Anchorage’s commercial and residential real estate market looks to be relatively stable this year, although some softening is expected.
Local realtors and brokers gave their best estimates for different segments of the Anchorage bowl real estate market at the annual Building Owners and Manager’s Association forecast luncheon Dec. 8.
The overall office vacancy rate for Class A office space is projected to rise, on average, from 6.8 percent in 2015 to about 7.6 percent in 2016, but Anchorage is still doing well compared with the national average office vacancy a rate of 13.4 percent average, Per Bjorn-Roli, with Reliant LLC, told those at the BOMA luncheon.
Lease rates are expected to remain stable 2016, at an average of $2.95 per square foot for all types of properties, Bjorn-Roli said.
“The market will be a little softer, however, and tenants will be well positioned to ask for concessions like free rent periods and property improvements,” he said. “This happened in 2011, too,” when the local market was coming out of a mild downturn.
About 157,000 square feet of new office space was added in 2015 in the Anchorage area with much of that in the Cook Inlet Region Inc. and Kuukpik Corp. new buildings in Anchorage’s Midtown. However, 30,000 square feet of the 157,000 square feet of space added in 2015 was absorbed by market growth, he said.
Class A office space Downtown is actually tighter now than a year ago, he said, with 2.7 percent of space vacant now compared with 2.9 percent a year ago. In Anchorage’s Midtown, however, the vacancy rate for Class A space is up to 10.3 percent from 6.3 percent a year ago, with this mainly due to the CIRI and Kuukpik building additions, Bjorn-Roli said.
Meanwhile, no major new commercial office projects are planned for 2016 and that should basically keep the market steady, with normal growth gradually absorbing the vacant space available.
However, if the Legislature really follows through with its threat to cancel the lease on the new Legislative Information Office building on 4th Avenue it would open up a large block of Downtown space. Legislators are interested in moving the Anchorage legislative offices to the state-owned Atwood Building on 7th Avenue, but this issue is far from settled.
Many features of the new LIO building were custom-ordered by legislators, and that could impose conversion costs if there are new tenants.
Bjorn-Roli said the financial shortfalls affecting state government won’t have any immediate effects on the commercial office space market because the state has the cash reserves to buffer shortfalls, at least for the next two years.
“We see a two-year window for cuts and adjustments,” he said. “However, there is a dramatic increase in the ‘concern’ index.”
But there is time for the adjustments and any impacts will be spread out.
“State spending is a major driving force in the office market,” Bjorn-Roli said, so the magnitude of budget cuts will be watched closely.
What may also cause effects would be reductions in oil and gas industry activity, but it’s hard to forecast this. BP has announced a workforce reduction, for example, but BP owns its office building in Midtown, so the reduction wouldn’t immediately affect the office market, he said.
“We see few effects in 2016 but in 2017 it may become an issue,” he said. “Our conclusion overall is that the Anchorage area office market it healthy and stable, with some softening expected,” Bjorn-Roli said.
It’s a similar story for markets for retail space market, Brandon Spoerhase, with BSI Commercial Real Estate, told those at the BOMA luncheon. Retail space markets are holding steady with lease rates overall averaging $1.55 per square foot in older buildings and a $2.65 per square foot average rate for newly-built space, said Spoerhase.
The fourth quarter 2015 vacancy rate estimated at 5.5 percent compares very favorably with the national average of 11.3 percent, he said.
Retail profit margins continue to be healthy, as demonstrated by national clothing retailer H&M’s 2015 opening in Dimond Center, which was the second most successful in the company’s history, Spoerhase said.
Two major retailers still looking at Anchorage include Whole Foods, the upscale grocery chain, and Victoria’s Secret, the womens’ apparel chain. New arrivals include three national food chains, Smash Burger; Sonic Drive-In, Dave & Busters.
One open space being eyed by national retailers is 40,000 square feet available at the former Carrs’ grocery store space in the Mall at Sears in Anchorage’s Midtown, Spoerhase said.
Meanwhile, major malls like the downtown 5th Avenue mall, Glenn Square and Tikahutnu Commons in northeast Anchorage, have little or no remaining space, Spoerhase said.
“Glenn Square still has a couple of ‘pads’ still available, but the hunt is on for a food retailer that won’t compete with the existing food retail tenants,” Spoerhase said.
The Fifth Avenue Mall is essentially full, and new retail growth has spilled out into adjacent space along 5th and 6th Avenues, he said.
Meanwhile, Pfeffer Development’s U-Med retail development on Alaska Pacific University lands in the Midtown university and medical district is still set for a 2016 or 2017 groundbreaking, Spoerhase said. This is a build-to-suit development project, he said.
Overall, BSI sees no significant change in the retail market in the next 12 months, Spoerhase said.
In commercial construction, a number of small to medium-sized private and institutional new buildings and school projects are planned for 2016, Jonathan Hornak, of Cornerstone General Contractors, told those at the BOMA luncheon. Hornak ticked off a number of medium-sized projects expected to be underway this year, such as a $17 million Anchorage Museum addition. No major new projects are pending, he said.
Four projects in the “rumor” category, which Hornak left unidentified, at least at the BOMA luncheon, include a reported 9,000-square-foot building in Wasilla and three buildings in Anchorage, one 6,000-square-foot facility, a second at 50,000 square feet and a third reported at 60,000 square feet.
Residential real estate meanwhile remains tight, as it has for some time. Speaking to both rentals and homeowner properties, Tyler Robinson, of Cook Inlet Housing Authority, said the apartment vacancy rate in Anchorage remains below 5 percent, but things are looser in the more expensive categories.
“We haven’t seen many effects yet overall,” from low oil prices and tightening state budgets, “but we are starting to see impacts at the higher end of the market,” Robinson told those at the BOMA luncheon.
Rents have been increasing for several years, with the average in 2012 for a two-bedroom apartment at $1,300 a month, up from $800 a month in 2000, he said.
As for single-family homes, the average sales prices today is about $370,000, up from $188,000 in 2000. The tight supply is mainly a factor of inadequate building of housing.
“Studies have indicated we need to be building 900 housing units a year, in all segments of the market, to keep up with demand. We’re actually building about 300 a year, so there’s a shortfall,” that translates to a very tight market, Robinson said.
The Municipality of Anchorage hasn’t been a real help in this because developers get wrapped up in red tape and delays. One major apartment developer has struggled to get permits for a 36-unit project.
In contrast, in other states, developers and working with local governments and nonprofits on a wide variety of projects that are often linked to green space and urban amenities and retail.
Robinson mentioned an Oklahoma City riverwalk project that matched urban recreation and greenspace with mixed urban and retail development in an attractive project. Accomplishing that took partnerships, he said.
In Anchorage, many private developers, “don’t feel welcome,” Robinson said.