Renting office space in Spokane becomes a challenge

The pandemic may be over, but the ripple effect it caused through local and national workforces continues to linger as local real estate firms struggle to find new clients for large office spaces.

Stay-at-home mandates turned millions of in-office employees to those who stayed home. And while companies have shifted many of those workers back into the office, some likely will never return, said Grant Forsyth, chief economist for Avista Corp.

“Spokane is no different from anyplace else – this change in work style,” Forsyth said. “You’ve gone from a model where everybody was working at an on-site location to where you have these three different options.”

Those options include working in a traditional office setting, working at home and a hybrid, where workers labor a few hours at their house before commuting into a more traditional workplace.

As a result, Realtors at NAI Black and Kiemle Hagood, the two leading local office rental firms, are struggling to fill office space that had been coveted up until the world learned about COVID-19.

Allowing fully remote or a hybrid work schedule “is going to guarantee a certain amount of commercial space will be available that was never available before,” Forsyth said. “I do believe this shift is probably permanent.

“Then you have a surplus of office space and you have to decide what to do with it,” he said.

A lack of new construction and lots of aging office space being repurposed or destroyed will lower the amount of office space, according to Jones Lang LaSalle, a global residential and commercial real estate services company.

Analysts at Jones Lang LaSalle said office space in the U.S. is declining for what is likely the first time in history.

Less than 5 million square feet of new offices broke ground in the U.S. so far this year, while 14.7 million square feet has been removed, often to be converted into buildings for other uses.

“We would have a lot of confidence in saying that national office inventory has never actually declined in the past,” Jacob Rowden, U.S. office research manager for the commercial property brokerage, said in an email.

Remote not going away

Working from home appears to be here to stay, especially for women and college-educated workers, according to a study released in June that looked at how Americans spent their time in 2022.

The data, from the American Time Use Survey suggests the pandemic changes continue to have a lasting effect, according to a story in the Washington Post.

Many white-collar workers who hunkered down at home during pandemic shutdowns have returned to the office, but extraordinarily high numbers have not.

For many, remote work appears to be a new normal.

Working from home “is a permanent shift,” said Julia Pollak, chief economist at ZipRecruiter. “We’re now seeing many companies start as remote-first companies.”

The new data is a “continuation of what we’ve been seeing” in the American workforce, she said.

In 2022, 34% of workers older than 15 reported working at home versus 69% in the workplace, dipping slightly from the previous year.

The total share exceeds 100% because some workers surveyed worked from both home and in their workplace in one day. Employees spent an average of 5.4 hours per day working at home.

The pandemic spike in working from home was limited to college-educated workers, especially those with a bachelor’s degree or higher, about 54% of whom worked at home in 2022.

The annual survey by the Bureau of Labor Statistics and the Census Bureau asks thousands of Americans how they spent the past 24 hours of their lives across different categories of activities.

At the beginning of the pandemic in 2020, the proportion of employed Americans who worked at home increased from 24% to 42%, compared with 2019.

In 2021, the number of at-home workers dipped only slightly, with the share of at-home workers holding steady at about 38% of all workers.

The dramatic shift toward at-home work is most pronounced in the female workforce. Pre-pandemic, 26.2% of women worked from home in 2019, which increased to 49.3% in 2020 and dipped to 41% last year.

In 2020, female workers also were much more likely than male workers to work from home, and since 2021, that gap has widened. Last year, 41% of female workers spent time working at home compared with 28% of male workers.

Spokane vacancy

With so many more workers at home, the real estate market for Spokane has seen a dramatic shift.

“It’s kind of the perfect storm. Obviously, COVID sent everybody home,” said James S. Black III, a commercial real estate agent at NAI Black. “As such, people are still clearly working remote. We’ve seen a lot of businesses not only shut down, but I’ve had several relocate out of downtown.”

And the same pattern is playing out in office buildings in Liberty Lake and Spokane Valley, said Craig Soehren, longtime commercial broker at Kiemle Hagood.

“COVID has changed the office dynamics,” Soehren said. “There is a huge proportion of people actively leasing space, some are looking for smaller spaces or satellite offices.”

According to statistics kept by Kiemle Hagood, the vacancy rate for office space in Spokane’s central business district went from 14.1% in 2019 to 18.8% in the fall of 2022, Soehren said.

The big, call-center-size office spaces have become un-leasable, he said.

“The market is terrible for large spaces. That’s where the real challenge is,” Soehren said. “But, there’s a real shortage for anything outside downtown that is between 3,500 to 7,500 square feet. Those are the spaces that are going quickly.”

As in any market dynamic, some companies have used the available space to relocate or, in some case, expand.

“I’ve been doing this a long time and I’ve been through a number of (economic) cycles,” Soehren said. “This one appears different.”

He noted the ballooning housing market sparked by an influx of population, which also has led to employment gains.

“But it hasn’t translated to butts in seats,” he said. “So many of these companies are allowing them to relocate and work from home. That’s the kind of new economy.”

Soehren said several accounting firms have downsized, leaving offices available in buildings such as the Bank of America Financial Center, 601 W. Riverside Ave.

“Organizations just don’t need space anymore,” he said. “I also represent JUB Engineering. Their business was doing great. They doubled their size when they moved over” to a new office on the seventh floor at 999 W. Riverside, which also houses The Spokesman-Review.

Converting offices to homes

As office space has opened, several developers have pounced on the opportunity to try to provide housing for a market that continues to need more places to live.

Red Tail Land Development, based in Irvine, California, earlier this year confirmed preliminary plans to convert the historic Crescent Building, 719 W. Main Ave., into 97 multifamily living units.

In the same neighborhood, developer Jordan Tampien and a group of investors purchased the historic Peyton Building, at 10 N. Post St., and plan to convert the former office space into 96 apartments.

“It’s one of those projects that we get really excited about. For us, it’s a triple bottom line. Really, it’s a good community builder,” Tampien told The Spokesman-Review in March. “We are taking 100,000 square feet off the office rental market and (it) gives us another 100 units” of apartments.

Black, of NAI Black, said the downtown office markets have always presented a challenge.

“It’s like musical chairs. When leases expire, they are always looking to upgrade their space in quality or affordability,” he said. “We are seeing a lot more older office buildings being converted.”

His own company did the same thing.

In 2021, Black Enterprises spent $6.5 million to convert the James S. Black Building into the Marjorie Apartments, a 50-unit mixed-use project at 107 S. Howard St.

“After we had it finished, within 30 days we had it fully leased,” Black said. “We should have done it 10 years ago. There is more demand downtown for housing than there is for office tenants.”

Homeless factor

Forsyth, the economist, said that the move to convert offices to homes could compound other social dynamics playing out in Spokane and in most every other major city in America.

“There is a desire to do something with this space,” he said. “If you convert it to housing, will people want to use it if cities don’t also address the issue of homelessness as well? I think that’s complicating this conversion of commercial to residential.”

San Francisco has several businesses, such as Seattle-based Nordstrom, that are pulling out. Portland, Seattle and other cities have growing urban homelessness with which “a lot of people have become frustrated,” Forsyth said.

“I always have to remind people that this problem stretches across the U.S. through many urban areas,” he said. “It does make urban renewal coming out of the pandemic … definitely more complicated.”

Soehren said he’s been marketing real estate in Spokane since 1983.

“When I started, housing in downtown was low-income and poor seniors in assisted-living,” he said. “The driver to make a vibrant downtown was to get working-class people to move downtown. We’ve achieved that to a certain degree.”

He recently met some clients looking for office space. They started off by saying they didn’t want to even look at downtown Spokane because of parking costs and homeless issues.

“So, there is a whole bunch at play,” Soehren said. “I’m hopeful for the office market that it will come back. But, I don’t think it will ever be what it was.”

The Washington Post and Bloomberg contributed to this report.