The Spokane-area office market has tightened dramatically, especially downtown, and is expected to remain tight through next year, say executives at two of Spokanes largest commercial real estate companies.


As a result, businesses that are looking to move or expand here and need blocks of 5,000 square feet of office space or more likely will find their options limited, the executives say.


Theres very little left, claims Mark Pinch, president of Spokanes Tomlinson Black Commercial Inc.


Larry Soehren, director of commercial property management for Spokanes Kiemle & Hagood Co., says he believes vacancy rates are as low as theyve been in recent years. I think all over its pretty good, he says.


Pinch estimates that the downtown vacancy rate for Class A, or premium, office space has shrunk to nearly 3 percent. Vacancy rates are higher in some lower-grade buildings downtown and in suburban areas, but they, too, have fallen, he asserts. When the market gets tight, its sort of a forced trickle-down effect, he says.


The Seafirst Financial Center, the Washington Mutual Financial Center, and the Washington Trust Financial Center are among the less than a dozen buildings here that generally are regarded as offering Class A space. Buildings considered to offer Class B space include the U.S. Bank Building, the Paulsen Center, the Sherwood Building, the Hutton Building, the Fernwell Building, and the Chronicle Building.


A number of companies, including the Principal Financial Group, Travelers Property Casualty Co., Potlatch Corp., and Sallie Mae have leased larger blocks of office space downtown over about the last year, contributing to the tighter market there. Pinch says a lot of small users, including both new and expanding companies, also have helped boost occupancy rates throughout the Spokane area.


The result is that Spokane is full, and were literally out of space, compared with typical inventories, he says.


That bodes well for next year, he contends, because if you combine the kind of demand that were seeing for Spokane with the kind of mortgage rates were seeing, which is under 9 percent for commercial mortgage money, that spells a big season for next year for (development of new) office space.


Pinch says he believes a lot of people still tend to judge a communitys economic health by its industrial activity. Most peoplewhen they think industrystill want to see smokestacks and assembly lines, but thats not necessarily the way we do business these days. In Spokane, office space harbors a lot of growth industries.


Pinch says current market conditions also raise anew the question of whether a major new office building is needed downtown.


Soehren says he believes the occupancy rate for downtown Class A space probably is close to 95 percentnot quite as high as Pinchs estimate, but still quite strong. Its obviously a good economy, he says of the reasons behind the shrinking amount of leasable space.


The incoming tenants are nice, but they dont drive the market. Its the ongoing expansion and growth of our existing tenant base that has fueled and pushed this market forward, Soehren contends.


He says he believes that the development of any major new office building downtown still is a long ways out, with construction activity next year more likely to be in the form of renovations of older buildings.


Some of the demand for larger blocks of office space in or around the downtown area may be dissipated, at least temporarily, when Worthy Enterprises Inc. opens a new 240,000-square-foot, five-story office structure that its developing just east of the Rock Pointe Corporate Center. Worthy began work on the project, which also is to include a six-story parking garage, earlier this month and expects to complete it in about a year.


Worthy says the new office building will have an approximately 56,000-square-foot floor plate, or standard floor size, on its upper floors, which would be among the largest in Spokane.


However, no other major office building projects even close to that size are known to be planned in the Spokane metropolitan area, although Arger Capital Corp. has said it intends to develop a $7 million, 60,000-square-foot office building on Sunset Hill next to another structure it just completed that is occupied by Farm Credit Bank.


Metropolitan Mortgage & Securities Co.s looming move to the 18-story, former Farm Credit Bank Building, which the Spokane company bought earlier this year, will create some additional vacant space downtown when Metropolitan leaves the buildings it currently occupies. However, Soehren says the move should have little impact, since Metropolitan is relocating downtown rather than moving out of the downtown area. Also, most of the space Metropolitan will be vacating isnt considered to be prime space.


Spokane city and county building permit figures show that the amount of office space here is continuing to expand, albeit at an unspectacular pace. Through November of this year, the two jurisdictions had issued a combined total of 22 permits for new office and professional building projects worth about $8.7 million in all, compared with 23 permits issued for projects worth about $6.8 million during the same period last year. Only about $1.6 million worth of the permits approved so far this year, however, are for projects inside the city.


Certainly part of the reason for the cautious construction pace has been the higher vacancy rates over the last couple of years, since the end of Spokanes most recent economic boom. Surveys conducted for the Real Estate Report, which is published semi-annually by the Spokane-Kootenai Real Estate Research Committee, show that the Class A vacancy rate in Spokanes central business district stayed mostly above 10 percent during that time.


The total office vacancy rate for downtown, including Class B and Class C buildings, has been at least a couple of percentage points higher. Suburban office vacancy rates also have been running mostly above 10 percent over the last couple of years.


Pinch and Soehren say they expect the tight office market to result in some rent increases. The average rental rate here for fully serviced Class A space currently is $16 to $18 a square foot.


Soehren says he expects any rent increases to be modest, about equivalent to the inflation rate plus 1 or 2 percentage points.