Office vacancies in downtown Spokane have jumped sharply in the last six months and could become more widespread, Spokane-area real estate agents say.


With more premium floor space on the market there nowand more becoming availableconcessions for tenants are expected to get sweeter, and rental rates could fall, the agents say.


It sounds to me like its a good time to be a tenant downtown, says Dan Cantu, owner of Cantu Commercial Properties LLC. If I have a lease coming up in the next 12 months, Im going to be able to make a good deal.


An office-vacancy survey completed last month shows a 19.3 percent vacancy rate for premium, or Class A, office space in the citys core. Thats up dramatically from 9.6 percent six months earlier.


Consequently, the overall office-vacancy rate downtown, counting all classes of space, has climbed to 16.5 percent, compared with 13.4 percent six months ago, the survey says.


Not surprisingly, the dramatic increase in Class A space is a direct result of a surge in vacant space in the Metropolitan Financial Center, at 601 W. First, says Karen Meek, a real estate appraiser with the Spokane appraisal firm Auble, Jolicoeur & Gentry, which conducts the survey in conjunction with several larger Spokane-area real estate brokerages.


The vacancies in that tower, one of five downtown high-rises considered to have Class A space, have increased as its owner, Metropolitan Mortgage & Securities Co., has begun working through its bankruptcy reorganization and paring down its operations.


If the Metropolitan Financial Center were left out of the survey, the Class A vacancy rate downtown would be 4.4 percent, Meek says.


If the market doesnt change, the Metropolitan building wont be alone as a significant contributor of vacant space in future surveys, says Craig Soehren, a commercial real estate agent at Kiemle & Hagood Co., of Spokane.


The vacancy survey didnt include the recently renovated American Legion Building, at 108 N. Washington, and the newly constructed American West Bank Building, at 41 W. Riverside, which are being marketed for lease, putting even more space onto the market.


The survey doesnt include buildings that have been on the market for less than a year, Meek says, so those two buildings likely wont be figured into the mix until early next year. The American West building likely will be classified as Class A space, and the American Legion likely will be considered Class B, she says.


Also, Soehren says, information for the current survey was gathered in February. Since then, two entire floors have become available in the Bank of America Financial Center, at 601 W. Riverside.


Bank of America itself vacated one floor, and Paine, Hamblen, Coffin, Brooke & Miller LLP, Spokanes largest law firm, left another floor, Soehren says. Paine Hamblen leased additional space in another Class A downtown building, the Washington Trust Financial Center, at 717 W. Sprague, so it could have all of its operations in one building. Soehren says, however, that the bank moved some of its own operations around in that tower to accommodate the law firm, so there was no net gain in occupancy in that building.


If space in the new American West building and the vacated space in the Bank of America tower were figured into the current vacancy-rate survey, Soehren says, Youre looking at a vacancy of over 25 percent.


Dave Black, CEO of Tomlinson Black Commercial Inc., of Spokane, says that to compete for tenants, downtown landlords initially will offer incentives to current and prospective tenants, rather than lowering lease rates. Such incentives might include more money for tenant improvements or free rent for a period of time, he says.


The market is going to be more favorable toward tenants in negotiations, Black says.


Already, the recent survey shows a slight decrease in average rental rates for premium downtown space. The average annual rate currently is about $19.50 per square foot, down from about $20.20 a foot six months earlier.


Soehren says that if lease rates downtown fall further, properties in the citys core will be able to compete more directly with buildings on the periphery of downtown, which usually have rented for lower rates. Eventually, owners of buildings on the downtown periphery could feel market pressure to lower their rates.


Vacancies on the periphery also increased in the recent survey, though far less dramatically. The survey puts the vacancy rate for the periphery at 9.2 percent, up from 5.6 percent six months earlier. That change, however, can be attributed to the status of the Schade Tower, at 528 E. Trent, which had gone from being listed as fully occupied last fall to being listed as empty in the current survey, Meek says. Its unclear why that change occurred, she says. Otherwise, she says, the market on the periphery is considered to be stable.


Elsewhere in the Spokane market, vacancy rates havent changed dramatically.


The North Sides vacancy rate now sits at 16.1 percent, up from 14.3 percent six months earlier, but far lower than the 20.3 percent vacancy rate of a year ago.


Cantu says a fair amount of leasing activity has occurred on the North Side, with virtually nothing happening in terms of new office construction.


I expect that number is going to go down before the next survey, he says.


In the Valley, the office-vacancy rate was 13.9 percent in the most recent survey, roughly the same as the 13.6 percent rate reported six months earlier. In the relatively small South Hill office market, the vacancy rate was 7.2 percent, down from 8.8 percent six months earlier.


Auble, Jolicoeur & Gentry has conducted the office-vacancy survey since 1999 and does so in cooperation with Kiemle & Hagood, Tomlinson Black Commercial, and G&B Real Estate Services Inc., also of Spokane.