U.S. commercial real estate prices rose for a third straight month in July as deals for smaller properties led a rebound that may stall as the economy slows, according to Moody's Investors Service.

The Moody's/REAL Commercial Property Price Index advanced 5 percent from June. It's up 1.2 percent from a year earlier and almost 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 are considered to be smaller assets and are located in areas other than Boston, Chicago, New York, Los Angeles, San Francisco and Washington. Turmoil in the issuance of commercial mortgage- backed securities may limit financing for these deals, hindering a recovery as economic growth estimates fall and the unemployment rate remains higher than 9 percent, Moody's said.

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

Relative yields on securities tied to offices, hotels and shopping centers have been rising as investors shun riskier assets amid concern a Greek default may infect European lenders. Banks have pulled back from making loans to package into bonds as price swings erode profit margins on the deals.

CMBS Slowdown
Demand had increased for real estate outside of major cities such as New York before a recent slowdown in CMBS lending. The CMBS slump may hurt demand for non-distressed building sales of less than $10 million in metro areas outside U.S. cities where real estate is most sought after, Tad Philipp, director of commercial real estate research at Moody's, said in a telephone interview. These deals accounted for 60 percent of July repeat sales, Moody's said.

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

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

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

Weakest Six Months
U.S. gross domestic product expanded at a 1 percent annual pace in the second quarter following a 0.4 percent gain in the first three months of the year, capping the weakest six months of the recovery that began in mid-2009, according to Commerce Department figures. The International Monetary Fund this week cut its forecast for U.S. growth this year to 1.5 percent from 2.5 percent in June, citing waning confidence among consumers and businesses and unresolved debt-reduction concerns.

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

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

CoStar Group Inc.'s National All Property Type Composite Index climbed 1 percent in July from June, the Washington-based real estate data provider said Sept. 13. The index was down 1.6 percent from a year earlier and is 33 percent below a peak reached in 2007.

Green Street Advisors Inc., a real estate research company in Newport Beach, California, reported commercial property values rose 1 percent in August from the previous month and advanced 18 percent from a year earlier. Prices are down 9 percent from their August 2007 peak, the company said Sept. 7.

Green Street's index is weighted by asset value and includes deals that are in negotiation or under contract. Moody's tracks completed sales.

Bloomberg News

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Commercial Property Up 5% in July

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