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Space shuffle.

While retail real estate is booming statewide, office and industrial sectors, particularly in Anchorage, are less robust.

To many in Alaska's commercial real estate industry, the proverbial cup definitely looks half empty, rather than half full. Fresh memories of recession and the present reality of only modest recovery in most sectors of the economy are the leading causes of wariness among leasing agents, property managers and others who monitor the state's commercial properties.

Commercial real estate typically includes office buildings, retail space, industrial sites and multifamily residential rental properties. The primary indicators for the industry are occupancy rates, rent levels and the volume of sublease space available in the market. These numbers, which at best are usually estimates, can fluctuate several times within the space of a year, or even a few months.

There's been good news and bad news from the commercial real estate sector in Anchorage, where the market is characterized by a confusing variety of trends and new developments that make it difficult to know whether to celebrate or despair. The economy remains flat; commercial rents are not what they used to be, but they're holding fairly steady; and occupancy is high. But an explosion of construction in retail space by several major discount chains is creating uncertainties, and some observers are skeptical of new downtown developments.

In Fairbanks, which is toasting recent and upcoming economic gains related to military expansion and development of the Fort Knox gold mine, the commercial market's prospects are brighter. The same is true in Juneau, which currently boasts healthy office and retail space markets, and may even be poised for significant new construction if pending developments in the mineral industry receive go-aheads.

Problems & Promise. Despite the scarcity of reliable statistics for measuring Anchorage commercial market activity, many industry observers agree that the man with the best numbers is Ken Kincaid, a commercial appraiser and Anchorage manager for Shorett & Riely. The Seattle-based firm has been doing Alaskan appraisals since 1964.

Kincaid's best estimates put the total office building inventory in Anchorage at 8 million square feet (excluding property dedicated to military, medical and banking purposes) and the retail inventory at approximately 7 million square feet.

According to Norm Rokeberg, an associate broker with Jack White Co., the commercial real estate market in Anchorage is "surprisingly robust" considering the slowness of the recovery in Alaska, the national recession and the extent of bank failures.

Although Rokeberg is doubtful, several observers estimate office occupancy at approximately 90 percent. "Generally, the market has been improving over the last two years," notes Bernd Hoffman, owner of Hoffman Commercial Inc. "Both office and retail rents were on the upswing last year. To some extent that's leveled off. In 1992, we can definitely see a flattening of the economy."

And that's something to cheer about, points out Jeff Thon of Pacific Tower Properties. "We cry the blues, but actually we're pretty healthy when you compare us to other markets. The real problem we have here is perception," says Thon. He notes that many locals consider an 8 percent to 10 percent vacancy rate to be high, not realizing that vacancies in other markets are running much higher.

Thon blames negative press reports about the economy for skittish psychology in the marketplace, causing even businesses thinking of investing in foreclosed properties to hesitate. "It definitely affects people who are leasing and people who are thinking of buying as investors, even when they're buying at 40 percent of replacement value. It scares the hell out of them," Thon says.

The 1990-91 period produced healthy numbers in the office market: climbing rents and a corresponding increase in the occupancy rate. But the improvement failed to produce a sustainable trend, driven as it was by Exxon Valdez oil-spill cleanup activities. Last fall, Exxon Corp. ended its two-year cleanup bivouac in the city, putting a lot of class A office space back on the market.

"I personally took a big hit in my inventory when Exxon did their final demobilization last fall. That's one of the biggest holes in the market right now," says Rokeberg. "That has put pressure on rents. There's been some easing of rental rates, but not significant. They never did recover from the pre-1986 period."

Currently, Class A rates in Anchorage are holding stable at about $1.75 per square foot, says Niel Thomas, associate broker for Fortune Properties. He explains that two trends are shaping the Anchorage market: companies investigating opportunities to upgrade their leased office space and companies still taking advantage of bargain prices on foreclosed properties to purchase for their own use.

Many of those seeking to lease better office space are faced with impending rent increases of up to 30 cents per square foot at current locations, but find that once they factor in the cost of moving furniture, buying new phones and redoing stationery, they'll just about break even. "I see inquiries about upgrades, but not much action," Thomas says.

Real Estate Recycling. More positive for the Anchorage economy is the trend for large companies with the financial wherewithal to purchase foreclosed buildings to use as their corporate headquarters. "This market is driven by local owners who want to use the property themselves, rather than by investors," Thomas explains.

Thus, Veco Inc. moved into the old First Federal Savings building on Northern Lights and Arctic, and NANA Corp. now occupies the former site of Home Savings. "One man's trauma is another man's triumph," says Thomas.

Another trauma for some in commercial real estate is the shadowy sublease market, which results from now-vacant office space under lease to companies that have downsized since signing a rental agreement. The desire of the lessee to offset losses by subletting the space puts pressure on rent levels not only in the same building but throughout the market.

Pacific Tower's Thon cites the example of a large statewide law firm headquartered in downtown Anchorage that holds the lease on a whole floor of class A office space. The firm is attempting to sublet the space for about 20 cents per square foot less than the current prevailing rate.

"The sublease inventory is a little higher than the last couple of years because of the Exxon pullout," Thon says. He estimates that inventory at 2 percent of the overall office market. "It doesn't take too much sublease space to drive down rents," he adds.

In the retail arena, Anchorage is experiencing an explosion in new construction. From the heavy equipment breaking ground for a new Costco outlet in East Anchorage to the recent announcement that a Kmart store will be built in South Anchorage near the Diamond Center, new and pending projects will add nearly one million square feet of retail space to a market that most experts agree continues to be overbuilt in the retail sector. The ultimate impact of these new developments, which also include an Eagle Hardware outlet on West Tudor Road and talk of a major discount toy outlet, is difficult to project with precision.

"No matter how you scratch it, that's a lot," says appraiser Kincaid. "They're going into areas that are already having trouble competing with Midtown. There has to be a loser."

Bruce Chambers, a sales associate with TRF/Brayton Inc., says Anchorage is simply catching up with national trends in merchandise retailing. The so-called "big box" retailers featuring acres of goods in a no-frills setting were looking for new frontiers and decided the economy was sufficiently strong to justify trying to satisfy pent-up demand.

Chambers says most real estate professionals agree that the retail market has size constraints. "The retail pie won't get bigger, the pie will be sliced thinner. There's going to be tremendous pressure on a lot of retailers in town. A lot of people are concerned about it," he adds.

Says Pacific Tower's Thon, "We've always been overbuilt in retail, and the entry of the big companies isn't going to help that."

Kincaid sees a brighter outcome from the new developments. Echoing the conventional wisdom that the developments in many sectors of the economy are heavily influenced by psychological factors that can't be quantified, Kincaid says positive impacts will result if consumers feel they are realizing substantial savings at the new outlets and have more discretionary income, thereby providing additional economic stimulus.

Status Elsewhere. Psychology is an important part of the commercial real estate picture in Fairbanks, too, says Tom Roberts, owner of Tom Roberts Realty. "It's not necessarily what's happening; it's what people think is happening. If we perceive things to be okay, they're okay," explains Roberts.

In the Interior city, which also is experiencing a retail boom, reality and perception seem to be closely aligned at the moment. Class A office rents are lower than in Anchorage, but holding steady at about $1.50 per square foot, Roberts says. Both Class A and Class B office space are nearly full.

Fairbanks suffered less than Anchorage during the mid-1980s recession and now appears well positioned for commercial expansion. Favoring that outlook is progress on plans to develop the Fort Knox gold deposit.

Mining may push the Juneau commercial real estate market into a new era of expansion as well, says John Williams, owner-broker of Re/Max of Southeast. "The market is pretty stable right now, not a lot of movement, not a lot of absorption. Rents are basically stable," he notes.

Williams says occupancy is high downtown and in the Mendenhall Valley, both in retail and office sectors: more than 80 percent in the valley and 90 percent to 100 percent downtown. He predicts that development of the Kensington Mine and possibly the Alaska-Juneau Mine will spark new apartment construction and development of new industrial sites for mechanical and fabrication activities.

Anchorage Outlook. In Anchorage, the future of commercial real estate seems a little less certain. Both office and retail rents may continue to soften in the near term, especially in so-called peripheral areas of town, says Hoffman of Hoffman Commercial. "But people in the leasing arena are pretty confident," he adds.

Hoffman predicts that Midtown demand for retail space -- and therefore, retail rents -- will continue strong. He believes that leasing activity will continue to be a mixed bag, with some existing businesses upgrading, others downsizing, and a few newcomers setting up shop. "Anchorage is still in the slow-growth mode," Hoffman notes.

Hoffman also expects expansion in multifamily residential construction, despite difficulties with financing. "Residential real estate is still a very strong segment of the commercial market, and we'll probably see some construction in that area. Rents are climbing and occupancy is very high; there's a shortage of supply. The population is increasing, which will continue to put pressure on the housing market," Hoffman explains.

Chambers of TRF/Brayton agrees that housing demand may encourage multifamily residential construction, but he notes that changes in the demographics of Alaska's population -- fewer white collar workers and more blue collar/service-sector workers -- signal potentially less demand for Class A office space. A number of large legal, accounting and technical firms have downsized their Anchorage operations, and the city's growing role as a worldwide and statewide distribution center is increasing demand for Class B offices and industrial properties.

The commercial real estate industry is closely watching the development of Alaska Railroad property downtown for its impact on the overall market. Some are concerned that it may hurt rather than help downtown vitality, that there may not be room for another major retail/tourist property at this juncture.

Others are more upbeat. "The question is, will the development act as a magnet for continued development downtown? I think it could be pretty positive for downtown. Right now, mid-town is a magnet in the other direction," says associate broker Thomas.

In the longer term, experts say future growth in Anchorage's commercial property inventory will likely occur in two additional areas. The first is along Tudor Road, as a result of construction of the new Native hospital, which will boost the number of workers and the traffic volume in that part of town. "I think the area out on Tudor Road is really going to grow in the near future," says Sue Fison, research manager for the municipality's economic development and planning department.

Fortune Properties' Thomas sees the Tudor Road possibilities but says he's taking a wait-and-see attitude. Although he notes the site is appropriate, he questions whether the investment will yield big returns. "The simple fact is that the cost of Matanuska Valley gravel makes most development prohibitive," says Thomas.

The other likely area for future growth is Spenard, which has been receiving a major facelift over the last several years. Fison cites the example of a car rental agency taking over the space formerly occupied by United Building Supply. Noting the growth in use of the airport as an air-cargo hub, Fison says properties such as the old National Guard armory across the street from the car rental agency are prime candidates for future development.

New commercial construction opportunities hinge on a number of complex factors, both within Alaska and in the nation's financial centers. "I'm very pessimistic about new construction on the horizon because rents now do not equate to replacement costs even at favorable financing rates, which are not always available," says Jack White Co.'s Rokeberg.

According to Rokeberg, to justify new construction, prevailing rents must be $2.25 per square foot, and major tenants must be available to occupy most of the prospective space. Neither factor is likely anytime soon without a "major structural turnaround in the economy," he notes.

Chambers acknowledges that brokers and property managers in the commercial real estate business thrive on change, as tenants expand and downsize in response to numerous factors. "Any change makes money for a broker. As a broker, you make it going both ways," he says.

But Chambers cautions that concerns such as government-spending levels and major restructuring of the domestic oil industry can lead to serious economic difficulties that could exceed the industry's ability to respond and adapt.
COPYRIGHT 1992 Alaska Business Publishing Company, Inc.
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Title Annotation:Alaska's commercial real estate industry
Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Article Type:Industry Overview
Date:Jul 1, 1992
Previous Article:Missing links leave oil untapped.
Next Article:Kodiak.

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