Downtown Spokanes once airtight Class-A office market has loosened considerably as the Metropolitan Financial Center has gone from fully occupied to 21 percent vacant in 16 months time.
Now, the real estate industry here is speculating about what impacts might be felt if, or when, the building empties further.
Jeff Johnson, a partner and director of leasing at Spokanes Kiemle & Hagood Co., says he believes the majority of that empty space is the result of corporate downsizing by the towers owner, Metropolitan Mortgage & Securities Co., which last month filed for Chapter 11 bankruptcy reorganization. Some of the empty space, however, was left vacant by tenants, such as Washington State University Spokane, that moved their operations out of the 18-story structure at 601 W. First.
Metropolitan has told Spokane-area real estate specialists that more office space soon will be available for lease in the tower, real estate sources say.
Thats both a challenge and an opportunity for the real estate industry, they say.
We hate to see space come on the market in our current economy, but I dont think it will have a huge, detrimental effect, Johnson says. Obviously, its a good building.
Real estate professionals here have been optimistic about the office market and this years prospective leasing activity, despite a discouraging vacancy report last fall. In that report, the vacancy rate for Class A downtown space had nearly quadrupled to 9.6 percent in a survey in October. A year earlier, the vacancy rate for downtown Class A space stood at just 2.5 percent. Scot Auble, whose real estate appraisal firm Auble, Jolicoeur & Gentry conducts the vacancy survey with Kiemle & Hagood and Tomlinson Black Commercial Inc., says the companies havent conducted the survey for spring 2004 yet.
The Metropolitan Financial Center is one of five downtown buildings that are classified as Class A space in the survey, and it accounts for a fifth of such space in the citys core.
At the time of the October office-vacancy survey, the vacancy rate in the building was 21 percent, dramatically different from a year earlier when the building was occupied fully, Auble says.
The roughly 37,000 square feet of empty space in the 178,000-square-foot building as of October made up a large chunk of the rise in vacant Class A office space downtown. The amount of such space that was empty rose to 82,500 square feet from 24,000 square feet a year earlier.
Those figures also indicate that the Metropolitan buildings vacancies accounted for about 45 percent of all of the empty Class A space downtown. Essentially, the buildings vacant areas were nearing the amount of empty space in the other four Class A buildings combined.
In the worst-case scenario, if all of the space in the Metropolitan Financial Center were to be vacated, the Class A office-vacancy rate downtown would more than double, says Mark Pinch, president of Tomlinson Black Commercial Inc.
Realistically, Auble, Pinch, and Johnson all say that the space in that building likely will become available gradually, rather than all at once, and that the space will be absorbed over time. Pinch says that he expects Metropolitan will emerge from reorganization and maintain its offices in that building.
Johnson says other tenants in the building include the Wells St. John PS law firm and the state of Washington.
So far, Pinch says, We havent felt the impact (of the buildings vacancies) for the downtown office market and the property owners who are competing to fill space.
He says talk of developing a new office tower in downtown Spokane already had subsided before the vacancy rate increased.
With the other Class A office buildings largely full, real estate sources dont believe the Metropolitan towers rising vacancy will have a profound effect on the overall downtown-office market. Auble says it might keep lease rates from increasing while prime property is absorbed, but other building owners arent likely to be pinched financially as a result of increased vacancy.
There hasnt been any suggestion that the building will be put up for sale, but both Pinch and Johnson say there are users who might be interested in such a property if it were to become available. Because the vacancy rate is high in the building, it likely would attract a company that needed space itself, rather than a real estate investor.
Neither a Metropolitan spokeswoman nor a property manager with the troubled company, which manages the tower internally, could be reached for comment, and Metropolitan hasnt addressed what it plans to do with its excess space there.
Metropolitan bought the high-rise building in early 1998 for $11.7 million from Farm Credit Services, the company said in its annual report. In that report, Metropolitan said it planned to make $5 million in improvements to the building.
In its 2002 annual report, Metropolitan said that as of Sept. 30, 2002, the mortgage balance on its building was about $11.4 million. The company hasnt released its 2003 annual report yet.
Leasing agents say the building has several positive attributes, but also has many limitations for prospective tenants.
Built in 1981, the structure is one of the newest high-rise buildings in downtown Spokane, and has surface parking nearby for use by its tenants. Also, its long rectangular footprint offers many offices with views of downtown and the lower South Hill, commercial real estate professionals say.
The building, however, was built to house one large tenantinitially Farm Credit Servicesand the rectangular floor plans arent easily divided for multitenant use. If a floor were divided lengthwise, it would create a long, narrow space for each user, Auble says. If a floor were divided crossways, the spaces would be of a more conventional shape, but some design eccentricities would present challenges.
For example, Auble says, elevators are located at both the west and east ends of the building. A single user might use one set of elevators for public use and the other for employees. If, however, two companies used separate elevators for access to their respective offices, it might be confusing to visitors.
Unless they are an industrious customer, they wont know which elevator to get on when they enter the lobby, he says.
Also, Johnson says that the mens and womens bathrooms are on opposite ends of each floor. If a floor were to be divided widthwise, one tenant would have the mens restroom, and the other would have the womens.
This isnt an insurmountable obstaclebathrooms can be remodeledbut its an example of an element of the buildings layout that makes multitenant leasing more challenging.
Its best suited for tenants who are going to take large blocks of space, Johnson says. If we had a large company that wanted to be downtown, it would be a great opportunity. Its just not going to accommodate the average downtown tenant.
That average downtown tenant leases between 2,000 and 5,000 square feet of floor space, he says.