Developers have spent millions of dollars to add new inventory to Spokanes downtown office market over the last several years, but much of that space still sits empty, due to the weak economy.


Furthermore, theres more space about to come on line. The new 56,000-square-foot AmericanWest Bank Building, at 41 W. Riverside, and the rehabilitated 50,000-square-foot American Legion Building, at 108 N. Washington, both are expected to open for tenants within the next two months.


Those structures could push the total measured inventory of downtown competitive office spacemeaning not owner-occupiedto more than 2.7 million square feet for the first time, statistics show.


Some developers and real-estate market observers here shrug off concerns about slow absorption rates, citing 40-year low interest rates that have helped minimize vacant-property costs and increased interest among prospective downtown tenants.


Others fret that a dearth of incoming and expanding businesses has created an undesirable environment in which downtown landlords with space to fill are relegated mostly to trying to lure away tenants from other buildings.


Its very competitive. Theres several years of space to be absorbed, acknowledges Spokane developer Ron Wells.


On the other hand, theres never been more interest in downtown, he asserts, adding, We feel very positive about the market.


Larry Soehren, vice president of Spokane-based Kiemle & Hagood Co., which manages several large downtown office properties, says everything hes seen suggests the market is pretty slow right now.


Hopefully, well see some signs of life pretty soon, he says.


Historically, downtown has been able to absorb 50,000 square feet to 100,000 square feet of new space a year, but there currently are a lot of people sitting on the sidelines, waiting to see what happens with the general economy, Soehren says. The office market is a lagging economic sector, meaning The general economy has to pick up before people start pulling the trigger on more office space, he says.


Part of the problem with that, though, he says, is, I dont get the sense this time that theres a pent-up demand just waiting for someone to shoot the gun and say everythings OK.


The Spokane central business district currently has an overall vacancy rate of about 13.4 percent, according to figures gathered by Auble, Jolicoeur & Gentry, of Spokane, for a fall 2003 real estate survey. That number is down from a peak of 14.9 percent a year earlier, but well above the vacancy rate of the previous several years.


Class A space, which refers to the top-dollar quarters in the citys most prestigious office towers, jumped to a 9.6 percent vacancy rate from 3.6 percent last spring. The vacancy rate for Class B space, which is found in somewhat older and less richly appointed structures and by far the largest monitored category here, fell slightly to 15.2 percent from 16.7 percent last spring. However, that still is one of the highest recorded rates over the last 10 years.


In older structures offering what is considered Class C space, the vacancy rate was 15.9 percent, but that was much improved from last year, when it climbed well over 40 percent.


Obviously, we have faith in the market long term, despite softer-than-expected market demand recently, Wells says.


He and his wife, Julie, own Spokane-based Wells & Co., which specializes in rehabilitating older buildings and has been one of the most prominent downtown office developers in recent years. Its projects include Steam Plant Square, Courtyard Office Center, Morgan Block, and Freeman Center.


Wells says he embarked on an aggressive development effort some years ago after growing weary of fielding phone calls from prospective tenants who werent able to find the type and size of space they desired downtown due to a lack of inventory. Wells & Co. had 185,000 square feet of space under development two years ago, without any pre-leasing, he says, and, We have just over 100,000 now, so thats pretty good.


The Steam Plant Square retail-office complex at 159 S. Lincoln now is about 80 percent occupied, while the Courtyard Office Center at 827 W. First probably is about 60 percent leased, he says.


In the last two months, weve had a lot of activity (there). Weve signed a lot of leases, he adds.


Examples of Wells & Co.s recently advertised lease rates there include $315 a month for a 270-square-foot space and $1,925 for a 1,640-square-foot space, equating overall to about $1.17 a foot, or roughly $14 a foot annually, utilities and janitorial services included. Rates are similar at Steam Plant Square, where the company has been offering a 1,200-square-foot space for $1,400 a month or a 2,020-square-foot space for $2,356.


Wells & Co. completed initial rehabilitation work months ago at the Morgan Block, at 315 W. Riverside and 314 W. Sprague, but Wells says it hasnt made office space there available for lease until now due to a tax credit-related delay.


That 75,000-square-foot complex may take longer to fill because Wells & Co. isnt dividing it into small spaces, but rather is focusing on finding one to three or four tenants who would lease all of it, he says. The complex doesnt have any signed tenants yet, but Wells & Co. is negotiating with two prospective tenants that could take up to 40 percent of the space there, Wells says. Advertised lease rates there start at $12 a square foot annually.


At Freeman Center, which includes five older buildings just west of Steam Plant Square, Wells & Co. has sold two of the smaller buildings and also a couple of full floors in an adjacent six-story building, Wells says. Its advertising the floors for lease at $4,100 a month or for purchase starting at $299,000.


Rob Brewster Jr., who rehabilitated the historic six-story Holley Mason Building, at 157 S. Howard, and recently lost a sizable tenant to another downtown building, is less upbeat about the market.


What we need is businesses that are expanding and growing and coming in from other areas. I think there is a lot of stuff coming on line, office-wise, and I dont see a lot of occupancy, he says.


I think the absorption will come once people realize downtown is really the heart of this region, Brewster says, but he adds, Its unhealthy that the only resource (at present) is pirating tenants out of existing buildings.


A stronger community focus on promoting and developing downtown housing would lead to further retail growth there and also, ultimately, strengthen the office market, he contends.


Mick McDowell, developer of the new $6 million AmericanWest Bank Building, and Steve Schmautz, co-developer of the restored Legion Building, voice little concern about how quickly theyll be able to fill their buildings with tenants.


I am either really foolish for investing that kind of money, or intuiting something or providing something that isnt available in the downtown office market now, McDowell says rhetorically.


AmericanWest Bank says it plans to occupy the main floor in that five-story building, and probably some upper floor space. McDowell declines to say specifically how much other space in the building has been leased, but claims hes tickled pink by how that lease-up effort has been progressing.


I think the renaissance of the east end (of downtown) has just begun, he says.


At the Legion Building, Schmautz says, Were working with some larger companies and some smaller ones, too, on possible leases. He says, We really wanted to get the project to more of a state to where they could see what kind of product were going to have before aggressively marketing the space.


He estimates it will take a year or two to get that six-story building fully occupied, which would be typical for that size of office property in this market.


It will come, as the economy recovers, Schmautz says.