Reversing two months of increasing commercial real estate prices, all three of CoStar's "headline" Commercial Repeat-Sale Indices decreased in October, continuing the recent see-saw performance of commercial real estate pricing, according to CoStar Group's newly released Commercial Repeat-Sale Indices (CCRSI).

CoStar's national all property type index declined 3.88% during October, giving back its 3.07% gain in September. The index representing all commercial properties and the broadest industry measure of commercial real estate transaction pricing, slipped to its lowest point since the index peaked in February of 2008. While still decreasing, the rate decline has begun to slow considerably. Since June of 2009 the rate decline has been reduced by half.

CoStar's general commercial real estate pricing index, representing smaller transactions that comprise the largest number of real estate transactions, experienced a larger monthly decline, 5.11%.

CoStar's investment grade commercial real estate pricing index, representing larger transactions that comprise the majority of the market on a dollar volume basis, experienced the smallest decline, 1.1%. The average deal size within the investment grade pricing index fell more than 63%, from more than $23 million in September to $8.4 million in October.

October's dollar volume for repeat property sales declined to one-half of September's dollar volume.

The high volatility apparent in the latest monthly update of CoStar's Commercial Repeat-Sale Indices is indicative of two prominent trends. First, monthly swings in pricing, sales volumes and average transaction size are common in markets experiencing a turn.

Second, it reflects the tension in a market characterized by the majority of sales occurring at two ends of the spectrum -- distress sales at the bottom end of prices, and keen investor appetite, especially among REITs, for higher quality properties in core markets at the top end of the market. We expect to begin to see the extremes in range of prices replaced with more modest and normal monthly price trends when the proportion of distress sales begins to slowly reduce.

Quarterly Performance: The Haves and The Have-Nots

The recovery in pricing of larger commercial real estate sales transactions continues to significantly outperform the recovery in pricing of smaller-sized transactions for the year.

The investment grade pricing index remains up 9.11% for the last three months, an extremely strong performance buoyed by the increased volume of larger-than-average deals and a large percentage of transactions that occurred in core markets in September.

Conversely, the general real estate pricing index remains down 7.70% for the last three months.

Peak-To-Trough Performance

The investment grade pricing index was the first of the three major indices in CoStar's repeat-sales index to begin to decline, in September of 2007. The general real estate pricing index didn't begin to decline until March of 2008. From its peak values, the general real estate pricing index has fallen 30.34% while the investment grade index has fallen 34.55% since its peak.

Sales Volumes and Future Pricing

Investment grade sales volume, while lower for the month of October, has increased 14% during the last three months and is nearly 70% higher than one year ago. General real estate volumes have declined 6% during the last three months and increased a mere 7% from a year ago.

"We expect the current see-saw pattern in pricing to continue as a result of the relative 'trickle' of properties that are being allowed to come to market," said Dr. Norm Miller, vice president, analytics for CoStar Group.

"Additionally," Miller added, "CoStar has reported increases in average asking rents and positive net absorption for several commercial property markets. However, net operating incomes are expected to continue to deteriorate for a time as rents on existing leases roll to lower market rents. At the same time, the lack of new supply could lead to strong rent growth in the future. Lastly, if interest rates begin to increase, we believe it will be a race between the rate of increase in net operating incomes and the rate of increase in interest rates."

This CCRSI report is based on data on commercial real estate sales transactions through the end of October 2010. In October of 2010, 604 pair sales were recorded compared to 612 sales pairs from September. Information on a small number of additional sales is also expected during the next few months, Miller said.

"Typically we receive additional data that adds a few percent to the numbers from two months ago and up to 12% more data from one month ago," Miller said. "Based on this, it appears that transaction volumes are stable or slightly up."

"Overall, there has been a significant upward trend in pair volume going back to 2009. January 2009 appears to have been the low point in the downturn in terms of pair volume, when 376 transactions were recorded. Since then, pair dollar volume has increased overall and the average deal sizes for both general and investment grade have increased as a general trend," Miller added.