UPDATE 2-US commercial property values seen down 25-30 pct

NEW YORK, Oct 23 (Reuters) - U.S. commercial real estate values may drop as much as 30 percent from their peaks as financing options are pinched by the credit crunch and lenders demand higher returns, according to JPMorgan Chase & Co.

The slowing economy has also led to rising vacancy rates and a slowdown in cash flows from the properties used to finance debt, JPMorgan analyst Alan Todd said in a slide presentation for a Thursday conference call.

While the average price decline is expected to range from 25 to 30 percent, property in better markets will be more resilient. Those in weaker ones could see prices drop more than 30 percent.

So far, prices have fallen 12 percent, but still have a way to go before bottoming, according to JPMorgan analysts.

Estimates vary, however, especially since sales are off about 90 percent, leaving few price comparisons. Real estate services company Jones Lang LaSalle Inc (JLL.N) forecasts a drop of 15 to 20 percent from the highs last year.

Meanwhile, lenders and equity investors will demand higher returns for added risk, pushing prices down when owners need to refinance their loans. Many of the balloon payments for loans from the easy credit days of 2005 to early 2007 will be up for refinancing by 2010, forcing borrowers to sell either part or all of their investment.

Funding concerns begin to worsen in 2010, with about an annual $55 billion in fixed- and floating-rate bonds needing refinancing by 2012, he said.

Financing constraints may persist despite initiatives by the U.S. Treasury to take hard-to-trade assets off balance sheets of banks and other institutions frozen by their portfolios, he said.

Todd's assessment comes as investors have upped bearish bets on commercial mortgage-backed securities (CMBS) on expectations that a slowing economy will cut incomes from properties such as hotels, retail store and office buildings.

Few analysts expect CMBS to match the meltdown in subprime residential loans, but selling has nonetheless intensified as the financial crisis sends investors fleeing risky debt.

Commercial real estate prices zoomed higher from 2005 to 2007 with the help of easier lending standards by underwriters that funded a greater portion of properties' values, or that made loans based on expected increases in cash flows in the future. Bonds originated in 2006 and 2007 are seen leading downgrades, which Todd said will increase through 2009.

Delinquencies are near a relatively low 0.5 percent, but rising unemployment suggests they will rise, he said.

But the U.S. CMBS market, the source of much of the cheap debt, has dried up. Just $12 billion of U.S. CMBS brought to market in 2008 so far, compared with $280 billion in all of 2007.

In fact, not a single U.S. CMBS deal was completed in the in the third quarter, the first time since Total Securitization newsletter began publishing tables in 2004.

The scarcity of loans for commercial real estate is a key concern for borrowers with loans coming due, Todd said. With the CMBS market on life support, borrowers in 2008 have turned to banks and insurance companies. But those lenders now either have their own balance sheet problems or are over their allotment for real estate investment.

Yield spreads on even the top, "AAA"-rated CMBS are rising with dealers laden with the bonds, and as hedge funds unable to find cheap funding have "exited" the market, he said. Other buyers, such as insurance companies, which have found themselves overly exposed to the sector are also selling. (Reporting by Ilaina Jonas and Al Yoon; Editing by Jonathan Oatis, Richard Chang)