Local commercial real estate holds steady

Chris Stephens

While the national commercial real estate market is showing slight improvement, the Anchorage market continues to hold steady.

Commercial real estate follows the economy. With the national economy showing improvement, so is the national commercial real estate market as reported by CoStar Group Inc., a real estate information service.

Nationally, unemployment is down from a high of 10.2 percent to about 8.8 percent, with 1.7 million jobs added through the first quarter. While too many people are still unemployed and the economic recovery is slower than we'd like, the numbers are better.

Manufacturing utilization is up from 69.7 percent to 74.3 percent. Corporate profits have improved, consumer spending is up, and the Standard & Poors 500 Index has doubled since the low of March 2009. Still, little new development is taking place.

Nationally in commercial real estate, the news is slow improvement. Office vacancies are down significantly -- from a high of 17 percent in 2009 to 12.6 percent now. Sales of office buildings, which were virtually on hold, have picked up dramatically in major markets.

Retail vacancy is down slightly to 7.1 percent from 7.5 percent in 2009. Industrial vacancy is also down slightly to 9.9 percent from 10.2 percent in 2009. Where the national market goes from here depends on corporate investment and hiring, and that depends on the economy.

Meanwhile, in Anchorage our economy is showing slight growth after 19 years of steady growth and a year of slight decline.

Our commercial real estate market is plagued by uncertainty for the second year. The causes of that uncertainty include the national recession, questions over the prospects for construction of a gas pipeline from the North Slope to the Lower 48, delays in Shell Oil's efforts to explore the Chukchi Sea, and pessimism about future oil company investment in the face of North Slope production declines.

The Legislature's inconclusive debate this past session about reducing oil taxes to stimulate production created additional uncertainty.

Recent news that the Denali Pipeline group has dropped its proposal for a gas pipeline has added to the overall anxiety.

This uncertainty is reflected in our commercial real estate market, primarily in much lower leasing demand. Tenants are tending to stay in their existing spaces rather than expand into larger new spaces when their leases expire. Many national companies are holding back on expansion here, and local companies are not betting on growth the same way they were a few years ago.

Most office buildings are nearly full, with the exception of new Class A buildings constructed over the past few years. Those buildings have been leasing slowly, but still have about a 20 percent vacancy compared to 3 percent for the rest of the Class A buildings. An increase in sublease space has occurred, due mostly to cutbacks by engineering companies. Class B office buildings have about a 6 percent vacancy.

Class A rates are about $3 a square foot for new buildings and $2.65 for older ones. Class B rates range up to about $2.25.

Industrial space has about a 4 percent vacancy with more space on the market. The average time to locate a tenant is up to 287 days. At the same time, rates are generally holding at 80 cents to $1 a square foot.

The retail market just won't quit. Tikahtnu Commons in northeast Anchorage is a great success but is taking tenants that would otherwise locate in northeast Anchorage or Eagle River. Petco is expanding throughout the state, Sportsman's Warehouse is looking at a new store in Soldotna, Walgreens is here, Olive Garden is coming, and Cabela's sporting goods is looking for sites here and in Fairbanks.

Retail strip space is generally full; rates range from $1.25 to $2.95 a square foot. The bad news is that Glenn Square in northeast Anchorage has never performed as planned, being eclipsed by Tikahtnu Commons.

Investors are clamoring for good investment properties. The operative word is "good." That means a stable tenant base in a well-maintained, realistically priced property. But owners have been reluctant to sell. They don't know what to do with the money from a sale and in uncertain times the tendency is to just hold on and not make any moves.

Like the national market, our commercial real estate market will follow the economy. Alaska's economy has shown remarkable stability in the face of the disastrous national economy and uncertainty over major projects here. Alaska has a lot going for it and commercial brokerage activity will pick up as the economy continues to grow.

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