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.
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.
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...