Real Estate’s Reality—Alaskan Brokers Expect an Economic Rebound in 2021
The COVID-19 pandemic has wreaked havoc on state and local economies throughout the United States, and, at least temporarily, changed the landscape of commercial real estate in Alaska. The good news is that real estate experts say it’s only a matter of time before the market rebounds.
The Alaska Department of Labor and Workforce Development (ADOLWD) acknowledged in its annual economic report, published in January, that it previously forecast modest growth in construction employment for 2020; however, the pandemic ushered in “crippling uncertainty” that nobody could have predicted.
ADOLWD economist Karinne Wiebold points to ongoing interest in the state’s staple industries such as mining, oil and gas, and tourism, combined with Alaska’s strategic location for military operations, as critical, positive elements.
“It may take a couple of years for visitor numbers to return to pre-COVID levels, and some tourists’ preferences may change, but Alaska will continue to draw visitors. Investments in Juneau, Hoonah, Skagway, and other coastal communities—such as new cruise ship docks—were expected to pay off sooner, but they will eventually bear fruit,” Wiebold writes.
The report notes that “two or three new hotels planned to break ground in 2020 but stalled with the loss of tourism,” but it also expects a positive outlook for residential housing.
“Anchorage permitted the largest number of new homes in five years through October,” according to the department’s Alaska Economic Trends jobs report. “A near-repeat performance is likely in 2021.”
Lottie Michael, senior vice president at Berkshire Hathaway HomeServices Alaska Realty, says that some segments of the real estate market have held up better than others, such as industrial space, particularly warehouses.
A mixed-use property listing on Old Seward Highway offers retail and office space.
“That market is still strong. The pandemic slowed it down, but it didn’t crash,” she says.
Michael attributes this resilience to the strength of online retail. “Companies like Overstock and Wayfair are going through the roof because so many people are buying things online,” she says. “When people do that, we need warehouses everywhere.”
The global pandemic didn’t cause the shift to online shopping, but it did accelerate the ongoing trend. McKinsey & Co. says a previous 2019 forecast expected e-commerce to account for 24 percent of sales by 2024. In July 2020, that figure reached 33 percent of total sales.
“To put it another way, the first half of 2020 saw an increase in e-commerce equivalent to that of the previous ten years,” according to “The next normal arrives: Trends that will define 2021—and beyond,” an article published in January by the group.
At the same time, ADOLWD said in its January economic report that retail employment in Anchorage has declined every year since 2016. “Specialized stores and department stores suffered the most. In just the last few years, Anchorage lost Nordstrom, Pier 1 Imports, Forever 21, one JOANN Fabrics location, and Sears, to name just a few.”
Even as online retail has placed a premium on warehouse space, the economics of developing industrial space doesn’t add up: “With the rate of return, it doesn’t make sense. We can’t get enough rent to justify new construction,” Michael says.
For retail space in strip malls, mom-and-pop stores can expect to pay effective rent of about $1.80 to $2.25 per square foot, Michael says. Big-box retailers that might need 50,000 square feet could pay around $1.80 per square foot, although they are less common. “We just don’t have that many Sam’s Clubs,” she says.
When Kmart closed its Alaska locations after filing for bankruptcy, Michael notes that its stores were backfilled with two or three retailers per building. “If it’s in a power center like Tikahtnu Commons, the covenants dictate that they have to stay retail,” she says. “They want someone that brings in traffic.”
Michael expects that once the COVID-19 vaccine becomes widely available and the virus becomes more manageable, the economic rebound will begin.
“We’ll have our arms around it and have a game plan by the third quarter of ’21,” Michael says. “Nobody’s anticipating this lasting forever.”
Yet she also expects some changes to take root over a longer period of time. One sector that is unlikely to return to a pre-pandemic levels is brick-and-mortar retail.
“[But] I don’t think the retail is going away,” Michael emphasizes. “In Anchorage, we do something called ‘recreational shopping.’ It’s just recreating.”
While many goods can be bought online, she says that some types of retailers will see more of a rebound than others. “If you’re going to buy furniture, like a couch, you want to sit on it,” she says, adding that the same goes for clothing purchases. “I think it’s going to be more refined shopping.”
Meanwhile mixed-use properties are seeing significant activity. “For the most part, they’re the ones that make sense,” Michael says, adding that a combination of residential and office space is particularly attractive to potential buyers, especially with spaces leased to a national tenant.
Prospective buyers should consider taking the plunge if they can lock in an interest rate at around 3 percent for a fixed, 25-year loan, she says. “I would say to a buyer, if they are astute investors, that would make sense,” she says. “It might not be totally sexy, but it might be a solid investment… Find a good property and lock it in for 25 years. You don’t have to own it for 25 years.”
The “Work from Home” Effect
Michael says she expects some resistance to the growing work-from-home trend, saying employees could balk at turning home offices into permanent workspaces. “If you bought a four-bedroom house, you probably want four bedrooms,” she says. “No one wants to give a room of their house or their apartment without compensation, and I don’t know of any [companies] that are giving compensation,” she adds.
Anecdotally, Michael says that she has only heard from one group of workers whose employer was providing a stipend of $20 per month for home office costs.
Class A office space leases are being advertised at around $2.50 per square foot, but effective prices—once landlord concessions are factored in—are closer to $2.25 or $2.30 per square foot.
“Right now would be a good time to negotiate,” she says. “If you could come in as a strong tenant, you can take that headache or that worry from the landlord.”
“That market is still strong. The pandemic slowed it down, but it didn’t crash. Companies like Overstock and Wayfair are going through the roof because so many people are buying things online. When people do that, we need warehouses everywhere.”
Become an Industry Sponsor
While it might take six months or more for demand to pick up significantly, Michael sees a sea change coming in how businesses approach office space.
“It just evolves, and if we don’t change with it, we die,” she says. “The market morphs into a different way of doing business.” Michael says that the current market climate is just “another hiccup” that requires “discipline to excel.”
“The people who are going to survive and prosper are those who have kept up with the market and evolved,” she adds. “My advice would be for people to pay attention to good advice, not your neighbor’s brother-in-law. Have a plan and do your homework.”
Despite a growing work from home trend, Lottie Michael believes many workers are resistant to converting their homes into permanent workspaces—unless compensated.
The Demographic Challenge
Brandon Spoerhase, principal broker at BSI Commercial Real Estate, says population decline poses a giant challenge to Alaska’s real estate market.
ADOLWD reports that the state’s population declined by nearly 4,000 people, or about 0.5 percent, from July 2019 to July 2020. The agency’s figures represent the fourth consecutive year that the state’s population—estimated at 728,903—has declined. Net outward migration and lower birth rates account for much of the loss. “For traditional commercial property owners, it was a real flat market, with much uncertainty,” Spoerhase says.
He says owners of Class A office space were providing concessions on the back end, with the rate continuing to drop throughout the third quarter of 2020. Yet the absorption of space also created a slightly higher price per square foot, up a penny from the second quarter to the third for the overall Class A market to $2.56 per square foot.
Vacancy rates fell slightly from the second quarter of 2020 to the third quarter, with Class B space accounting for most of the losses, declining from 10.59 percent to 9.15 percent in the period. The vacancy rate for Class A space declined slightly from 12.91 percent to 12.67 percent, according to quarterly surveys conducted by BSI Commercial Real Estate.
Despite the slowdown, Spoerhase sees optimism in the market. “Some projects are still going forward,” he says, adding that developers are looking ahead. “They think 2021 is going to be a good year, and 2022 is going to be even better.”
“It’s going to be interesting. As time goes on, if your workforce retention is no longer confined to the market you’re in, you might be inviting companies or their employees from all over the world to come and work or live in Alaska—and vice-versa.”
“Downtown retail came to a standstill because of the lack of people traveling,” Spoerhase says, adding that despite tourism’s decline, inventory has risen.
“On the investment side, even out-of-state, large-scope investors have really shied away from retail in Anchorage which historically has been a hot market to attract investors,” he adds.
Credit A retail tenants are becoming harder to find, meaning that the market is “having a difficult time getting investors interested in that product,” Spoerhase says.
Like Michael, Spoerhase sees a tight market for industrial real estate, continuing a trend that has taken shape over the past decade.
Anchorage’s Retail and Industrial Scene
Park Plaza is slated to open November 2021.
“Most demand is for good-quality, high-cube warehouse space, which we have very little inventory,” he says.
For industrial spaces, Spoerhase says the market is looking at about $1.15 per square foot. Meanwhile, new construction is clocking in at around $1.45 per square foot.
“The challenge is the high cost of land and cost of construction has been prohibitive to new industrial developments,” he says, adding that clients are paying “exorbitant” prices for industrial spaces in some parts of the state, including Anchorage. “That’s something that we have to educate tenants [about] as they come to town.”
A full market rebound might take a while, Spoerhase says. “We might not see it for a long time, depending on how Alaska’s oil and gas and mineral exploration is going to be affected by the incoming administration because we’re such a resource-driven state.”
“We don’t really have a really crisp stock answer as to what’s going to happen,” Spoerhase says. “Much of that depends on what happens with vaccinations.”
While interest rates might have helped the commercial real estate market somewhat, the overall climate has provided a damper.
“Lending institutions are… really risk-averse right now,” Spoerhase says. “I would say it really hasn’t been as beneficial as people would think for purchasing commercial property.”
Yet Spoerhase sees bright spots in Anchorage retail. “I’m kind of bullish on downtown. I always have been,” he says. “You can’t have a city without a downtown.” New tax credits to increase housing density in the downtown area will provide another tailwind for commerce in the area, he adds.
Spoerhase points to the mixed-use development of the nine-story building at 601 W. Fifth Avenue, formerly Key Bank Plaza, which will accommodate more than 120,000 square feet of office and ground floor retail space that will be wrapped “with a high-performance glass curtain wall on the north, south, and east sides.” It’ll include expansion of an existing building and construction of a 400-plus-car garage.
Changes to Office Work
Remote work will certainly change the face of how businesses approach staffing and office decisions, and the shift could benefit Alaska, Spoerhase says.
“With COVID, a challenge to the workforce has been retention,” he says. “The workforce is a global competitive market, so you might have people wanting Alaska’s quality of life and end up working from Alaska for companies that are geared up toward teleworking and Zoom meetings and things like that. So you might see people coming to Alaska that are working for companies outside of Alaska.
Construction has begun on Park Plaza, a mixed-use development slated to open November 2021 in downtown Anchorage.
“It’s going to be interesting,” he adds. “As time goes on, if your workforce retention is no longer confined to the market you’re in, you might be inviting companies or their employees from all over the world to come and work or live in Alaska—and vice-versa.”
Like Michael, Spoerhase says that the development of COVID-19 vaccines has provided a real reason for optimism—and confidence—in a market rebound.
“Once the money starts flowing again because of that confidence, projects will resume,” he says. “We’ve had a real shadow of uncertainty, but better days are ahead.”
“The people who are going to survive and prosper are those who have kept up with the market and evolved. My advice would be for people to pay attention to good advice, not your neighbor’s brother-in-law. Have a plan and do your homework.”
In This Issue
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On January 16, a fire destroyed the water plant and washeteria in the southwest Alaska village of Tuluksak. For the village of about 350 people, it was a devastating blow. The water plant was the only source of drinking water in the village, in which the primarily Yup’ik residents lack indoor plumbing and rely on honey buckets, not uncommon in the flat, swampy region.