ROCK BOTTOM COMMERCIAL RATES MOTIVATE SMART BUILDING OWNERS. AIDEA, Alaska’s leading subsidized lender is now offering commercial rates that have fallen below 4%–almost mirroring the 2020 precipitous fall in residential mortgage rates. The program, which historically has required a minimal 10% participation by a conventional bank helps new and established entrepreneurs take advantage of the State’s role in seeing to it that the funds available are put to work especially where jobs are created and secured. But there are drawbacks to the program, with some complaints that underwriting is “too complicated,” and that the “process just takes too long.” The participation by a local lender (usually at 10%) takes some of the risk out of the lending process because the local bank knows the customer, and initiates the process. Once the qualification with the local bank takes place, the AIDEA loan—the larger percentage of the deal is underwritten. Because the local banks typically cannot compete with the lower AIDEA rates, their portion of the loan package has rates that are typically 1-3% higher than the AIDEA rates, so the loan really involves a “blended” rate which is still lower than most existing notes with a conventional lender. We believe that now is the time to secure this opportunity either to refinance or to initiate a new loan. Your local banker can give you good direction on this now—
LEASING OFFICE SPACE AFTER COVID MODERATES—WHOSE CRYSTAL BALL IS THE ONE TO FOLLOW? No doubt you’ve been wondering first—when is the COVID situation going to eventually fade away? That is the question the CDC is attempting to manage nationwide. The good news is that in Alaska, we’ve been fortunate to have an ample supply of vaccine, and our distribution networks are working efficiently. The unusually high percentage of veterans, seniors, and Alaska Native tribes in Alaska have increased the odds that Alaskans are ahead of those in other states in accessing the vaccine, and putting this thing behind us—sooner than later. But many large office spaces, leased by the State and the Federal government still remain mostly vacant as thousands still work from home. But there are signs that this is changing—large non-profits, including some tribes and native corporations are now planning to “stage” a return to the office, but most of these clients report that it is clear that a “return to normal” in office occupancy is simply, not in the cards. This means that building owners will have to make certain that their renewal rates are competitive, and that their tenants’ needs are carefully and expertly addressed. While there is little office vacancy now in Juneau, Sitka and Ketchikan, that can change with job losses related to the state budget outlook. Meanwhile, observing closely what the state will do with its office leases remains the best strategy for predicting the outlook.
HANG ONTO YOUR HAT! THE COST OF COMMERCIAL CONSTRUCTION CONTINUES TO SKYROCKET. Labor costs, freight costs, and the spiking cost of building materials continue to drive a dramatic uptick in the already high cost of commercial construction in Juneau. While local contractors remain busy in the face of the pandemic, the silver lining here is that commercial rates, now at historic lows, make some construction projects still viable. Recent sales of commercial land, now in the range of $22-$25 per square foot, have established a “floor” for all commercial land values including land that is zoned industrial, commercial, and light commercial. That number is $22 psf. Because almost no inventory of commercial property has become available since 2005, interest in the Bicknell subdivision at the airport remains high due to the early purchase of parcels by companies with a state-wide presence. We expect this trend to continue through the close of 2021, provided that lending rates stay low. For those investors looking at existing buildings to purchase—we predict that the affordability “gap” in the cost of building new versus purchasing existing buildings will spur interest again in buying existing buildings that are well maintained and in superior locations. This will be the case because new construction costs will continue their dramatic increases for the foreseeable future, making that option much more expensive.
INVENTORY OF STAND-ALONE ‘WALK-UP’ RETAIL LOCATIONS REMAINS LOW WHILE DEMAND REMAINS HIGH; RENTS STABLE. An Anchorage investor recently visiting Juneau asked us “where are the possible locations for me to locate my business that I plan to bring here?” We responded by saying that “the market for retail locations continues to be tight, with the only vacancy that is significant, exists in the malls.” And that kind of a destination does not “fit” all retail businesses.” That acute shortage is particularly tough on companies that are “regional” credits—those that have locations statewide because their investors require a certain standard for their locations to include in each market. This is true especially for franchise food operators who often have national specifications that often cannot be altered. There is no easy solution to this problem. But long term, Juneau will need to address this issue. There just must be more land made available for small businesses to thrive and grow. As long as the demographics of Juneau reflect high personal incomes and education levels, the most talented entrepreneurs will figure out ways to secure new locations that will complement their long-term business plans.