This Space For Rent While Some Buildings Are Vacant, Office Space Is At A Premium In Downtown Spokane

Following its recent merger, Paine, Hamblen, Coffin, Brooke & Miller, Spokane’s largest law firm, needed to find some downtown office space.

Easy, right?

After all, there are all these buildings downtown. And if the conventional wisdom holds that downtown has been in decline, finding a couple of floors on which to locate 63 attorneys and their support staff shouldn’t be that hard.

Not so fast.

Quietly, to the glee of Spokane’s building owners and leasing agents, the city’s downtown office space has filled up.

Downtown’s Class A space, the most polished and the most expensive office space, is 96 percent full, said Craig Soehren, a leasing agent who compiles an annual office space survey for Kiemle and Hagood.

The other categories are healthy as well, Soehren said, with Class B space, consisting of well-maintained older buildings, 89.5 percent full and Class C space 77 percent full.

“The market is very good,” Soehren said. “Looking at the universe of downtowns, a vacancy rate under 5 percent (for Class A) is pretty incredible.”

The result is that a firm like Paine, Hamblen, which merged with Chase, Hayes, Arpin & Smythe Feb. 1, is struggling to find a place where it can relocate its office.

Shaun Cross, the firm’s managing partner, admits Paine, Hamblen is being picky.

With expansion plans calling for the firm to add 20 to 40 lawyers in the next few years, Paine, Hamblen is looking for 60,000 square feet of contiguous downtown Class A space, said Cross.

And it doesn’t exist.

“There are pockets of space here and there, but there’s not the size pockets we need,” he said.

Paine, Hamblen’s search for space, and the high occupancy rate for the downtown’s existing Class A space, is leading some to speculate that a new downtown office building may be built in the next several years.

“There’s a strong, strong need for a new downtown office building, said Jeff McGougan, senior sales and leasing office specialist for Tomlinson Black Commercial.

The market could absorb a building with about 100,000 to 120,000 square feet, McGougan said.

However, the cost of building downtown would demand that its tenants pay rents considerably higher than the current $17 to $19 per square foot for Class A space.

To pay off a building, a landlord would have to charge $22 to $24 per square foot, Soehren said.

For a large tenant, the difference could approach $250,000 a year.

“Last year, rents went up 50 cents a foot,” Soehren said. “At that rate, you can figure three to four years.”

But the prospect of a new building may be attractive enough to certain tenants to pay higher rents, maybe as high as $22 a foot, McGougan said.

“I think the market could push that and almost bear it, to $20, $21, possibly $22,” he said.

Cross says a new, downtown office building may be inevitable.

“My belief is that there is going to be a climate where additional Class A space is going to be coming on-line,” Cross said. “We’re getting inquiries and all sorts of interest. I think we have plenty of choices out there.”

Paine, Hamblen is weighing its options, Cross said, and that includes negotiating with the owners of its current home, the Washington Trust Financial Center, for more room there.

But if a downtown office building becomes a reality, it will take commitments from big tenants like Paine, Hamblen.

“For a developer to go into downtown, most would probably need significant amounts of pre-leasing,” said Soehren. “You put someone like Paine, Hamblen together with another 20,000 to 30,000 square foot tenant and you’re talking about a new building.”

Of course, not every developer needs commitments from tenants before they will build.

Arguably Spokane’s most successful office builder, Walt Worthy has built the Rockpointe office complex without significant pre-leasing.

“You can’t get tenants to sign up first,” Worthy said. “People like to see what they’re going to lease. They want to kick the tires, so to speak.”

Located north of downtown, in the area real estate specialists call the periphery, Rockpointe is made up of four buildings, with the latest, Rockpointe East, opening in October.

Now about 40 percent occupied, Rockpointe East contains 240,000 square feet of Class A space on five floors, with the big, wide-open floor plates tenants now request.

Worthy was able to build Rockpointe East without prior commitments because of the economies of scale, he said.

“If you look at Rockpointe as one big project, we already have 500,000 square feet occupied,” he said. “You add 120,000 square feet and the project is still 80 percent full.”

As for building his first Rockpointe near Boone and Washington in 1987, Worthy said, “I probably wasn’t as smart back then.”

Worthy attributes his project’s success to competitive rates, a good product and, perhaps most importantly, free parking.

While a downtown office may give a business visibility and prestige, the lack of available parking can be a significant obstacle.

“Most of the visibility you get downtown is driving around, looking for office space,” Worthy quipped.

It’s the problem of finding, and building, parking downtown that makes Worthy think the future of office buildings in Spokane is on the outskirts of the central business district.

“People have to park somewhere,” he said. “If Spokane follows the pattern of most other cities, people are going to build around downtown.”

City boosters hope he’s wrong.

The Downtown Spokane Development plan, a comprehensive strategy to rehabilitate the urban core, calls for Spokane to add 39,000 square feet of both Class A and Class B office space a year for the next 15 years. While much of the Class B space will come from the adaptive reuse of existing offices, warehouses and stores, the Class A space must be built from scratch.

Michael Edwards, president of the Downtown Spokane Partnership, admits the target is ambitious.

“It’s huge,” he said. “It’s a high goal, but it’s grounded in the economic pro forma done as part of the plan. It’s a reflection of what’s possible, knowing it’s aggressive.”

To make those goals a reality, Edwards said, developers like Worthy need to be enticed into building downtown. That will only happen as the profile for downtown is enhanced through new retail projects and as more parking is made available, Edwards said.

“We have been very successful in maintaining the retail position of downtown, and the next step is office,” he said. “As rents start to creep up and we create places for people to park, it begins to make more sense for people like Walt Worthy.”

While the shortage of Class A space isn’t dire, it does have an impact on companies who are relocating to Spokane, said Mark Turner, president of the Economic Development Council, which recruits business to Spokane.

“We get inquiries that are Class A-space driven and we do find ourselves in a scramble mode, and that will be the end of the inquiry,” said Turner. “Other communities would have more or cheaper or better space.”

From Turner’s perspective, a new office building would be welcome.

“As it related to our interests in the attraction of regional headquarters and corporate headquarters, it would be key and it would probably be successful,” Turner said.

No matter the demand, however, a new downtown office building will only happen if a developer can match the rents needed to pay off a building debt with the tenants willing to pay those rents.

While Paine, Hamblen’s Cross said his firm would pay a premium to stay downtown, not everyone places as much value on the prestige that comes with a downtown location.

Any big increase in rent to support a downtown office project will benefit developers on the periphery, said Worthy.

“If the rents went up another $4, we’d probably offer it for (an additional) $1.50 and they’d still have a problem leasing downtown,” Worthy said.

Graphic: Area office space

OFFICE SPACE PARTICULARS By Oliver Staley Staff writer Office space definitions, prices and examples for down town office space, as used by Kiemle and Hagood property managers. (The firm does not use classifications for office space outside of downtown): Class A - Newer, well-maintained office buildings, generally built after 1970. In downtown Spokane, prices range from about $17 to $19 per square foot per year. Examples include the SeaFirst Financial Center, Metropolitan Financial Center and Spokane Regional Business Center. Makes up about 45 percent of downtown office space. Ninety-six percent of downtown Class A space is occupied. Class B - Older buildings that have been well-maintained and offer some amenities found in newer buildings, such as conference rooms and modern heating and air-conditioning systems. Downtown rents: $14-$16 per square foot per year. Examples: Paulsen Center, U.S. Bank Building. Makes up about 30 percent of downtown office space. Some 89.5 percent of Class B space is occupied. Class C Older buildings that have not been significantly remodeled or as well maintained. Rents range from $8-13 per square foot per year. Examples include the Great Western Building and the Rookery at Howard and Riverside. Makes up about 6 percent of downtown office space. 77 percent of Class C space is occupied. Not classified - Small, one- or two-story buildings or owner-occupied buildings. Rents vary. Makes up about 20 percent of downtown space.