Anchorage economy mostly steady

Chris Stephens

The end of 2010 marks the second year with uncertainty hampering the Anchorage commercial real estate market.

Economic problems in the rest of the nation and uncertainty about the proposed gas pipeline from Prudhoe Bay to the Lower 48 have created a climate of caution and a wait-and-see attitude. Even so, the Anchorage economy has mostly held steady, with only a slight decline of about 1 percent.

This year has seen increased vacancies in almost all categories of space but lease rates generally have been holding. At the same time, lease and sale activity has been slow but slightly ahead of 2009, which was substantially below the banner year of 2008.

The Class A office market vacancy rate has developed two tiers: The new Class A buildings have a high vacancy, nearly 30 percent, and the rest of A category is substantially full. Lease rates in the new buildings are $3-plus per square foot, while older buildings range from $2.50 to $2.95 with about a 2 percent vacancy.

Class B vacancy has increased over the year to about 10 percent and lease rates range from $1.50 to $2.25 per square foot.

Warehouse vacancy has increased from about 3 percent to about 4 percent. Rates are unchanged, ranging from about 75 cents to $1.10.

Retail vacancy is higher in older buildings, while newer well-located properties have held their own. Rates vary widely, from as low as $1.10 to as high as $2.45.

The sales market has buyers but activity has been slow because sellers are scarce. Many buyers are motivated by substantially higher yields in real estate than they're finding from financial investments. Record low loan interest rates are another motivator for buyers.

Owners have been reluctant to sell mostly because they do not know what to do with the sale proceeds. Exchanging into another property can be difficult because of the limited supply of properties on the market. Low returns from financial instruments are unappealing to them and the stock market appears too risky for some. But the stock market recovery has provided some very high returns.

Next year looks as if it will be an improvement over this year because of several factors. Interest rates are down from previous years and rates will probably decline more as the Federal Reserve Bank increases the money supply to induce economic activity. Lower interest rates will make real estate more affordable for owner occupants and more profitable for investors.

The Anchorage Economic Development Corp. is predicting that the Anchorage economy will slightly improve -- with a shift to positive growth. Commercial real estate does what the economy does, so an improving economy should increase commercial real estate activity.

This next year we will learn the results of the recent "open seasons" offered this summer and fall by the two natural gas pipeline construction groups: BP and Conoco Phillips' Denali project and the TransCanada Corp.-Exxon Mobil prospect. I hope there have been workable submissions from potential gas shippers and an arrangement can be worked out among a pipeline company, producers and the state to allow construction to move forward.

The Lower 48 economy is proving to have a slow recovery, but nonetheless, there is recovery. As the economy improves, confidence should gain, which will translate to a more robust gas market.

We are very fortunate to live in Alaska, a state that to a large degree has avoided the recession and where we have a state government in relatively good financial condition. Our economy -- once derided as very unstable -- has proven to be extremely stable. We have lots of opportunities on a scale unimaginable elsewhere in the country. I am an optimist who is optimistic about Alaska's future.

Here's wishing you a very merry Christmas and most prosperous New Year.

Chris Stephens, CCIM, is a local associate broker specializing in commercial and investment real estate. His opinion column appears every month in the Anchorage Daily News.