Demand for retail space in most of the Spokane area continues to be strong, while vacancy rates for office and industrial space are shrinking at a moderate pace, real estate market observers here say.


One of the brightest spots in an annual fall vacancy survey was a dramatic tightening in ground-floor retail vacancies downtown, says Scot Auble, president of Auble, Jolicoeur & Gentry, a Spokane appraisal firm that compiles the survey with participation from Kiemle & Hagood Co., Goodale & Barbieri Co., and NAI Black, also all of Spokane.


The vacancy rate for ground-floor retail space downtown was 4.68 percent, the fall survey says, down from 8.59 percent a year earlier and 16.28 percent in the 2005 fall survey.


That could foretell increases in rental rates for new leases, Auble says.


When vacancies go below 5 percent you typically see increases in rent, he says.


Auble attributed the low vacancy rate to continuing growth in retail sales downtown, which, in turn, attracts more retailers.


Downtown is doing better and better, he says.


He says, for instance, that Crescent Court, the former Crescent department store building at 707 W. Main, has several new tenants.


Its a huge building and its getting leased up, Auble says. Last year, they leased a lot of space in there.


As a whole, the downtown-core retail-vacancy rate also improved, to 6.89 percent in the fall 2007 survey, from 8.05 percent a year earlier.


The downtown periphery, meanwhile, has been airtight, with almost no vacant retail space for a number of years, the survey says. Average new lease rates there have jumped 27 percent since the fall of 2003, to $16.10 per square foot on an annual basis from $12.65 per square foot. Retail rates in other parts of the Spokane area also have risen, though not as dramatically.


Lease rates for retail space as a whole rose more than those for office and industrial space, Auble says.


The only place rental rates moved was in retail, he says.


Retail-vacancy rates on the North Side, where there has been a spate of new construction, have trended in tandem with those downtown. The fall 2007 survey shows a vacancy rate of 4.57 percent compared with 8.38 percent a year earlier.


Marshall Clark, president of Clark Pacific Real Estate Co., of Spokane, says he doesnt foresee any letup in retail demand on the North Side in the near future.


All available raw ground for retail and office uses near Northpointe has been sold in the last three months, he says.


Clark, too, says there might be some moderate rent increases driven in part by rising construction costs.


Spokane Valley, which has a retail-space vacancy rate of 13.68 percent, is lagging behind other areas in and around Spokane, although the vacancy rate there also has been on a tightening trend for the last four years.


Clark says the Sprague-Appleway corridor, where traffic flows on a pair of one-way streets, may be to blame in part for Spokane Valleys higher retail-vacancy rate, because the couplet is perceived by many shoppers as inconvenient.


Most retail has been added by the Spokane Valley Mall, he says. Thats a lot of square footage to absorb there. And it leaves a lot of back space to fill up along the couplet.


Still, he predicts that the Sprague-Appleway corridor will be rediscovered over time.


It will take time, like the lower Division-Ruby couplet north of downtown Spokane, he says. Retail space there is desirable now, but it took awhile to fill up.


If theres a weakness in tenant demand for retail space, its in the relative number of people seeking small shops of less than 1,500 square feet in size, Clark says.


Theres a scarcity of those tenants, he says. They are the would-be franchisees. They are likely to be more cautious about the economy than a national company thats looking for some space to fill in on the map.


Office space


The survey shows a slight one-year increase in the vacancy rate for Class-A office space downtown, where the vacancy rate for such space was 13.82 percent last fall, up from 11.52 percent a year earlier. The Class-A vacancy rate, however, has been on a significant improving trend from just a few years ago, when Metropolitan Mortgage & Securities Co. collapsed and vacated much of its 178,000 square-foot, 18-story flagship building at 601 W. First, Auble says.


The building, now named the Wells Fargo Center, is filling up well, he says.


The vacancy rate for Class-A office space peaked at 27.56 percent in the fall of 2004.


Class A is considered the most desirable classification of office space downtown, as opposed to classes B and C.


The overall vacancy rate for all classes of office downtown space is on a steady tightening trend.


Craig Soehren, associate broker with Kiemle & Hagood Co., of Spokane, says hes optimistic 2008 will be a strong year for commercial leasing.


Leasing demand is going well for this time of year, he says. Were working on a lot of office prospects.


He says the Northwest is somewhat insulated from economic downturns in other parts of the country, as long as this is the place where people want to work and live.


Average lease rates for Class-A office space downtown have been stable in recent years, Soehren says. According to the survey, the average new lease price last fall was $20.28 per square foot, compared with $20.17 in the fall of 2003.


Soehren says lease rates might rise in the near future.


Were anticipating rent spikes, he says. That vacancy rate has dropped, and theres not a lot of new commercial construction in the close-in marketplace.


He also says a number of office buildings have changed hands and new owners might raise rents to realize returns on their investments.


Spokane Valley usually has had the highest office-vacancy rate in the Spokane area in recent years, although Soehren says thats not causing him too much worry.


Thats where new product is being built, he says. Were seeing significant leases there. Indiana Avenue and Mirabeau Parkway are performing strongly.


Industrial shortage


Soehren says theres an apparent shortage of smaller industrial spaces in the Spokane area.


Theres not a lot of new product being built in the marketplace. Industrial vacancies are pretty low, he says.


Spokane Valley isnt lagging other areas when it comes to industrial space. The Valley, which has more than 14 million square feet of industrial spacemore by far than any other part of the Spokane areahas a vacancy rate of 5.38 percent for such space, the fall survey says. The rate is second only to the area west of Spokane, which has an industrial-space vacancy rate of 1.49 percent.


Auble says the industrial-space vacancy rate will only get tighter, until prospective tenants are willing to pay more rent for new construction.


I keep predicting industrial is going to see an increase in rents, but theres a big gap between the feasibility for new construction and market rent, he says.


Rental rates will remain level for only so long, Auble says.


Just about every sector is doing well or improving, he says. I think rents are probably going to increase in every marketassuming strong economic conditions continue.


Contact Mike McLean at (509) 344-1266 or via e-mail at [email protected].