By Kate Gibson

The stock market has for weeks been dogged by talk of trouble lurking in commercial real estate, yet an exchange-traded fund of commercial property companies has rallied 50% in the last two months, despite commercial mortgage delinquencies hitting 11-year highs in April.

Delinquencies are up "by a factor of five from a year ago. Even though commercial real estate lags the cycle, the numbers highlight the battle banks face in producing profits," said Nick Kalivas, equity analyst at MF Global Research.

Property research firm Trepp LLC on Thursday reported the level of loans 30 days or more behind in payments last month climbed to 2.45%, with the credit squeeze making it hard for landlords to refinance bank loans.

"We're very concerned about commercial real estate," said Bill Feingold, managing director at Newport Value Partners. He believes the stock market has gotten ahead of itself, rallying on earnings from banks and other companies that stem from cost cuts as opposed to growth.

On Friday, financial shares paced strong gains after the Labor Department reported job losses slowed in April. . The Dow Jones Industrial Average (DJI) was up 128.16 points at 8,538.01. The S&P 500 (SPX) added 16.37 points to 923.76, and the Nasdaq Composite (RIXF) advanced 13.75 points to 1,729.99.

Also rallying, the Dow Jones U.S. Real Estate Index (IYR) rose 5.6% to 34.43, up 55% from its March 6 close of 22.21.

The index's components include Simon Property Group Inc. (SPG), the nation's largest mall owner and biggest publicly traded U.S. real estate company.

Simon Property on Wednesday said it would sell $800 million in new stock, its second foray into the equity markets in less than two months, illustrating its need for capital.

Shares of Simon Property on Friday gained 0.6%. The company earlier this month reported first-quarter earnings rose 14% amid higher rents, although occupancy rates weakened as retailers hit by declining sales posed difficulties for mall landlords, some of whom are saddled with large debt.

One case in point is Simon Property rival General Growth Properties Inc. (GGWPQ), which last month filed for bankruptcy protection as the Las Vegas developer and shopping mall owner struggles to restructure $27 billion in debt.

Once one of the most highly valued REITS [Real Estate Investment Trust] in the market, Nasdaq has since suspended trade of General Growth Properties' stock, which in recent weeks dived under one penny. A year-ago, its stock priced at $42.00 a share.

One of the key stand-outs in the most recent Senior Loan Officer Survey is "the extent to which demand for commercial real estate loans has collapsed," Merrill Lynch & Co. Inc. analysts Drew Matus and David Rosenberg wrote in a Tuesday note.

The net percentage of banks reporting weaker demand for commercial real estate jumped to 66% in the second quarter from 55% in the first quarter in what the analysts called the weakest showing on record."

"Meanwhile, the majority of banks continue to tighten their lending standards on commercial real estate loans. Fully 66% of banks tightened standards and, though that is marginally better than the 79% in Q1, this tells us that we can expect continued declines in commercial construction the quarters ahead," Matus and Rosenberg said.