Modest hopes harbored for commercial real estate
Analysts predict slow growth in occupancy for region’s many vacant spaces
The River View Corporate Center has it all: location by the Centennial Trail and Spokane River, amenities like exercise and conference rooms and parking.
Everything, that is, except occupants.
The 250,000-square-foot office building in Spokane Valley is only one-quarter leased up two years after opening, despite offers of reduced or free rents and expensive or expansive build-outs, owner Walt Worthy said last week.
“It’s the nicest building we’ve ever built,” he said, but the market for big office spaces – 50,000 square feet per floor at River View – has all but vanished in the aftermath of the recession.
Worthy said River View was a high-end version of the final expansion of the Rock Pointe Corporate Center, a project he sold in November 2005 for $82.8 million. Demand for space was so strong then that three of the five floors were fully leased before construction was complete.
But in the two-plus years between the Rock Pointe sale and the River View opening, demand died, Worthy said.
Rock Pointe itself has fallen on hard times, with a receiver appointed a week ago to assume control of the complex until ownership can be sorted out.
And a trustee’s sale of the Wells Fargo Building, just a few blocks away downtown, is scheduled for Wednesday.
“It’s strange times right now,” Worthy said.
Others in the commercial real estate business would agree.
An oversupply of office and retail space has put renters in control. And, as with the residential market, brokers do not expect a turnaround until job numbers increase and employers start looking for new work space. The good news is more willingness on the part of banks to finance commercial real estate transactions.
Mike Livingston, a broker at Kiemle & Hagood Co., said the vacancy rate for office space in the Spokane area was about 14 percent last spring, within a range of 11 percent to 15 percent since 2001.
Results of another survey expected this week may show the vacancy figure moving slightly higher, but Livingston said commercial real estate brokers west of the Cascades would like to be able to say markets there have held up as well as Spokane’s.
Only 8 percent of Class A space in downtown Spokane – mainly the taller buildings – is vacant, but 18 percent of Class B space is empty, he said.
Livingston said rents are holding up fairly well. Tenants may be leasing less space, but the Spokane market typically does not experience the subleasing that causes rent volatility in markets like Seattle, he said.
Potential investors in Spokane properties are holding back until they perceive the market has bottomed, and that point may not be too far off, Livingston said. Buyers who intend to occupy at least part of a building are already becoming somewhat more aggressive, he said.
More people will get into the market when they conclude stocks are not going to offer returns comparable to those possible with real estate, he said.
“I think 2011 is going to be better times,” Livingston said.
Matthew Byrd, a broker at Cornerstone Property Advisors LLC, said the midterm election results and the pending income tax agreement in Washington, D.C., already are renewing investor optimism regarding real estate values.
Most of the action has been in multifamily housing, where there are more interested investors than there are buildings to sell, he said.
But Cornerstone brokered the deal that will bring a Trader Joe’s to Lincoln Heights on the South Hill next year, and there could be others, Byrd said.
“I think it’s a sign Spokane is a market where retailers can do well,” he said.
Byrd said bankers are slowly warming to commercial real estate financings.
“I feel like it’s getting better,” he said, cautioning, “It’s going to be slow, steady growth.”
Demetri Koston, vice president for Newmark Realty Capital Inc., does not own or manage commercial real estate, but he does arrange financing for clients that include pension funds and major insurance companies.
He called Spokane a “binary” market in which good deals attract multiple bidders and bad deals none. Often, he added, a refinance will wipe out the owner’s equity.
The good deals include well-located, well-kept buildings with good long-term tenants, Koston said.
Lesser-quality buildings in Spokane Valley with 50 percent or less occupancy will not get financing, he said, adding that his clients are looking for deals north of $5 million.
Koston said most of the interest is in multifamily housing, with little or none in hotel properties, raw land and single-tenant buildings.
He said the hard times for commercial real estate are not unique to Spokane, which he predicts will recover faster than other areas.
“I’m very bullish on Spokane and the region in general,” Koston said.