U.S. commercial real estate prices rose for a third straightmonth in July as deals for smaller properties led a rebound thatmay stall as the economy slows, according to Moody's InvestorsService.

The Moody's/REAL Commercial Property Price Index advanced 5percent from June. It's up 1.2 percent from a year earlier andalmost 13 percent from its post-peak low in April, the New York-based company said in a report today.

The gains followed an increase of sales of properties that areconsidered to be smaller assets and are located in areas other thanBoston, Chicago, New York, Los Angeles, San Francisco andWashington. Turmoil in the issuance of commercial mortgage- backedsecurities may limit financing for these deals, hindering arecovery as economic growth estimates fall and the unemploymentrate remains higher than 9 percent, Moody's said.

“This month's gain is more a continuation of the bottomingprocess than a harbinger of recovery,” the company said in thereport. “Slow job growth will crimp expectations for the absorptionof vacant space and for rent increases, which in turn willconstrain near-term price increases.”

Relative yields on securities tied to offices, hotels andshopping centers have been rising as investors shun riskier assetsamid concern a Greek default may infect European lenders. Bankshave pulled back from making loans to package into bonds as priceswings erode profit margins on the deals.

CMBS Slowdown
Demand had increased for realestate outside of major cities such as New York before a recentslowdown in CMBS lending. The CMBS slump may hurt demand fornon-distressed building sales of less than $10 million in metroareas outside U.S. cities where real estate is most sought after,Tad Philipp, director of commercial real estate research atMoody's, said in a telephone interview. These deals accounted for60 percent of July repeat sales, Moody's said.

“The CMBS market largely is a main source of financing for themiddle market,” Philipp said.

A gain in commercial-property values may be held back by buyersmaking more conservative estimates for rent increases and leasingamid slow job growth, according to the report.

“Price increases in the near term are likely to be earned theold-fashioned way, by rent growth, rather than through higherleverage or financial engineering,” Moody's said.

Weakest Six Months
U.S. gross domesticproduct expanded at a 1 percent annual pace in the second quarterfollowing a 0.4 percent gain in the first three months of the year,capping the weakest six months of the recovery that began inmid-2009, according to Commerce Department figures. TheInternational Monetary Fund this week cut its forecast for U.S.growth this year to 1.5 percent from 2.5 percent in June, citingwaning confidence among consumers and businesses and unresolveddebt-reduction concerns.

Total U.S. payrolls were unchanged last month, the weakestreading since September 2010, and the unemployment rate held at 9.1percent, the Labor Department said Sept. 2.

The Moody's index tracks repeat sales, which totaled 192 inJuly. It gives all property transactions the same weighting.

CoStar Group Inc.'s National All Property Type Composite Indexclimbed 1 percent in July from June, the Washington-based realestate data provider said Sept. 13. The index was down 1.6 percentfrom a year earlier and is 33 percent below a peak reached in2007.

Green Street Advisors Inc., a real estate research company inNewport Beach, California, reported commercial property values rose1 percent in August from the previous month and advanced 18 percentfrom a year earlier. Prices are down 9 percent from their August2007 peak, the company said Sept. 7.

Green Street's index is weighted by asset value and includesdeals that are in negotiation or under contract. Moody's trackscompleted sales.

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