Anchorage office market hesitant, retail future bright

Commercial realtors, like many folks in Alaska, are waiting to see how slumping oil prices will affect their industry in the coming year.

“Everyone’s anxious; there’s a lot of nervousness. But, the truth is, you don’t just close your business down because oil prices slip,” Reliant LLC manager Ted Jensen told members of the Building Owners and Managers Association Anchorage Jan. 9.

He noted that while the current price drop does not bode well for an economy as heavily dependent on the petroleum industry as Alaska, the duration of the drop is much more important than its severity at any one point.

Building owners with long-term leases in place likely have little to worry about, he said. However, those with short-term tenants or leases set to expire could have a harder time keeping space occupied.

“Six months from now, I think we’ll be in a better position to see,” Jensen said. “We still won’t know how long (low oil prices) are going to last and how low they’re going to go, but the market will have had a chance to respond.”

A big positive is that even if the commercial real estate market takes a hit over the coming year or two, it is in a strong position right now.

In Anchorage, Class A office vacancy increased, but only slightly, over 2014 from 4.3 percent to 4.6 percent today. Class B space increased a little more from 5.7 percent to 6.5 percent.

Jensen said the “very healthy” office market should be able to soften with minimal impact. “We’ve got a lot head room which is good.”

Recent construction of office space has contributed to the modest increase in vacancy rates. New Class A vacancy jumped from about 4 percent to 6.4 percent over 2014, according to Jensen, while only 3.8 percent of existing space is open.

As recently as 2011, new Class A vacancy was as high as 15 percent, he said.

Overall office vacancy in Anchorage is currently at 5 percent.

Industrial vacancy stayed at about 2 percent in 2014, after being as high as 6 percent in 2010, according to Pacific Tower Properties broker Brandon Walker.

JL Properties’ new office building at International Airport Road and C Street has Calista Corp. as its main tenant, but also has about 25,000 square feet remaining to be leased. Midtown’s 188 West Northern Lights office complex also has about 40,000 square feet available, Jensen said.

Rent for both office classes held steady over last year, with average Class A staying at about $2.60 per square-foot and Class B going for $1.95 per square-foot. Jensen said he expects rents decrease slightly in 2015 if they change at all.

State Economist Neal Fried is predicting an overall job loss in Anchorage of about 800 positions in 2015 after losing about 400 jobs last year. He emphasized that the numbers are small — a 0.5 percent loss for 2015 on an average employment base of 156,300.

The losses in 2015, as they were last year, will be attributable primarily to government contraction with a net loss of 500 government jobs.

While almost all of those positions require office space, Jensen said the effect on the office market would be minimal.

“If you’ve got the federal building and you lose someone through attrition or retirement and you don’t rehire, there may be an empty desk. That doesn’t mean you squish everyone over and try to lease out 500 square feet to the private sector,” he said.

Even with high oil prices it would be hard for the Anchorage economy to grow at this point. The Anchorage and Matanuska-Susitna region’s population grew less than 0.5 percent over the past year, according to the state Labor Department. When that is combined with an unemployment rate of about 5 percent — considered full employment — there is little room to expand.

Fried said the stagnant population growth is due largely to a burgeoning economy in the Lower 48, meaning less people are coming north looking for work.

Retail remains strong

What’s happening to the south will also impact the state’s retail market, Commercial Real Estate Alaska Vice President Lottie Michael said.

What large chain retailers do nationwide is often reflected in what happens to their stores in Alaska, despite how the Alaska market is faring.

“Nationally, the big boys, the big retailers, are anticipating 2015 and 2016 to be years of expansion,” Michael said. “Because they’re driving our car I think we’re going to have a really big year in the retail market.”

She said no big stores are anticipated to leave; several chains are investigating Anchorage; and others have made commitments for 2015.

Men’s Warehouse, Pier 1, and cosmetic-salon chain ULTA Beauty are all moving into Tikahtnu Commons in Northeast Anchorage this year.

Michael said ULTA Beauty is the only national chain she’s aware of that has ever opened in Fairbanks — just recently — before Anchorage.

“What we are seeing now is what we will continue to see: repositioning of tenants, restacking of tenants, and resizing of tenants,” she said.

Overall retail vacancy in Anchorage was at 2 percent last year with about 500,000 square feet of space available. She said the five-year vacancy average is about 3 percent. Average retail space is going for about $1.65 per square-foot triple net; new space costs $2.25 or more.

Michael will be watching what happens with JL Properties’ 200,000 square-foot outlet mall development on C Street in South Anchorage, as well as Dimond Center’s The Outlets of Alaska, she said.

New space will also become available as Sears and Home Depot resize their stores as part of national plans. Home Depot usually occupies about 30,000 square feet and will be cutting its stores in half. Alaska locations are looking for tenants to lease the new space, she said.

A remodel in the Midtown Mall at Sears is allowing Nordstrom Rack to move in as Sears downsizes.

Michael said marijuana legalization will almost undoubtedly be felt in the state’s retail markets based on what’s happened in other states that now allow recreational use of the drug.

“Regardless of your view, the marijuana industry is going to affect us. It’s going to affect all of retail,” she said. “Look at Colorado and Washington space in retail centers, especially the older retail centers; those prices just shot up and demand just outpaced available space. I think we can see that.”

She said where dispensaries locate will depend greatly on whether lease conditions permit such a business and the attitudes of neighboring tenants.

Elwood Brehmer can be reached at [email protected].

11/18/2016 - 2:24pm