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Commercial real estate's mixed bag.

Booms, busts and slow growth give the state's commercial real estate industry a roller-coaster ride.

Alaska's commercial real estate market, aside from the retail craze sweeping urban centers, is playing to mixed reviews. Office and warehouse leasing appear healthy, but new construction and sales in these market sectors continue to lag well behind the boom years.

"It's nothing to write home about, but there's nothing to worry about either," explains Gregg Gunnarson, vice president of Management Services for Jack White Co. "I think it's a good, stable year and that it will continue through 1993 with moderate growth."

The Alaska Department of Labor agrees, projecting about a 2 percent annual growth rate in the state's economy through 1994. While other sectors of the economy, such as transportation and mining, are expected to contract, retail construction and employment are surging across the state.

Shark Feed

"It's typical that once a retailer moves, their competitor moves with them -- it's sort of like a shark feed. It's not that the pie is that much bigger up here, it's just that the pie is going to be cut into smaller pieces," observes Dale Jackson, president of Anchorage-based TRF Brayton Co.

As national retailers Kmart, Wal-Mart, Fred Meyer, Costco and Pace Warehouse enter or expand their base in Alaska, small retailers that cater to low- and middle-income wage earners could be squeezed out of Anchorage and other urban areas, dumping huge amounts of commercial space on the market.

"I think we are getting about twice the amount of retail space we need for our population," says Jackson. "Those that can adapt to the change will probably survive. But you're going to see a lot of them fall out, especially the marginal ones."

While it's no doubt a banner year for retail and government construction in Anchorage, however, it probably will be years before Anchorage lease rates increase enough to justify the cost of new office buildings, particularly high-rise or so-called Class A structures. On the other hand, "We're finding that the space is relatively well absorbed," notes Jack White's Gunnarson.

A recent Jack White survey of 3.5 million square feet of Class A and high-quality Class B office space in Anchorage found an overall 8 percent to 10 percent vacancy rate among the 40 properties surveyed.

"I don't think I would characterize it as a tight market -- but it's probably in balance right now," says Gunnarson. "There's a reasonable demand on the existing supply but not enough to push rates up."

TRF Brayton, which handles leasing on about 2 million square feet of office, warehouse and retail space, says vacancy rates in the Anchorage office market are difficult to figure at times, partly because of widespread tenant movement between office buildings.

For example, TRF Brayton's Jackson points out that 100,000 square feet of unoccupied space in city hall won't be counted in Anchorage's office inventory until building renovations are completed. When city workers move back in, four other buildings around town will be vacated, putting thousands of square feet of office space on the market.

Jackson also notes that certain segments of the office market, such as environmental companies and government agencies, are expanding, while others, such as accounting and law firms and oil companies, are shrinking.

He adds that office and warehouse leases taken by companies and firms catering to the 1989 Exxon Valdez oil spill are ready to expire, adding yet more office space to the market.

Mixed Bag

"What confuses it so much is that it is such a mixed bag, and only time will tell ... what the net effect is," says Jackson. "But if you are looking at the market as a whole, you might be looking at a slight positive gain. But there will be definite losers in certain areas."

The computer revolution also could have a long-term negative effect on office demand. Explains Gunnarson, "You can actually do the same work from home. That's happening quite a bit in the Seattle market. So it may be that our office inventory may be adequate for 10 years."

Of all the commercial leasing markets in Anchorage, industrial warehousing is the tightest, especially for clients with specific needs wanting just a few thousand square feet of space.

"Fit is the main issue -- and there's not a great deal of inventory," explains Timothy Spernak of Jack White.

Adds Jackson of TRF Brayton, "The problem is not that there is a lot of vacancy in that area. The problem is that there are only a limited number looking for big spaces. The major companies are in such a cost-cutting mode or cost-cautious mode, they will not pay a dime more for what they want. So it really boils down to whether you want to break (the space) up and create more traffic."

While leasing rates for office and warehouse space have improved since Alaska's great economic recession, they're still not high enough to justify the cost of new private construction in Anchorage.

"We're at least 75 cents a square foot away from new construction," says Jack White's Gunnarson. "Rents have to be $2.50 to $2.75 a square foot to build a Class A building."

And while low interest rates on bank loans have spurred the residential real estate market, high interest rates, large down payment requirements and the lack of available financing continue to depress the commercial market. Today's buyer is either a well-heeled investor who can bring a lot of money to the table, or an investor who can live with a short-term loan.

"It's not very easy for your average investor to buy a 10,000-square-foot office building that he doesn't occupy. It's going to be very hard for him to get a loan in this banking market," says Gunnarson.

Large commercial tracts are also becoming difficult to find in the Anchorage bowl these days. Much of the remaining land is either of poor quality and therefore expensive to develop, or the owners aren't willing to sell at today's prices.

"If you drove around the downtown area, you would assume there's lots of land available," observes Jackson. "In fact, there's darn little. Most of it is owned by people who have no intentions of selling."

Get Ready, Fairbanks

Meanwhile, Fairbanks and Juneau also are cashing in on Alaska's retail construction boom, although other segments of commercial markets in these towns aren't nearly as robust.

In Fairbanks, "I see continued slow growth but no burning aspect of the market," notes Robert Fox, associate broker for ERA Meyers Real Estate.

However, Fox says that with a tight 3 percent vacancy rate in Class A buildings, Fairbanks may be ready for a new office building. But he cautions, "I think the banks are going to want to see a lot of field work first to see if there is a demand."

Fox also says the Fairbanks warehousing market is generally "pretty tight" but that Class B and C office space is 15 percent to 20 percent vacant. And there is plenty of land available for development, he adds.

Juneau - Renewed Optimism

In Juneau, John Williams, broker/owner of ReMax of Southeast Alaska, says market fears over the recent closure of the Greens Creek mine never materialized, adding that new retail construction and the prospects for additional hard-rock mining have brought renewed optimism to the city.

Williams points out the industrial warehousing market is strong with active buyers and that space is "relatively tight." He says the office market is stable with a 15 percent vacancy rate and that no new construction is planned in that market sector. Land is available outside of the downtown area.

"Based on residential sales and the traffic in commercial activity, things are improving. I would say it's a better year than last year," concludes Williams.

While industry analysts agree retail and government construction projects should keep Alaska's economy hopping for awhile, it's difficult to predict how the commercial real estate market will perform after 1994. But new oil discoveries in the Cook Inlet and on the North Slope could slow production declines at Prudhoe Bay, the state's largest source of income.

"Some people think it's going to boom in the next three to four years, while others think it's going to bust," says TRF Brayton's Jackson.

"I think it will remain a mixed bag for awhile. But if nothing else, the one thing the business community should have learned by now ... is that quality real estate properly located works. The other thing is caution -- you've got to be cautious in this business."
COPYRIGHT 1993 Alaska Business Publishing Company, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Tyson, Ray
Publication:Alaska Business Monthly
Article Type:Industry Overview
Date:Jul 1, 1993
Words:1426
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