For the first time in three months, U.S. commercial real estate property values rose in April, according to Moody’s Investors Service.

The Moody’s/REAL Commercial Property Price Index rose 1.7% from March; however, prices declined 16% from April of 2009 and are down 41% from the Index’s October 2007 high.

From a Bloomberg report:

Economic growth in the second half of 2009 and first quarter of this year have helped lift prices for offices, warehouses and stores from an October low. Property sales jumped 50 percent in the first quarter from a year earlier to $15.4 billion, Real Capital Analytics Inc., a commercial real estate research company in New York, said April 22.

“What we have is a bottom in the market,” Christopher Cornell, an economist at Moody’s Economy.com in West Chester, Pennsylvania, said in a telephone interview. “We have seen essentially a flat trend in commercial property prices in the last several months.”

Pacific Investment Management Co. (Pimco) released their analysis of the commercial real estate market this week, saying that unemployment and property price uncertainty will continue to put a damper on recovery.

A Wall Street Journal article outlined the key findings:

–Capital has returned to commercial real estate. “But optimism should be tempered, because national price indices are misleading when transactions are limited and fail to reflect the significant uncertainty around property valuations,” the report said.

–The transfer of commercial real estate risk out of the banking system may take longer than previous cycles, and as a result, prices won’t return to 2007 levels only toward the end of this decade.

–Macroeconomic factors such as unemployment will affect the outlook for rents, vacancies and capitalization rates.

Pimco suggests there are opportunities for patient investors as the deleveraging continues. Some of the options include dispositions of the assets of banks taken over by the Federal Deposit Insurance Corp., restructuring of large commercial loans and buying discounted subordinate positions in commercial mortgage-backed securities.

An article last week in the LATimes noted that while prices are not exactly climbing, investors are “on the prowl again” and bidding is brisk for desirable commercial properties.

The report noted that there is a lot of commercial real estate investment money on the sidelines awaiting bargains that just haven’t materialized because lenders have been extending loans.

When attractive buildings become available, bidders are showing up.  The Wilshire-Bundy Plaza, a preeminent Brentwood office building, drew 40 bidders and fetched $111 million.  One CRE broker called that “an incredible price”.

The article also noted:

If the commercial real estate market continues to gain strength it would represent a significant shift in economic risk because many experts had feared that mass defaults by landlords on their loans could cripple banks and drive the country deeper into recession.

“It’s true that thousands of commercial loans must be worked out and some of these properties will enter the market in 2010,” investment banker David Rifkind said. But “federal policy has been accommodating to banks and they are not being forced to realize losses.”

“There is so much money sitting on the sidelines that when distressed assets or even small pools of loans come to market, there is a flood” of interest, said Rifkind, managing partner of George Smith Partners.

“That became palpable to us in the first quarter,” he said. “Money can’t stay on the sidelines for long periods of time. It has to retool and be put to use.”

Dr. Sam Chandan, President and Chief Economist of Real Estate Econometrics and an adjunct professor of real estate at the Wharton School of the University of Pennsylvania, recently gave a presentation on what he believes 2010 holds for the commercial real estate market.  The upshot of his findings:

• Though the economy remains fragile, we are beginning to recover from the depression scenario
• The economy will need support the next few years
• There will be some modest growth in spending in 2010
• Multifamily is not faring well as the greatest demographic for renters is in the 21-29 year age range; this group is facing 16% unemployment and living back at home or pursuing advanced degrees
• The real estate sector of the economy has declined sharply from 2007 highs
• The first time home buyer program undercut the industry
• NOI will stabilize over time; last recession it took 4 years to stabilize
• Transaction activity will be primarily concentrated in the REIT sector and private buyers
• Private buyers will be seeking properties in the $1-3,500,000 price range
• Prices will stabilize and credit availability will be more robust
• Retail operations will remain challenging
• Still a disparity between buyers and sellers but the gap is narrowing
• Investors waiting for the flood of distressed properties have been disappointed
• FDIC has instituted a variety of programs to avert flooding the market
• Lenders are exercising the extend and pretend option
• The CRE section of the economy will revive with the creation of sustainable jobs

Dr. Chandan’s personal website is www.chandan.com.