Commercial real estate turns corner in '11

Chris Stephens

2011 was a year of increased commercial real estate activity in Alaska, and 2012 appears likely to continue that improvement.

Uncertainty about the future has been our biggest problem. Uncertainty was reflected in the decisions of many companies here simply to renew leases rather than buying, building or moving to larger spaces. Sales have been difficult. Buildings considered to be solid investments have been scarce on the market. Buyers have been cautious about completing purchases.

But Anchorage is back on a growth track. Our city has been fortunate to avoid, for the most part, the disastrous recession that has rocked the rest of the nation. Alaska's economic growth, which slipped to a negative 1 percent in 2010 (after 20 years of steady growth), turned around in 2011 to a positive 1 percent growth. Economic growth means increased demand for commercial real estate, which has shown up in improved market activity and absorption of lease space.

During the past year, vacancies in the class A office market decreased to about 5 percent. B space vacancy remained steady at 7 percent. New office buildings constructed in the past several years are largely full. There is a speculative for-lease office building under construction at 2701 Gamble Street that will have 35,000 square feet on three floors; it will be ready in April. Another speculative lease office building is planned to break ground in May with eight floors and 84,000 square feet at C Street and International Airport Road.

Rates in recent new buildings and those under construction are in the $3-plus a square foot range. Older class A rates range from about $2.55 to $3. Class B office space has wide variety available in terms of quality, location and size. Rates range from about $1.25 to $2.35 a square foot.

Industrial space has had a slight decline in vacancy rate to about 5 percent. Lease rates range from about $.85 to $1.10. Rates vary significantly based on the amount of land included in the lease. Note that these rates are based on the tenant paying utilities and minor maintenance and the landlord paying taxes, insurance and major maintenance. This is different from what is typical in the rest of the nation, where tenants usually pay taxes and insurance.

Retail continues its run of growth with national retailers continuing to find Anchorage a worthwhile market. More are coming. Tikahtnu Commons in northeast Anchorage has become the major retail location in that part of town and north past Eagle River.

The big news is the opening of an Olive Garden restaurant this month at Tikahtnu,with a second Olive Garden going into the Dimond Center in South Anchorage.

The malls are doing well. Even Glenn Square, at the Glenn Highway and Mountain View Drive, which has been plagued by high vacancy because of competition from Tikahtnu, is doing better in leasing small shop space.

Strip retail is generally tight. Rates range from $1.15 to $2.50 a square foot, depending on location and quality.

Commercial land prices have been generally flat, although prices can vary significantly depending on factors such as location, access, zoning, soil condition and size. In general, industrial land is about $10 to $12 a square foot; commercial land ranges from $12 to about $35 outside of downtown. Downtown prices range from $35 to about $140. Soil condition is a major issue and can add significant cost. The best land has been developed: We are dealing with what's left.

Investment property sales have been slow because of the lack of available properties. Many buyers want the higher returns that commercial real estate provides, as compared with most other types of investments. Yet property owners have been reluctant to sell because they don't have another, better use for the money. Financing for solid investment properties is not an issue.

The national economy is beginning to show signs of improvement. Many of the questions we've faced here in Alaska should be resolved this year. The Alaska economy is on an upward path. I think it will continue to grow in spite of cutbacks in federal spending.

In the long run, Pacific Rim countries are going to continue strong growth with high demand for raw materials. Alaska's location on the Pacific Rim and its abundant natural resources mean our state will benefit. That demand will be a major factor in our future economic growth and development.

As the overall economy continues to improve, so will our commercial real estate market.

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