Downtown Spokane office vacancy continues to climb

Feb. 24—Spokane's downtown office-space vacancy rate is climbing at the same time several owners of commercial properties face the prospect of refinancing mortgages at the interest rates that have stifled housing markets nationwide.

A recent study by the Mortgage Bankers Association predicted that $4.7 trillion worth of commercial properties held by lenders and investors will mature this year nationwide. That comes at a time when about 20% of offices are vacant in downtown Spokane, according to data compiled by the real estate firm Kiemle Hagood.

Craig Soehren, a longtime commercial broker at Kiemle Hagood, explained that commercial mortgages work differently than those used to purchase a home. Home mortgages typically get paid off over 30 years as the homeowner pays interest and principal in monthly payments.

Most commercial loans have terms of three, five, seven or even 10 years that are typically interest-only payments. When the terms "mature," the owners can pay off the note or they can refinance.

"And a lot of those are resetting," Soehren said. "They may have had interest rates at 3.5% and now they are in the high sixes and sevens. It's going to be really interesting."

Soehren said the problem is not as acute in the Lilac City, which has a downtown core that is dominated by older buildings and has little space to add new structures.

However, larger cities like Seattle, Portland and San Francisco could face a glut of lease holders facing tough decisions as the economy continues to adjust to remote and hybrid work hours that became the norm during the COVID-19 pandemic.

"The challenge is that if you have a call-center type building that is vacated and the debt comes due, you are most likely going to give the building back to the bank," Soehren said. "I'm not aware of any of those" in the Spokane area.

James S. Black III has been a commercial real estate agent for NAI Black since 2005. NAI Black and Kiemle Hagood are the two leading local office rental firms in the Spokane area.

Black said downtown has become a harder sell. It's expensive to find enough parking for office workers, and employees must deal with ongoing issues surrounding a large homeless population.

"More and more restaurants are closing. It's a challenge for us trying to attract companies to come downtown," Black said. "What we are seeing is people don't want to come downtown. They don't want to work downtown."

As a recent example, Travelers Insurance is vacating the Crescent Building at 719 W. Main Ave. and relocating to Spokane Valley.

Red Tail Land Development, based in Irvine, California, last year confirmed preliminary plans to convert the historic building into 97 multifamily living units.

In the same neighborhood, developer Jordan Tampien and a group of investors purchased the historic Peyton Building, at 10 N. Post St., with plans to convert the former office space into 96 apartments.

Both Soehren and Black believe the trend to convert former office space to living units will continue.

Overall, Spokane has about 12.6 million square feet of general office space. Based on Kiemle Hagood's most recent figures, about 14.4% of those offices are vacant.

But in the downtown core, an area bordered by the Spokane River south to Third Avenue, and Division Street west to Monroe Street, the vacancy rate was 19.7% in the last quarter of 2023.

But the impending move out of the Crescent Building will probably boost that percentage up to about 21%, Soehren said.

Still, Black and Soehren continue to find several clients who want smaller office spaces, from 2,500 to 5,000 square feet.

"The smaller space is very active," Black said.

Some building owners are finding they need to add amenities, such as onsite fitness centers, to make their deals more attractive to clients.

"That small market space has been incredibly dynamic and positive," Soehren said. "We have lots of tenants looking for space. But, they are not looking at spaces over 20,000 feet."

Soehren, who has been in the local business for about 40 years, said the last time he can remember the downtown approaching 20% vacancy was in the early 2000s when Metropolitan Mortgage & Securities collapsed and about 100,000 square-feet of office space went dark.

"That was a huge shot to the downtown market," Soehren said. "Those are the things you get used to in a market like this."

But right before 2019, downtown was extremely hot.

"We literally had no vacancy for parking so we couldn't rent any more spaces," Soehren said. "The market changes. Because of Spokane's size, a company will leave the market, leave a hole and you have to reformulate."

At the same time, Black remains bullish on the Lilac City moving forward.

"The silver lining in all of this is that Spokane continues to grow," he said. "Hopefully, we can attract some new businesses that want to be here because of all the things that Spokane has to offer."