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Weekly Updates2006 RECAP
In 2006, the Anchorage office market continued to rebound from the increased vacancies and softer market conditions of 2005. The result was continued musical chairs in the midtown area, and an even tighter downtown market. In spite of the ongoing expansion of the medical market with Providence Hospital's growth, for the first time in several years the medical field wasn't the biggest market force. In 2006, that claim can be made by two segments of the market: Alaska Native corporations, and the oil and gas industry.
In response to the demand, vacancies went down and rents started increasing back to the nearly record-breaking levels of 2003. As a result, several new buildings are under way now, or breaking ground in the spring 2007. These include the first high-rise office buildings in several years. For some users, the high construction costs have led them to consider significant rehabilitation to existing buildings, but prospective buildings are still difficult to find.
OFFICE VACANCY
The vacancy rates have decreased significantly and are now in the 4.1 percent range throughout Anchorage in the Class A market. In the Class B and C markets, the vacancy rate is approximately 7.8 percent.
Larger blocks of office space (more than 10,000 square feet) are extremely difficult to find downtown, and very limited in midtown. Many of the choices are marginal in quality, have poor natural light or limited parking.
RENTAL RATES
Base rental rates for existing Class A buildings are ranging from $2.35 to $2.75 per rentable square foot ("prsf") per month ($28.20 to $33 prsf per year). Landlords are typically receiving annual 3 percent per month increases beginning in the second year of the term, and in some cases, operating expense pass-thrus as well. With continued increases in demand, existing building rents will play catch-up, and we'll likely see higher rates this year. Rates for the few new buildings that are presently available are in the $2.75 to $2.85 prsf per month ($33 to $34.20 prsf per year) range, with similar increases in the latter years. The newest buildings, which are under way or will break ground this spring, will have starting rates around $3 prsf per month ($36 prsf per year) when they're completed next summer or fall.
Class B rates are ranging from $1.65 to $1.95 prsf per month ($19.80 to $23.40 prsf per year). These are anticipated to begin to fall by early 2008 when the new Class A buildings hit the market and some additional Class B space is freed up in the market. Class C rates are ranging from $1.20 to $1.50 prsf per month ($14.40 to $18 prsf per year).
As always, building location and views, lease terms, and tenant improvements are the driving factors in rental rates for all classes of buildings.
DOWNTOWN
The downtown office market is very tight with many buildings at or close to 100 percent occupied. Class A building vacancy is lower in downtown than midtown at approximately 2.5 percent. Of the approximately 50,000 square feet of Class A vacancy downtown, about half is located in two buildings: 420 L Street, which has approximately 9,000 square feet; and KeyBank Plaza, which has approximately 16,000 square feet available.
Many of the positives in downtown, such as the new convention center, new restaurant/bars, specialty retail shops, and pedestrian enhancement projects--like the E Street corridor--will keep the downtown market active. The State-owned Atwood Building only has a couple of private tenants left as it continues to move State agencies into the building.
In the short-term, the benefits related to the new convention center will be countered by an increasing parking problem. As a result, the owners of parking facilities in the core downtown area have increased their rates until new garages are constructed. The average rate for unassigned parking passes is approximately $115 per space per month. That's almost double what the rate was two years ago.
MIDTOWN
There continues to be a lot of movement, expansion and new construction in the midtown area. Owner/users are the primary drivers behind the new construction. There are only a few Class A buildings with large vacancies, including the Bristol Bay Building with 12,000 square feet; the Alutiiq Building with 21,000 square feet; and the Calais Buildings with 20,000 square feet.
New construction has started on two buildings in midtown. This includes the 14-story, 280,000-square-foot JL Tower in the Centrepoint complex off C Street, which has its site work, utilities and foundation complete. The general contractor for this project is Davis Constructors and Engineers Inc. Also under way is the 15-story, mixed-use 188 WNL Building, which will have approximately 123,000 square feet of office space, plus 20,000 square feet of retail space and a parking garage. This is located on the corners of West Northern Lights, Benson Boulevard and C Street and is being built by Neeser Construction. Additionally, one other building, the five-story, 58,000-square-foot Westside Building off 33rd Avenue and Denali Street may begin site work this summer.
UNIVERSITY/MEDICAL DISTRICT
The U/Med District remains strong and continues to be driven by the health care industry.
The 38th Avenue Medical Center, a 61,000-square-foot building off Lake Otis, was completed last fall and houses medical offices and the Providence Physical Therapy Department. There is approximately 18,000 square feet available for lease in the building. The various Providence medical office buildings have approximately 24,000 square feet available, while Alaska Regional Hospital has a handful of smaller suites available in their medical office buildings.
New construction in the area includes the recently completed Providence Tower T, which has approximately 116,000 square feet and is home to the Heart Institute. Additionally, Providence recently renovated the old Alaska Psychiatric Institute Building, which is 128,000 square feet, to house the administrative offices for the hospital. Providence has started construction on Tower U, which will be the Cancer Center, adjacent to the Heart Institute. The Cancer Center is approximately 95,000 square feet, and will result in the expansion of the parking garage as well.
SOUTH ANCHORAGE
South Anchorage has a limited amount of office space, but presently has some of the larger blocks available. These include the Morris Communications Building, which has approximately 10,000 square feet of Class B space; the new O'Malley Square mixed-use building with approximately 30,000 square feet of office space; and the Dimond Center with about 25,000 square feet in smaller, non-contiguous blocks.
NEW CONSTRUCTION SURGE
Over the last six years, Anchorage has seen more than 1 million square feet in new construction of office buildings. Another approximately 460,000 square feet is planned for construction in 2007, including three large, mostly speculative buildings in the midtown area. In the medical community, there has been approximately 700,000 square feet of new medical office buildings constructed since 2002. An additional 225,000 square feet of medical office buildings is being proposed in the next few years.
BUILDING COSTS PSF
The single biggest factor for new office buildings is the cost of construction. Over the last three years the costs have risen over 25 percent in Anchorage. Construction costs are projected to continue increasing in the next several years.
Construction costs for new office space, not including land costs, range between $235 to $300 per gross square foot. The smaller number represents a low-rise Class A building with standard tenant improvements, with the larger amount for high-rises that have special design features and extensive tenant improvements. Medical office buildings are typically on the highest end of the range.
Including the cost of land, the total turnkey package for a new building is between $300 and $360 per gross square foot. Given the scarcity of available land, this could easily increase in the coming years as more developers face higher land and site preparation costs.
NEW CONSTRUCTION RENTS
The rental rates for new construction are going up significantly as a result of the increased construction costs. Buildings constructed in 2006 have rents in the $2.75 per-square-foot range, though some owners are subsidizing the actual costs to attract tenants. The newest buildings being completed in 2008 will require rents in the $2.95 to $3.50 per-square-foot range to pencil-out for investors. The gap between new construction rents versus existing building rents was pretty close a few years ago, but has widened again given the rising construction costs.
SUMMARY
In spite of all the new construction in the last couple of years, there is very little vacant office space around Anchorage. Assuming the moderate economic growth that is anticipated, existing rates will go up as much as 10 percent as tenants expand and renew leases in 2007.
For the first time in six years, mostly speculative buildings are being constructed. One of the big questions is whether tenants will pay $3 per square foot in rent. The biggest question may be whether they have a choice given the scarcity of available Class A space. The larger tenants with special requirements likely won't have a choice, but the small tenants may look toward the remodeled older buildings to reduce their overhead in future years.
John Opinsky has been in the commercial real estate business since 1995 and recently became a partner at Frampton & Opinsky LLC. He specializes in the office market, including leasing, property management, sales and development. For more information, visit the company's Web site at www.akofficeproperties.com or contact them at 276-1007.
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