Buying and Selling Commercial Real Estate in Alaska
A range of options for investors
This June, the forecast calls for a hot time in Anchorage, a chilling effect in Fairbanks, and calm seas in the Southeast. The commercial real estate forecast, that is. While the recession has made its mark on the Lower 48, Alaska had a bit of a dip about a year ago, but that glanced off the seemingly untouchable commercial market, particularly in Southcentral.
For investors of any level, commercial properties can give diversity to a portfolio, especially in volatile market times because commercial property values respond to different market conditions than those that affect stocks and bonds, and like these asset classes, there is a range of options to consider—retail, warehouse, land, office buildings, or multi-family housing.
The Anchorage commercial market reflects the general economy of Anchorage, which has seen good, steady growth for the last twenty years, according to Jeff Thon, CPM, Senior Commercial Associate Broker, Jack White Commercial. There is good disposable income and steady economic growth in town. Investors in-state and out are looking at Anchorage.
BurgerFi and Krispy Kreme are coming to town. Anchorage Outlets is going up across from the new Cabela’s in South Anchorage. Southcentral Foundation and Alaska Native Tribal Health Consortium are adding another building to the Alaska Native Medical Center campus in the U-Med District. Construction on the Blood Bank of Alaska building off DeBarr should start this summer. Warehouse space is at a premium. Available visible corners are nearly non-existent.
Anchorage is so hot investors are beating down the doors. Chad Graham, Broker, Graham Commercial Real Estate Consultants, Inc., says that part of what makes Anchorage look so good is its cap rates—capitalization rates, used to determine the investor’s potential return on his or her investment (divide the income the property will generate, after fixed costs and variable costs, by the total value of the property). Graham says that local cap rates are 7 to 9 percent, while Outside rates hover around 6 percent.
Graham began his career in the Anchorage market and says a major medical supplier just paid $1.15/square foot “triple net”—meaning they pay for everything, utilities, etc., which makes it really about $2/square foot. The warehouse market, in particular, is in an interesting place.
“The number one product is warehouse,” according to Graham. “There is a steady increase because there is only a 2.3 percent vacancy rate in the Anchorage Bowl. If you want to build a warehouse, it will be tough to get financing and rent to make it work.” What often happens is that a business owner has been leasing space for so long, and, when profit turns, the owner decides to buy a building—usually the building housing the business. Then, after owning the building and the business, the owner decides to invest in another building. And then another. “They get a feel for it and want to keep doing it,” Graham says.
Thon and Graham both suggest that investors are looking at Anchorage all the time because it is so steady. “People have money to spend,” Thon notes, “and they want to spend it here versus Outside because our economy is so good.” Low vacancy rates, no more land on which to build—when buildings come on the market, Thon says, they get scooped up.
“Lots of old industrial is being bought up, and they are tearing down old buildings to put up new. Look at Walgreens,” he says. “They tore down an Arby’s; they tore down Johnson’s Tire. They wanted prime real estate and they bought out someone else to get it.”
With warehouse space at just above 2 percent vacancy, apartment at 3.2 percent, office at 5 to 6 percent, and retail at 5 to 6 percent, Anchorage is a seller’s market, and investors are waiting in the shadows to pounce, paying agents like Graham and Thon to be at the ready. In some cases, agents are being sent out to find a space that owners want to sell. Graham points to a recent apartment building sale he made that broke a record in price per unit.
“A usual price is $75,000/unit sale, and this went for $103,000/unit based on a desirable location and rental rates.” Again, he notes, vacancy rates are extremely low, so tenants are paying premium rental rates. Nationwide vacancy rates are at 5 to 6 percent, and Anchorage is at barely 3 percent. “The cap rates are going down on apartments, and it is the number one investment in the nation,” he says. “With the recession, less people are buying homes, it is hard to get financing, so there are a lot of renters. In Anchorage’s Mountain View neighborhood, rents are at $1,200 for two-bedroom apartments.”
“We have a problem,” Thon says. “We have more buyers than properties available.”
On the other hand, the commercial market in Fairbanks has cooled to the point of being hypothermic. Pamela Throop, broker and president of Alaska Commercial Properties and a Fairbanks broker since 1983, paints a somewhat bleak but realistic picture, and Anchorage brokers are quick to agree with her assessment.
“We have three brand new buildings that have never been occupied,” Throop says. “Two just sold for half the price of construction. The third has no offers and sits vacant.” It should be a buyer’s market, but no one is buying. Investors aren’t even sniffing around the edges—local or national.
“The cost of utilities in Fairbanks is a huge expense, and it is keeping people from coming in, and it is causing people to leave,” Throop emphasizes. “Heating and electric are up 200 to 400 percent in less than a decade. We are on the verge of depopulating if something doesn’t break soon.”
When the cost of oil skyrocketed in the mid-2000s, it took a toll on Fairbanks. Often Alaskans think of the price of heating oil and gas at the pumps affecting rural Alaska, but Fairbanks was not immune. With no natural gas line, they are dependent on oil for heating their homes and running their electric. Throop says that in 2007 it cost nearly $15,000 to heat her own home. “Oil was $1/gallon nine years ago, and it is $4/gallon now. Electric costs—generated by oil—have also doubled.”
Throop says there is a lot on the market in Fairbanks because everyone is moving out. Alyeska closed its warehouse. United Rentals closed up and took everyone and everything to Anchorage. Fairbanks cannot compete with the strong economy in Anchorage nor can it shed the cloak of doom presented by the high cost of utilities, she adds.
“We are in a holding pattern,” she emphasizes. “We and investors here and out of state are waiting to see how the LNG [liquefied natural gas] situation turns out.”
For all her reality checks, Throop still believes in selling commercial real estate. “People are buying distressed properties built in 2005, which are really well built but no one has touched them until [the price is] under $100/square foot.”
Throop is at the ready when the change comes for disposable income to go toward investing in business rather than toward the fuel bill.
In the Southeast panhandle, the steady calm of the economy keeps brokers busy, and Nancy Davis of Davis Realty in Sitka is no exception. She’s been working seven days a week. “The commercial real estate market in Sitka is stable,” she says. “We have a different situation here than in a lot of Alaska because we are so small and there is not a lot of new land available.”
There is not a lot of new commercial being built, but there are two buildings on the market for $699,000 and $1 million. That’s about average, with one or two commercial properties changing hands each year.
“The downtown area has had owners that have had property handed down from generation to generation,” Davis notes. “Owners have updated the building, but, basically, Lincoln Street in downtown Sitka looks very much like it did years ago. There is just no additional commercial land available in the Lincoln Street area.”
But Sitka, a town of nine thousand, has the surrounding islands that have lodges and sport commercial listings that come and go as dreams are lived and dashed. Islands themselves are sometimes listed as available land. “There’s the Baranof Warm Springs and Port Alexander,” Davis says.
“Sitka is a wonderful small city,” Davis says, “with all the [same] shopping and recreational opportunities as anywhere else. Our air transportation with Alaska Airlines is very good for a small island community.”
A trend indicator for Sitka is that retail sales are dipping, which, according to the Sitka Trends Economic Newsletter (March 2014), means less retail shops. The newsletter also noted that cruise ship passenger volume dropped 61.79 percent between 2008 and 2012, causing several retail stores to close. That being said, in 2010, Baranof Island Brewery Co. opened about a mile from downtown Sitka.
All of Southeast is seeing some movement. Commercial real estate offerings include undeveloped lots and land, retail and office buildings and units, warehouses, multi-family housing investments, historic buildings, and shopping centers.
Laurie Evans-Dinneen writes from Anchorage.
Posted: June 5, 2014