I am often asked what lease rates are going to do over the next couple of years -- a good question without an easy answer. Here is a look at current rates and a discussion of the major factors influencing future rates.

Anchorage commercial lease rates have gone up dramatically during the past 10 years.

For example, rate ranges in 1999 class A office were $1.75 per square foot, warehouse was 75 cents, and strip retail space was 95 cents to $2.25.

Five years ago, the rate ranges for those same spaces were $2.45, 85 cents, and strip retail was unchanged.

Today, office rates range from $2.65 for older class A buildings to more than $3 for new buildings. Warehouse rates are about $1, and strip retail is as high as $3.25.

Rates have reflected Anchorage's steady economic growth for the past 19 years. During that time, the vacancies created by the market crash of the late '80s were absorbed and speculative office construction began in 2003. Since then there has been new office construction for both speculative and user-occupied buildings totaling about 1.2 million square feet of office space.

There has been no speculative warehouse construction because the lease rate to justify construction is about $1.35 per square foot, well below current rates. There has been some strip retail construction and mall development in northeast Anchorage at Glenn Square and the Tikahtnu Commons.

So far this year the lease activity for commercial space is much lower than it has been over the past several years. Interestingly, we are seeing some national companies downgrading, moving from class A office space to class B, to lower their operating costs.

The factors influencing future lease rates are many and varied. The forecast for the Anchorage economy this year is slight to moderate decline, which makes us look good compared to the rest of the country. But how will our economy really perform and affect the demand for space? When will the national economy begin to recover? How will the recovery, when it happens, impact us?

Current occupancy rates are very high with only limited space available, and new construction will not relieve the shortage of space for most tenants. While construction costs have actually come down due to excess supply of materials, the cost of constructing new space is still so high that it requires lease rates at the very top of the market. Only a small fraction of Anchorage tenants can afford those rates.

The gas pipeline from Prudhoe Bay is a huge project of equally huge importance to the state. The competing pipeline projects -- Denali, owned by the gas producers, and TransCanada Corp., under contract with the state -- will be seeking commitments in 2010 from gas owners to ship through the pipe. The machinations and politics of these competing proposals are beyond description. I hope these two competing proposals will somehow result in a gas line being constructed.

The price of oil, critical to the state budget and continued oil exploration, is now trending upward in the mid-$40-a-barrel range. OPEC wants the price to be in the $60 to $70 range, and because OPEC countries control a lot of the supply they are likely to get their way. But given all the questions about world demand for oil and other factors, who knows.

Given all these uncertainties, it is unlikely we will see lease rate growth of the same magnitude over the next several years as in the past few years, and it is possible rates could decline. But should the price of oil rise into the $70 range, the national economy begin to recover, and a gas line agreement reached that includes construction, then it is a whole new ball game.

Chris Stephens, CCIM, is a local associate broker specializing in commercial and investment real estate. His opinion column appears every fourth Friday.

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