The CoStar Commercial Repeat-Sale Indices (CCRSI), produced by CoStar Group, found that investment-grade property continued to decline in value for the second straight month in July.

Properties of sufficient quality and size for inclusion in large institutional portfolios saw their value decline by 5.05% during the month following a similar dip in June. The cumulative drop of nearly 10% over the two-month period nearly offsets the strong 11.78% increase in May that gave analysts hope that the recovery might be accelerating. As a result, the three-month change in the investment grade index ending July 31 posted a slight 1% increase. The CCRSI August report is based on data through the end of July.

The investment grade index fell 14.34% over the last 12 months -- seemingly a large decline, but a major improvement over the 20% to 33% annual drops observed from April 2009 through April 2010.

However, while institutional real estate is softening, general commercial real estate continued to show improvement. The CoStar composite index for all commercial real estate rose 6.41% for general commercial property and 5.67% for the composite in July, suggesting that with investors finally able to source financing, interest is picking up in second-tier and tertiary markets and smaller properties. The general composite index remains down by nearly 6% from a year ago, but far better than numbers observed during the previous 12 months.  Still, given the weakness in the important institutional-grade market segment, "It's a shaky bottom" for commercial real estate, said Norm Miller, vice president of analytics for CoStar Group, Inc., commenting on the July indices.

"This recovery is not going to be V-shaped where we hit bottom and bounce right up," Miller said. "We're actually seeing investment-grade and general real estate go two different directions, which is pretty interesting."

"It appears transaction volume is picking up slightly in general real estate and [investors] are finally able to close some of those deals. I wouldn't say underwriting standards have loosened, but it's increasingly possible to get financing for investors with enough equity to put down."

Miller said the market will continue to be tainted for a while yet by distress due to the uneven national economic recovery. "A fair amount of distressed sales is mixing into our numbers, so we're seeing more distress for investment grade than for general real estate. By average transaction size, the distress sales are much bigger than general sales, and that means there's more distress mixed in with that larger investment-grade market."

Sales transaction dollar volume picked up for all property types during the second quarter of 2010, with significant increases in the office and multifamily sectors. Industrial and retail volumes remain low but also showed some increase in activity.Overall investment activity appears to be trending slightly higher so far in the third quarter over the second quarter, Miller said.

While transaction volume increases generally point to positive movement in pricing, the level of distressed sales is adding volatility and noise to the indices, "and all we can say now is we're observing a shaky bottom," Miller said.

CoStar launched the CCRSI last month in response to the void within the $11 trillion U.S. commercial real estate industry for an effective, non-biased indices to measure commercial real estate price movement by property type and geography. The index fills a gap for consistent and timely information on fundamental economic issues facing the CRE industry, including the important question of whether prices and values are climbing or falling on a month-to-month basis.

CoStar has identified more than 85,000 repeat sale pairs in its U.S. database, which it believes is the largest and most comprehensive comparable sales database in the U.S. commercial real estate industry.

Pair volume has been trending upward since 2009, with February 2009 appearing to have been the low point in the downturn, when just 374 sale pair transactions were recorded. Since then, pair volume has increased overall and beginning in November 2009, year-over-year changes in pair volume have been positive every month.

Other significant observations of the latest indices include the following:

• Public and private real estate investment trusts (REITs) have been the most active buyers, followed by developer-owners and individuals and investment managers, including hedge funds.
  
  
• Distress is a factor in the mix of properties being traded. Since 2007, the ratio of distressed sales to overall sales has gone from around 1% to above 23% currently. While overall distressed sales are still increasing, they appear to be peaking as a percentage of sales, although overall volumes are also picking up, according to the CoStar National Composite Monthly Indices.
  
  
• Hospitality, at 35%, showed the highest level of distressed sales as a percentage of transactions in the second quarter, followed by multifamily at 28%, office, 21%; retail, 18% and industrial, about 17%.