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Chris Stephens: Anchorage commercial real estate is a tale of boom, bust and recovery

Chris Stephens

I started my commercial real estate brokerage in Anchorage in 1981. In the 32 years since, I have seen everything a market can do -- from boom to bust, recovery and steady growth.

When I started, Anchorage was much smaller. We were a city of about 175,000 people, compared to today's population of nearly 300,000. The city and state were on the verge of an economic boom. Oil revenue started flowing into the state with the completion of the oil pipeline and the subsequent run-up in oil prices and oil development.

With the oil bonanza bringing in billions of dollars to state coffers, state spending took off. Oil exploration was going full throttle; the major oil companies were pressing ahead with big developments on the North Slope.

People poured into the state looking for work. Construction was going on everywhere. Financing was available for just about anything. We saw construction of all kinds of commercial properties, from class A office buildings to retail malls. Class A rents reached $2.50 a square foot. Warehouse space was in such short supply that rates soared as high as $1, a rate so high we're only just now seeing it again.

The commercial real estate market benefited from an added kicker. In 1980, Congress changed the tax rules for investment real estate so a property could have a positive cash flow but show a tax loss. As you can imagine, investment real estate became a hot tax shelter that drove demand in an already booming economy. Everyone jumped into investment real estate.

But it was too good to last. In 1986, Congress reversed the tax rules, which wiped out about 20 percent of the value of investment real estate. A year later, oil prices started a drastic decline.

The party was over. Our economy crashed. While the market showed signs of overbuilding as early as 1984, the crash caused property values to fall off the table. Borrowers started defaulting on loans all over the place. Banks, investors and businesses were going under. Class A office rents dropped to $1.75 a square foot and warehouse rates to 45 cents.

Recovery took a long time. Alaska was red-lined by lenders outside the state. The surviving local banks turned into very conservative lenders, which made financing difficult. Many owners couldn't sell properties for the prices paid during the boom. And Alaska had a risky boom-bust reputation.

The market leveled out in 1988. By 1992, it showed solid signs of recovery. This was the beginning of a 20-year run of steady growth. In that year we saw national retailers come to Alaska: Costco, Kmart and Eagle Hardware (later Lowe's). These were followed in 1993 by Wal-Mart, with two locations in Anchorage and one in Wasilla.

Our economy kept perking along. By 2000, we had a 1 percent office vacancy with rates up to $2 a square foot. In 2001, the first speculative office building since 1984 -- the Michael Building on Gambell Street in Midtown -- was constructed. Lease rates for all types of space began to move up, with class A office reaching into the range of $2.75 a square foot by 2005. Warehouse was up to 80 cents.

During this period, Anchorage's land shortage became apparent. With the city's steady growth, demand for land increased and finding sites for commercial and industrial development became more difficult. Industrial land prices climbed steadily from $3 a square foot in the 1980s to $6 by 2000, to the $9 range by 2005. They are now in the $12 range. The shortage of land in the Anchorage Bowl is a growing problem and prioritization of use is a major issue.

We also became painfully aware that warehouse development for lease does not pencil out in Anchorage because of the high cost of construction. The only new construction is for owner-occupants. We have had the same warehouses for lease all this time, with additions to the lease market only from owner-user buildings that have become surplus for the owner-user.

The real estate bubble from about 2003 to 2008 affected residential properties more than commercial real estate, which largely avoided getting caught in the bubble. Banks remembered the pain of the market crash here in the 1980s -- perhaps the one positive result of that crash.

National retailers keep coming to Anchorage. In the last half-dozen years we have seen development of speculative high-quality class A office buildings that are largely full today. Lease rates in those buildings are more than $3 a square foot. Office vacancy rates are low and more new construction is certain. Warehouse rates are now in the $1 range, still way below the rate required for new construction.

We have come a long way since back when I started. The town of Anchorage has grown into a small city with a much larger, more diverse and more stable economy and commercial real estate market. One thing that has not changed is the city's vigor and enthusiasm, and the excitement and many opportunities it provides.

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


Chris Stephens
real Estate