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Industrial real estate's recovery: despite continued excess capacity, the market for Anchorage industrial properties is improving.

Industrial Real Estate's Recovery

IN ALASKA'S MOST INDUSTRIAL city, real estate brokers agree rental and sales markets for warehousing, manufacturing and other industrial properties are tightening and some client needs are even difficult to satisfy. But a severe hangover from the latest economic recession--low rents and a surplus of discounted inventory--continues to plague the market and could hold back new construction for some time.

Because Anchorage's industrial market is driven primarily by services, it was among the first to fall when Alaska's oil-dependent economy crashed in 1986. At the depth of the three-year recession, vacancy rates rose to an estimated 15-20 percent as businesses folded and the unemployed exited the state in record numbers.

Barring another economic boom, it is doubtful the market will regain its prerecession high when friendly bankers and spend-minded legislators, fueled by a river of oil dollars, drove a willing construction industry into an unprecedented building frenzy. "There is no doubt in my mind that the market was overbuilt," says Ronald Bunn, an Anchorage real estate analyst.

Nevertheless, Bunn and others who keep a close watch on Anchorage's real estate market conclude that while certain types of industrial properties face a long road to recovery, many are on the rebound. Vacancy rates for industrial properties in North and South Anchorage at the end of April averaged 10 to 13 percent and were much lower near Anchorage International Airport, according to one study. There is about 6 million square feet of industrial space in Anchorage.

"A return of confidence to the economy has something to do with it," Bunn says. "There is increased demand because there is an increase in population, which translates into a demand for business spaces."

"I find it difficult to fit the needs for people looking for space," says Douglas Taylor, associate broker for Jack White Co. "The biggest problem is finding the inventory to meet the needs of my clients, so I think we'll see some built to suit."

In the meantime, buyers and renters of industrial properties in Anchorage are scooping up the recession bargains, moving into quality buildings as they become affordable. To a great extent, they are established businesses playing "musical chairs" with existing space, observes Philip Livingston, president of Livingston and Johnson Inc.

"There's a lot of Grade B space out there, but it's not available because it's tied up in institutional portfolios," Livingston explains. "We have a demand here based on discounted values. So rent and sale prices will remain depressed as long as these properties remain in the pipeline. I don't think we have much downside; we have a consolidation and stabilization period going on."

While still well below levels necessary to spark new construction, rental rates are on the increase, brokers agree. Based on the "triple net" standard, in which the renter pays for utilities and other operational costs, Class A warehouse space greater than 20,000 square feet was leasing for 55 to 70 cents a square foot at the end of April, up from a recession low of 40 to 55 cents. Class B space ranged from 25 to 45 cents a square foot, up from a low of about 20 cents.

G. Dale Jackson, vice president of TRF Brayton Commercial Real Estate says, "Most users in the market over the past six months and for the next six months want high quality. The stuff that was built in a poor location is a long way from (recovery). Top quality warehouses in a good location are at a premium right now." He adds that Class B and C warehouses that don't have docking accommodations, or can't service what they were built for, are still above about 20 percent vacancy, commanding roughly half the rental rates of Class A warehouses.

The biggest demand for industrial properties is for so-called "small incubator" space of 1,000-4,000 square feet, area that can be used for both storage and offices. Rents were 90 to 95 cents a square foot "fully serviced" by the end of April, up from about 50 cents during the recession.

Says Jack White's Taylor, "The segment under the most demand is for the small automotive and repair shops--they are begging for space. I would say the vacancy rate is less than 5 percent."

From Jewel Lake Road west to and including the airport, the vacancy rate for all industrial properties is even tighter. One survey placed the rate at 2.8 percent at the end of 1989, but Livingston says it's more like zero. He calls the airport "an anomaly" and points out that the area's international transportation functions separate it from local influence.

According to Livingston, what property is available at the airport, is raw land that is too costly to develop without state incentives--the type of deal Federal Express and now United Parcel Service have cut with the state for construction of major cargo-handling facilities to support their international routes.

"UPS and Federal Express are the best things to happen to us in a long time. They create good, steady jobs. I think the airport is going to see an absolute boom over the next few years," says TRF's Jackson.

The jury is still deliberating on the issue of just how many companies would locate in Anchorage to support two world-class cargo operations, however. Says Livingston, "I think you are going to see a boom in terms of employment and fuel, but I'm not sure it's going to have a direct effect on bringing more industry into town. If they do, it will be away from the airport because the development costs there are pretty restrictive. But near the airport is really anywhere in Anchorage. You can get from the port to the airport in 15 minutes and from South Anchorage to the airport in 10 minutes."

Brokers point out, what the rest of the Anchorage industrial market really craves is a megaproject such as construction of a gas pipeline from Prudhoe Bay to Valdez or oil and gas development in the Arctic National Wildlife Refuge--the same type of development that spurred the Alaska economy in the mid-1970s. Air cargo, timber, mining and fishing will help serve to diversify the economy, they say, but will not generate widespread construction in the industrial sector.

Says Livingston, "Oil has been the driver of the economy. If oil goes downhill, most of the private sector goes down with it, because they are supporting the oil industry. Industrial growth will occur when the discounted inventory is gone."

Adds Taylor, "There isn't any one significant thing you can hang your hat on and say the market is going to blossom. But you do have to be positive about the population and economic growth and that is driving continued absorption of oversupply."

Analyst Bunn points out that industrial space relates to office space demand. "As the labor force and population increase so do the demand for goods and services and the necessity for storage and service space--just as office space demand increases to meet employment growth," he says.

For lower quality industrial properties, Taylor projects recovery could take three to five years. "It's a question of whether we're going to adjust quickly or slowly," he notes. "I think the next 12 months probably will bring at least a 10 percent adjustment in values to the stronger segments. We've brought rents up in the past six months. If we can continue to do that, they should be able to drag values along with them."

Expect slow but steady growth in Anchorage's industrial real estate market, advises Taylor. "Small towns are easily influenced by major economic events, so certainly a major (event) has the ability to create a boom economy here. The Exxon Valdez oil spill gave us a major boost. Tourism will help. The gas line would have a major impact. Continued development in coal would help diversify our economy, and I feel there is some potential to develop international trade and the free-trade zone. But as oil prices go, so goes Alaska."
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Author:Tyson, Ray
Publication:Alaska Business Monthly
Date:Jul 1, 1990
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