Commercial Real Estate Outlook Not so Rosy in Anchorage

Lawrence Yun, chief economist for the National Association of Realtors, has forecasted a national 2.5% increase in office rent, a 4% increase for industrial properties and a 2% increase in retail for 2018. Here in Alaska, our commercial real estate forecast doesn’t look quite so rosy, according to the recent presentation at the BOMA lunch by Mark Filipenko of Bond Filipenko, commercial properties LLC. Retail lease rates fell in 2017 to an average of $2.04, down from $2.10 in 2016. Class A lease rates still hover over $3.00 per square foot while older Class A rates hover above $2.50. However, both old and new offer concessions such as free rent and larger allowances for tenant improvements. After attending the BOMA lunch in 2017, I decided to move my brokerage from Class B space to a mid-level Class A space. It was, and still is, a good time to move your offices in 2018.

Anchorage lacks industrial land for development and the disconnect between the cost of new construction and existing industrial properties continues to widen. The overall industrial vacancy rate has remained stable over the past three years between 2.22% and 2.4% in 2017. But, in 2008, metal construction costs were between $120-$140,000 per square foot. In 2017, those costs hover between $175-200, according to Filipenko, making speculative development problematic. Industrial land, zoned I1 and I2, has remained constant at $12-20 per square foot, depending on the quality of the dirt. Owner users or owners who have held industrial land for a long time are the most likely candidates for new industrial construction.

Locally, overall retail vacancy rates were 4.59% in 2017 with mall vacancy rates at 7.16%, which was before the Sam’s Club and Sears pull out announcements. What worries me most about retail are the typical mom and pop small businesses that populate the first floor of mixed-use buildings. Whether it’s a coffee shop, a small bookstore or a unique gift store, it’s hard to compete with the big boxes and Amazon prime. Price vs. customer service vs. convenience is the retail dilemma for 2018. Whether it’s a drone or a drive-up at Freddy’s to pick up your groceries, it’s hard for the small mom and pops to compete.

Henry Chamberlain, President and Chief Operating Officer of BOMA International recently identified the top 18 commercial markets. Needless to say, Anchorage was not one of them. And, yes, our neighbor to the south, Seattle, topped the chart. While Houston, with 10,000 homes uninhabitable and 50,000 homes with major damage due to the hurricane impact, was off the chart.