Lease rates for premium downtown office space are rising to new heights here, as increased demand for floor spaceand a dearth of new inventory in the citys corecinch that already tight market segment further.


Commercial real estate observers here say landlords are commanding annual lease rates of just over $20 per square foot for some top-quality, or Class A, office spaces downtown, though the average rent for such space is closer to $18.50.


The vacancy rate for Class A space in the citys core is just 2.6 percent, according to a survey conducted last month by the Auble, Jolicoeur & Gentry real estate appraisal firm, of Spokane, in conjunction with Kiemle & Hagood Co. and Tomlinson Black Commercial Inc., both also of Spokane.


Thats even tighter than during the past few years, when vacancy rates for Class A space downtown hovered at 5 percent before starting to drop last year, says Jeff Johnson, secretary-treasurer of Kiemle & Hagood, one of Spokanes largest commercial real estate and property-management concerns.


Since a limited amount of office space is coming on line this year, the market is expected to constrict even more, Johnson says. Based on current market conditions, lease rates for Class A space downtown could increase by 5 percent this year, he says, which at the high end would mean a rate increase of about $1 per square foot.


The study examined rents and vacancy rates for about 930,000 square feet of Class A space downtown, of which about 24,000 square feet was vacant.


The office-vacancy survey reports that outside of the citys core, vacancy rates in office markets on the periphery of downtown, the North Side, and the South Hill all have tightened somewhat this year, while the vacancy rate in the Valley office market has risen by more than a full percentage point.


Lease rates on the South Hill have remained the same in a year-to-year comparison, but average rents in the other markets have risen between $1 and $2 per square foot.


For the downtown periphery, the office-market survey reports a 5.4 percent vacancy rate, compared with 5.8 percent a year earlier. The average rent in that area is just over $15 per square foot, compared with just under $14 last year. Still, Johnson says some structures there, such as the WHC Building, which is located at 201 W. North River Drive and has views of downtown, are drawing $20-per-square-foot rents.


In the Spokane Valley, the study reports a 7.9 percent vacancy rate, compared with 6.6 percent a year earlier, and an average rent of just under $13, compared with about $11 last year.


That market includes the high-profile Liberty Lake area, where space in new office buildings has been advertised for as much as $22, though Johnson says the highest rents being paid there are closer to $19.50.


Vacancy rates shrunk in the substantially smaller office markets on the North Side and South Hill.


On the North Side, the study reports a 9.1 percent vacancy rate, compared with 12.6 percent a year earlier, and an average lease rate of just under $13, compared with $10.50 last year.


On the South Hill, the study reports a 6.5 percent vacancy rate, down from last years 9.5 percent vacancy rate, and an average lease rate of just under $16, which is the same as it was last year.


Older space downtown


Almost all of downtowns Class A office space is located in structures that were built 20 or more years ago. Johnson says at least one premium office building built last year in another part of the Spokane area is commanding greater lease rates than currently are being paid downtown. That structure, the Northpointe Office Building, developed on Spokanes North Side through a limited-liability company headed by Spokane developer Dick Vandervert, is leasing some space for $22 per square foot, Johnson says.


Mark Pinch, president of Tomlinson Black Commercial Inc., says some potential tenants would pay even higher lease rates to be downtown if a new Class A office building were available in the citys core.


Theres 100,000 square feet worth of tenants who are willing to pay more to be downtown, he says. Whether theyll pay $30 (per square foot) or not, I dont know.


The $30 figure that Pinch refers to is a lease rate that Johnson says developers of a proposed new downtown office tower would need to charge in order for the $50 million-plus project to pencil out.


That projects development team, which includes Kiemle & Hagood co-founder Jerry Hagood and downtown property owner K. Wendell Reugh, has proposed construction of a tower that would include 200,000 square feet of office space atop one floor of retail space and 400 to 600 parking spaces.


The proposed office tower, which would be located at the southeast corner of Howard Street and Riverside Avenue, currently is scheduled to be completed in 2004, Johnson says.


Theres some time to work up to that ($30 lease rate), he says.


While tight, the downtown office market had a strong amount of activity last year, with some businesses expanding and others moving to larger spaces within the citys core.


It was a game of musical chairs, and you can guess who didnt get a chair, Johnson told the 2001 Real Estate Market Forum here on Feb. 20. It was the smaller tenant.


He told his audience, however, that some office users who require smaller amounts of floor space have been able to sublease offices from some larger users thatin light of a slowing national economyeither are downsizing or arent growing as quickly as once projected.


The Auble, Jolicoeur & Gentry study found the overall downtown-office vacancy rate to be about 9.7 percent. That included Class B and Class C spaces in addition to Class A space.


Class B office space typically is older space that might or might not be located in a desirable area and has had some updates, whereas Class C space typically is older with few updates and in some cases is located in more obscure locations.


Surveyed Class B and Class C properties had 12.9 percent and 26.6 percent vacancy rates, respectively, which is comparable with last years results. Overall, average annual rents for downtown office space were about $15 per square foot.


Both Johnson and Pinch say Class B and, to a lesser degree, Class C buildings might benefit from the tight Class A market, since some tenants might choose those kinds of spaces if premium office space isnt available.


Jeff McGougan, a real estate agent at Tomlinson Black Commercial, says the tight market has prompted some tenants to buy buildings that had been on the market for a long time. For example, a limited-liability company bought the former Integrus Architecture PS building, at 242 W. Main, late last year. The building, which the limited-liability company is remodeling for TechGroup Inc., a Spokane-based company that provides temporary staffing for hospitals nationwide, has been vacant for about three years.


Currently, McGougan says, Ive got some clients who want to buy buildings downtown, and theyre not there.