Ofsted said Sunderland's children's services, which will be run by community interest company Together for Children along the lines of Achieving for Children (AfC) in Richmond and Kingston, are "making steady progress from an extremely low baseline".
The council was rated "inadequate" by Ofsted in July 2015 after inspectors identified a "corporate failure" among senior staff, which was leaving children and young people at risk of harm.
The inspectorate's third monitoring visit since then, which was conducted last month, found that senior managers have responded well to concerns.
Ofsted praised improvements to the timeliness of statutory visits by social workers as well as a reduction in caseloads, which social workers told inspectors are now "manageable".
A fall in the number of children who have had a change in social worker was also noted and social workers told inspectors they felt supported by managers.
The inspection team said: "Staff morale in Sunderland is good and there are reduced sickness levels and stability within teams, which help to support good practice of social workers and to build relationships with children and carers.
"Staff with whom inspectors spoke feel well supported through more structured supervision and report that senior management direction is much clearer. Overall, children, parents and carers spoke positively about the support that they receive and welcome the stability and consistency of having the same worker."
However, a number of concerns remain, including "inconsistent" quality of record keeping. Assessments for court proceedings were also beset with "poor quality of work".
Sunderland City Council leader Paul Watson said: "We know there is still a long way to go, but it's heartening that Ofsted have reported the steady progress being made after each of their three monitoring visits.
"Children's services are in a much better place now than they were in 2015 and we're continuing to work hard to make a positive difference to their lives of the children and families we work with."
Together for Children has been running children's services in the city in shadow form since September and will become an organisation in its own right in April.
It is headed by chief executive Alex Hopkins, who is a former DCS in Northamptonshire. The mutual was set up following discussions involving Nick Whitfield, the chief executive of Achieving for Children (AfC), who was appointed as children's services commissioner in Sunderland by the Department for Education.
AfC was formed in 2014 to run children's services in the London boroughs of Richmond and Kingston. Last September it emerged that it is in talks to also run children's services in Windsor and Maidenhead.