment firm Savanna, which has acquired five troubled buildings in the past 15 months, including 100 Wall St. and 104 W. 40th St.

“We were looking for broken assets because they offer the best upside,” said Savanna Managing Partner Chris Schlank.

Savanna spends money on renovations and marketing, and cuts vacancies. Since the firm bought 104 W. 40th, for example, occupancy has risen to 65% from 40%. “We bring in equity, fresh ideas and fix problems,” said Mr. Schlank.