Given all the focus on the impact Alaska's recession has had on Anchorage home prices, some may wonder about the status of the commercial real estate market. Is Anchorage full of vacant storefronts and empty office space or not? Let's take a deep dive into the numbers to find the answer.
The retail market has enjoyed a few exciting developments and shake-ups lately, with major retail and large box store tenants announcing new locations and closures of their Anchorage stores. These decisions are made in corporate boardrooms outside of Alaska and generally do not take into consideration Anchorage stores' profits.
These prime retail locations are sometimes already leased to a new tenant before the existing tenant announces their store is closing. Retail lease rates have steadily climbed since 2008, and this year the average retail lease rate is $2.50 NNN, (triple net in which the tenant pays their portion of utilities, taxes and insurance). This rate is for "power centers" (examples: Glenn Square and Tikahtnu Commons), junior box stores (smaller anchor tenants in power centers) and inline strip malls.
The office market has been most affected by low oil prices. Most of the major resource development companies have renegotiated and contracted their lease space obligations since 2015. Most of these primary office tenants are now settled. In a telling illustration, the Class A, newer office market in 2015 had a vacancy rate of 5.85 percent, compared with today's 14.60 percent vacancy rate. The Class B market — older vintage buildings with limited amenities — has experienced similar vacancy trends. The 2015 vacancy rate was 5.9 percent and in 2018 the vacancy rate is 11.30 percent.
More space within the office market is available for lease as recent low oil prices have influenced oil and gas related tenants by contracting their square foot lease foot print in Class A office space. Landlords have been successful in stabilizing the rental rates by making some of the following concessions: negotiating front-end free rent on new leases, known as rent abatement or rental rate reductions, and larger tenant improvement budget allowances than in past years. The overall average Class A lease rate remains steady at $2.85 per square foot compared to Class B, which has started to soften with a lease rate of $1.65 per square foot.
The industrial market has been a great investment for many landlords, with the vacancy rate staying close to 2 percent as far back as 2008 and standing today at 2.5 percent. As mentioned above, low oil prices and job losses in the oil and construction industries have led to new vacancies. Some landlords have booted out existing Class A credit tenants as the new, budding marijuana industry has taken a significant demand on industrial properties. A few industrial landlords have taken on these marijuana tenants, which can be perceived as high risk — but with the financial return of rents as high as 150 percent above market.
One of the major caveats is that because of federal banking regulations, the banks can't have anything to do with the state-approved marijuana industry, and thus the landlord has to own the property free and clear with no debt.
The above market information is sourced from the BSI Commercial Real Estate Newsletter, which started 25 years ago as the Office Building Survey by the late Jeff Thon, CPM. The survey now consists of 85 buildings and the information is supplied by building owners, managers, leasing agents and the Multiple Listing Service.
The good news for Anchorage is the commercial market is stable and has managed to weather the recession so far. It is a healthy market that continues to attract international, national and local investment.
Brandon Spoerhase, CCIM, is a lifelong Alaskan, a former member of the Anchorage Planning and Zoning Commission. He specializes in commercial and investment real estate and is the Broker for BSI Commercial Real Estate. His column appears monthly.