Spokane Journal of Business

High demand for low-rent space

Inventory remains low despite strong interest from startups

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The demand for low-rent office space downtown is rising, statistical and anecdotal indicators suggest, but real estate experts here say a number of obstacles are impeding the development of more such space.

The need for low-rent offices in the citys core is fueled primarily by startup businesses that are looking to move out of home offices and by out-of-town companies seeking to establish a physical presence here, commercial real estate specialists say. Although plenty of older, largely vacant downtown buildings would provide the much-needed inventory, most developers shy away from such renovation projects because theyre concerned they wouldnt pencil out financially, experts say. Some also are turning their attention to office condos, which target more stable, established tenants.

The vacancy rate for Class C, or lowest-rent, office space downtown was about 9 percent as of last fall, dropping sharply from nearly 17 percent in October 2005, according to recently released figures compiled by Spokane-based Auble, Jolicoeur & Gentry. The average rental rate for Class C space was roughly $13 per square foot, last fall, up from roughly $11 per square foot in 2005.

Those figures compare with a vacancy rate of 14 percent for Class A, or highest-rent, office space downtown last fall, down from more than 17 percent in 2005. The average rental rate for Class A space was roughly $18.60 per square foot last fall, down from more than $19 per square foot in 2005.

Meanwhile, Lorraine Hotel building owner Steve Salvatori says he has a waiting list of 28 people wanting to lease space in that historic structure. The three-story, 10,000-square-foot building at 308 W. First has been full since he it opened last October as the Spokane Entrepreneurial Center.

I think if people can find a way to make $300- to $400-a-month offices available, thered be almost unlimited demand, he asserts.

Salvatori is looking for an opportunity to open a similar low-rent office center downtown, and hopes to acquire a building within the next few months to do so.

Two other office buildings that include low-rent spacesthe Courtyard Office Center and the Eldridge Buildingare full and havent had vacancies for months.

Its a market that hasnt really been tapped into. I think people would be surprised by the demand and the amount of small businesses that want to move downtown but need something reasonably sized and priced, says Mark McLees, a real estate agent at Spokane-based NAI Black. Demand for those types of spaces will continue to grow if theres the product out there.

Salvatori offers spaces in the Lorraine Hotel lease-free and doesnt require a deposit. Rents range from $280 to $395 a month for offices that have up to nearly 300 square feet of floor space, he says. Amenities covered by the rent include on-site parking, utilities, broadband Internet access, a conference room, and storage space in the basement.

Salvatori says most of his tenants are one-or two-person businesses that want a larger, more professional space than their home office. Other tenants include startup companies that have businesses that arent conducive to being operated out of a home, or companies from outside the area that want a small branch office here.

Eric Armstrong, co-owner of Balance Architecture, which was one of the Lorraine Hotel buildings first tenants, says he and his business partner, Chris Herath, signed a rent contract two months before they moved in because they didnt want to miss the opportunity to have an office there. Herath says the low-rent space has helped the fledgling firm hold down its initial overhead costs, and that its been nice to be in the black four months into opening the business rather than opening in the red and playing catch-up for a year or two.

Armstrong adds, The lower rent opportunity is a very much needed stepping stone in the community for people who want to get out of their house or take their business to the next level.

Salvatori says hes attracted to the low-rent office niche because no one else is doing it. He says he also believes strongly in the value of entrepreneurialism and the vitality and economic diversity it lends to a community.

Its going to have a limited attraction, of course, and Im not going to make a killing on it, Salvatori says. Im not a charity or a nonprofit; I just want to make a modest return on investment and pass through everything in lower rents, rather than make a 10 or 15 percent return.

Salvatori says convincing landlords to develop low-cost office spaces is challenging, especially if they have to pour a significant amount of money into renovating a building to make it suitable for such a use.

Its not like developers arent willing to do something like that, but a bank wouldnt lend on it because it wouldnt make economic sense, he says.

Scot Auble, president of Auble, Jolicoeur & Gentry, says landlords are in a catch- 22 because if they dont improve old buildings sufficiently they cant find tenants even for low-rent spaces. At the same time, if they spend a lot of money to improve a structure, they must charge higher rents to turn a profit. Parking also poses challenges, because developers must either provide parking spaces or charge low enough rents that tenants would be willing to pay to park downtown instead of renting an office space outide the core.

Searching for space

NAI Blacks McLees, who is working with Salvatori to find buildings suitable for low-rent offices, says that in light of high construction costs, a building must have a layout that lends itself to an easy conversion to make the project pencil out. While such buildings are available downtown, it isnt a concept that has caught the eye of other developers because many of them currently are setting their sights on office condo projects, he says. For instance, hes working with a development group here that recently announced plans to turn the historic former Jefferson Hotel, at 115 S. Jefferson, into retail and office condos.

I think the money is going to follow the direction of the office-retail condos, he says. Weve just scratched the surface of the availability of those developments and the demand for that type of space.

Spencer Stromberg, property manager and in-house counsel at Spokane-based Wells & Co., which has developed several mixed-use condo projects downtown, including the Freeman Center and Morgan Lofts, says developers typically are more attracted to office condo projects than low-rent offices partly because they can base an entire development on condos. Converting a large building into 300-square-foot office spaces is difficult because of the amount of space thats wasted on the hallways needed for such a layout, he says. In such layouts, most developers end up offering smaller office spaces in the leftover space of buildings designed mainly for larger tenants.

In addition, developers who are looking at the feasibility of a renovation project typically prefer to base their decisions on having larger, more mature companies as occupants instead of startups, Stromberg says. The latter typically have less predictable cash flow, and thus are are more price sensitive and interested in short-term leases, Stromberg says. The recent decline in demand for residential condos also has renewed developers interest in office condo projects, he says.

Stromberg adds, though, that while Wells & Co. isnt looking for office space projects currently, it would be interested in developing low rent office space if it found a suitable building. The company owns and manages the Courtyard Office Center, at 827 W. First, and the Eldridge Building, at 1325 W. First, both of which have small office spaces that rent for as little as $350 a month. He says those buildings rarely have vacancies.

Demand for those is very strong, he says. I could rent out more if I had more.

Salvatori is hunting for another office building to offer low-rent spaces because he also believes tenants would gobble up the spaces quickly. He says hed prefer a 10,000-square-foot turnkey building, but would be willing to consider a larger, shell building if the price was right.

My mission is value pricing, he says. It doesnt do any good if Im slugging it out with all the other landlords that are getting $20 per square foot in rent.

Salvatori says he has found suitable buildings, but is waiting for their sale price to come down enough to make a project viable. He claims there are buildings downtown that have several vacant floors, but landlords have been content to leave those spaces empty and make a profit by charging tenants they already have more money.

I understand that they want less of a load on their building, he says. But there are some great old buildings that arent being very productive right now because nobody wants to do anything with them.

McLees says he expects that more low-rent office spaces downtown will become available as retail spaces continue to fill up. Retail tenants will provide landlords with enough profit that they would be willing to rent out their vacant office spaces at lower rates, he asserts.

I think most people recognize that its good to start getting these entrepreneurial startups downtown, because they become entrenched and want to stay here as they grow, he says. Thats something thats lacking right now, and will add tremendously to the vibrancy of downtown.

Contact Emily Proffitt at (509) 344-1265 or via e-mail at emilyp@spokanejournal.com.

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