The upside: Low interest rates are holding, the market is strong and vacancy rates are low.

The downside: Construction costs are getting too high, lease rates are rising and vacancy rates are low.

The city has entered its 18th consecutive year of job growth. That growth leads to a need for more commercial space, which lowers the vacancy rate.

Class A office space has a 4 percent vacancy rate, while about 8 percent of classes B and C are empty, said John Opinsky, partner with Frampton and Opinsky, a property management company.

The industrial sector has a less than 2 percent vacancy rate.

But low vacancies lead to higher lease rates — an increase of up to 12 percent for some office spaces. In a strong economy — especially one with low interest rates — that tends to lead to more building.

It did in 2006. The city of Anchorage last year had its second-biggest year ever in terms of permit valuations, at more than $800 million in commercial and residential building. That includes several big-ticket items, such as the convention center, museum expansion, a new school and two big office buildings.

But construction costs have seen double-digit percentage increases over the past two years, a huge hit when considering putting up a multi-million-dollar structure. Brian Meissner, principal at the architect firm ECI/Hyer, said builders are experiencing a 9 to 11 percent cost escalation on projects.

The proposed $303 million prison in the Matanuska Valley is seeing an increase in costs of about $600,000 a week, mainly through inflation, he said.

For Wal-Mart, which in early 2006 announced lofty plans to expand in Anchorage, the cost became too much. The super retailer put at least two of its super centers on hold, said Chris Stephens, of Bonds Stephens and Johnson.

A handful of new multi-story office buildings are still on track for the downtown and midtown areas, Opinsky said. But lease rates for those facilities will surpass $3 a square foot.

The retail market is tight, too. Anchorage has 40 listings of retail space available in 14 properties, Stephens said. The majority those vacancies are in spaces of less than 5,000 square feet, and a good deal of that lists a lease rate of more than $2 a square foot.

New retail construction is underway, including the Glenn Square shopping center, located in Mountain View. Most of the 250,000-square-foot retail and office space is leased, he said.

The Glenn Square developer, P.O'B Montgomery, recently purchased Dimond Crossing, which houses the CompUSA store in South Anchorage. Renovations are currently underway.

Other retail construction on the horizon includes a space at Tudor Road and C Street, which will house a Starbucks coffee shop and the North Star Centre mini-mall.

The biggest disappointment is Wal-Mart. Stephens said that the Wal-Mart expansions on Minnesota Drive and on Dowling and the New Seward Highway are on hold because the cost of construction was too high. Wal-Mart had planned to build super centers in the two locations.

Work had begun last summer at Dowling — the retailer reportedly scooped up all the available gravel in town early in the season, leaving other developers scrambling to find rock for their projects. But builders ran into contamination and other permitting issues.

Representatives from Wal-Mart and local builder Brady Construction have not returned messages about the projects.

Meanwhile, the proposed Wal-Mart construction on DeBarr Road area near Muldoon finally got through the zoning portion of the project, but was recently served with a lawsuit over an alleged conflict-of-interest vote from Assemblyman Dan Coffey. The suit says Coffey should not have participated in an Assembly vote to approve the retail store because he would personally benefit from the move.

The big question, Stephens acknowledged, is what about Target and Olive Garden? There's good news and bad news on that front.

The good news is that Target looks promising. Stephens put up a rendering of a proposed mall to be built by Cook Inlet Region Inc. in the Muldoon area, off the Glenn Highway. The rendering displayed a big anchor store, with a clear “Target” label.

CIRI currently is working on zoning and access issues in its $100-million-plus proposed Muldoon development.

The bad news is Olive Garden. “They aren't coming,” Stephens said. “They just don't get it. You say 'Alaska,' and you might as well have said we're on the other side of the moon, especially if the company is based back East.”

The rumor mill hints at of at least one other Target store to come, probably in South Anchorage, and possibly also in connection with a CIRI development. Also circling the rumor mill is the potential for local businessmen to open a new seafood restaurant downtown.

Meissner, of ECI/Hyer, put up a photo of a big lobster and other seafood on ice. “I can't share names,” he said. “But everyone will be happy.”

At least two upscale hotels are also looking to enter downtown Anchorage, catering to convention-goers and tourists, he said.

Anyone looking for industrial space may be out of luck for the year. There are very few vacancies, rates are rising and little construction is planned, mainly because the costs to build are too high, said Robert Martin, commercial broker with Ravenwood Real Estate.

Vacancy rates in 2006 were at 1.75 percent, compared to last year's rate of 1.44 percent. The national vacancy is nearly 10 percent. Still, the sector saw only 160,000 square feet of new space built in 2006, compared to 450,700 the year before.

Sell prices jumped from a high of $15 a square foot in 2005 to $19 last year. Lease rates also jumped, from an average of 87 cents a foot to 91 cents last year.