Late last month, the Journal sat down with Craig Soehren, a real estate broker at Spokane-based commercial real estate agency Kiemle Hagood, for its most recent episode of the Elevating The Conversation podcast about the Inland Northwest office market.

The Elevating The Conversation podcast is available on Apple Podcasts, Amazon Music, Spotify, and elsewhere. Search for it on any of those platforms or the Journal's website to hear the entire conversation, but for now, here are five takeaways — edited for space and clarity — from the episode.

1. The best word to describe the state of the Inland Northwest office market is “confused.”

 I say that for a number of reasons.  It's been in the Journal and in other publications that the office market post-COVID is struggling, and to a certain degree in certain segments that's true, but in other segments it's really strong.

As an example, Spokane historically has had a lot of call center spaces, which is characterized by large floor plates, lots of cubicles, a lot of clerical-type functions. Post-COVID, that industry is pretty much evaporated in our market, and that's where you find a lot of large vacancies, primarily in the Liberty Lake and Spokane Valley submarkets, and a little bit to the West Plains and some downtown.

However, small spaces after COVID have been incredibly active. And certain other size categories in our market have been really tough to find. Spaces in the 1,000 to 2,000 square feet of quality space range are tough to find. If you're looking for, let's say, somewhere in the neighborhood of 5,000 to 10,000 square feet of quality space right outside downtown, in the area we call the “close-in market,” which is the one-mile radius around the core, there's one option for you in the market today.

So even though the market overall has somewhat struggled, there is lots of the market that is doing really well.

2. Interest rates, other economic factors continue to impact the market.

 Last year was a really rocky year in our industry, primarily because it was an election year and depending on who the president was gonna be, it was going to dictate what the market conditions were going to be in the investment real estate market, what was going to happen to interest rates.

Once the election happened, business leaders could kind of know what the policy of the federal government was going to be: basically a continuation of the tax policy of the first Trump administration and then some form of tariffs.

The tariffs don't really affect the office market per se, because that's more of a retail type situation. But with some certainty on the regulatory side and lesser regulations, people can make decisions.

Last year was a year of people not wanting to make decisions because they didn't know what the future held. Once the election happened, people could make decisions kind of knowing in their mind where they thought things were going to go. 

The other thing is interest rates, and we're living through it right now with all the turmoil about what Chairman Powell, what the Fed's going to do in September.

With the latest information I heard, prognosticators are saying it's an 89% chance of at least a quarter of a percentage deduction in the borrowing rate.

Lower interest rates help real estate, both single-family and investment real estate. What we've seen in Spokane is a lot of activity in the owner-occupant space, for people wanting to buy their own home, if you will, for their business. That's driven a lot of transaction volume now that interest rates have relatively stabilized this year with the long term hope that rates will go down and continue to go down for the foreseeable future until we have to deal with the deficit.

3. Downtown Spokane vacancy rates are historically high. 

 Going back to 2024, the vacancy rate in downtown was 27%. Going back to the fall of '23, we were at 19.75%.

Today, the rough numbers indicate the vacancy rate in downtown is about 31.5%, primarily driven by Travelers Insurance moving out, a downsize out of the Umpqua Bank headquarters by them, and some vacancies in some of the other Class B buildings, like the U.S. Bank building and the Paulsen building, which have a little bit more vacancy than they have historically had.

I've been doing this 42 years and I haven't seen vacancy rates that high. During the dot-com bubble, it never got that bad. During the financial crisis of ‘07 through ‘10, it didn't get this bad. This is kind of new territory that I've ever seen.

4. Safety and security concern the biggest factor behind downtown vacancy rates.

 The biggest thing that's hurting downtown is the perception and the reality of security and the gateways to our community with homeless people everywhere. 

Walking down the street and watching people releasing bodily functions, doing drug deals, people yelling for Narcan, those are things that are real. I've seen it myself and a lot of guests see that.

We have a lot that's going for us. Basically it goes down to government responding and having the, I'll call it the guts to go out and do the hard work and working with the community, working with the nonprofits to try and help those that are challenged, find solutions of how to deal with them, and help get them off the street, and hopefully long term help to rehabilitate those that we can rehabilitate.

 The Clean Team does a great job and Spokane Downtown Partnership does a great job in doing what they do.

Private owners have stepped up a lot. It's not just downtown. There’s those same behaviors going on in North Spokane, everywhere.

Building owners are now shouldering a significantly higher burden for security than they ever have. Most buildings never used to have their own private security. Now, pretty much every building in downtown has a GoJoe Patrol, Phoenix Protective Corp., somebody there on site pretty much every day, all day.

That causes an expense to that owner, which drives the value of that property down. So, the building owners themselves are stepping up mostly — the good ones where they have good occupancy and they can afford it.

5. High construction costs pose additional challenges.

 The real change has been in construction costs.

Going back to earlier in my career and up until about probably five years ago, most office tenants in our market, when they were looking for office space, expected the owner to do all the tenant improvements and pay for the tenant improvements and have that encapsulated in their rent that was quoted to them.

That's changed.

A building that you used to spend, you know, to re-carpet, paint, and move a few walls around, that cost $20 a square foot. To do that same job now is costing $40 to $50 a square foot.

And a lot of tenants who used to only do three-to-five-year leases are now, to get more tenant improvements from owners, are having to sign seven-to-10-year leases.

That has been a big change in our market, and tenants now are understanding that they may have to pay a significant amount out of pocket for their tenant improvements, depending on what their corporate standards dictate they have to have in their space if you're a large corporate tenant.

Other tenants, they can maybe make modifications and maybe go to an open office concept versus private offices. I mean, when a door costs $1,500 between the door and frame, those things kind of start adding up over time, and so everybody's trying to save money and keep the rent budget down.

But with the cost of construction, it's really hard to do, and it also puts pressure on rents and so even though vacancies have gone up, the rental rates have had to go up to compensate for those extra tenant improvement costs that the owners carry.

This interview has been edited for length and clarity.