Spokane’s largest buildings face uncertainty, potential

Designed, at least partly, by renowned architect Kirtland Cutter, the Peyton Building is one of Spokane’s oldest structures and sits on what had been known as downtown’s “million-dollar corner.”

Partially destroyed by a fire in 1898, the building at 10 N. Post St. has housed bars, businesses, law firms and the local office of U.S. Rep. Cathy McMorris Rodgers.

Now the Peyton is part of an effort to convert office space into apartments as banks, building owners and developers struggle to adjust to an economy where more and more remote workers has sapped demand for traditional larger office space.

Ryan Berg is working alongside Peyton owner Jordan Tampien on a $33 million makeover of the building that will add a climbing wall, a library and a two-story atrium in addition to 96 apartments.

“I think other developers will look to this project to set the standard with how you do an adaptive reuse of an office into apartments downtown,” Berg said. “Mayor (Lisa) Brown and the city are really coming to bat for us. They want to see this project be a success and they are helping make sure it is.”

City planners helped expedite permits and waived some fees, according to Steve MacDonald, the city’s director of community and economic development.

“You don’t want to have a downtown with empty offices and empty sidewalks and no commerce going on,” MacDonald said. “The Peyton project, with that many units right in the middle of downtown, could bring activity to the whole area – which is what we need.”

According to Brown, the project could be the first of many.

“Sometimes developers have to see something work, and then there’s more interest that follows,” Brown said. “Spokane is at an interesting point, like many downtown cores that suffered during the pandemic.

“The thing that’s going to really help us turn it around is activating empty spaces.”

While cities like Seattle or Boise hope their tech industries will fill vacated office spaces, Spokane’s largest industries are health care, education and manufacturing.

Converting those offices to apartments and condominiums would solve filling the dead spaces and providing an answer to the local housing shortage.

But converting an office building into a place to live is difficult, said Dermott Murphy, building official for the city.

“It’s law that each unit have its own bathroom, kitchen, subpanel and thermostat,” Murphy said. “It depends on the building, but projects likely require substantial revisions of electrical, plumbing, heating and cooling systems. It’s a major undertaking.”

For instance, the Peyton was purchased for about $12 million, which is about a third of the cost it will take to convert into apartments.

That requires deep pockets before developers can even start.

Cowles Real Estate, a subsidiary of Cowles Co. which owns The Spokesman-Review, converted the old Macy’s building, at 612 W. Main St., into 114 apartments.

The company also converted the Chronicle Building at 926 W. Sprague Ave., that had housed the Spokane Daily Chronicle newspaper and other businesses into 32 apartments.

In addition, Cowles’ development arm repurposed the building at 809 W. Main St., which is across the street from Riverpark Square. The lower portion of the building is now home to P.F. Chang’s restaurant and Anthropologie. The upper space, once a JC Penney and then a Burlington Coat Factory store, was remade into condominiums, including one that set a record when it sold for $2.25 million in 2022.

Doug Yost, vice president of acquisitions and development for Cowles Real Estate, was with the company during much of the work on those projects.

“When you get to the point of construction of a conversion project, honestly, that’s sometimes the easiest part,” Yost said.

Those difficulties include design, acquiring permits and negotiating tenant leases.

“And if you’re doing an older building, you don’t necessarily know what’s in your walls until you get into them. So, there’s all those things to figure out,” he said. “But new construction? No problem.”

Cowles Real Estate has since shifted gears to focus on ground-up construction. According to Yost, this is partly because economic pressures caused by the pandemic have made it even more difficult to convert old buildings.

“Because of the cost to do these conversions, it doesn’t make sense to do something like that again,” he said. “It’s hard to make those projects pencil.”

Glut of office space

Much has changed for developers since the pandemic.

Construction costs are up about 33% since 2019, according to the Bureau of Labor Statistics. And high interest rates have made financing projects difficult.

But an opportunity has presented itself.

Because as more and more workers take opportunities to work from home, the value of office buildings is falling.

By the end of 2024, the average value of commercial buildings will have dropped 14.7%, according to Business Insider.

As a result, banks around the country holding notes on these buildings are facing immense stress as building owners struggle. Nearly $1.5 trillion worth of commercial real estate debt is maturing by the end of 2025 leaving some banks in the position of extending the terms of the debt or foreclosing on the building if owners default.

But the looming wall of debt from the commercial real-estate market poses an opportunity for developers of conversion projects because cheaper buildings make those efforts more financially feasible.

Washington politicians have taken notice.

Lawmakers earlier this year passed legislation deferring sales and use taxes associated with conversion projects. Those breaks do not, however, cover the sale of the property.

“We estimate it would save us about $1.6 million,” Ryan Berg said of the bill’s effect on the Peyton project. “That a substantial sum. It helps.”

Despite going into effect in June, work it still in progress to finalize the law by the Washington State Department of Revenue.

Friday, the Department released interim rules and an application process for developers, according to spokesperson Mikhail Carpenter.

“The interim guidance will be in effect until formal rulemaking concludes next spring,” Carpenter said in an email.

He said the current rules, “provide cities and businesses the binding and clear guidance they need to get started.”

Developers plan to apply for the tax deferral under the interim rules, Berg said.

And another project could be on its heels.

Owners of the Crescent Building recently released plans to sell the building. Irvine, California-based investors Michael Earl and Sean Miller went so far as commissioning a local company to draw up an example of how the building could be converted.

According to a listing brochure, the Crescent Building, at 719 W. Main St., could become 90 residences of between one- and four-bedroom units.

But a conversion of the building would be especially difficult considering the building’s massive footprint, said MacDonald, the city official. Developers would have to convert seven floors.

“Many of the older historic buildings are good candidates,” MacDonald said. “Because of its large floorplate, maybe the Crescent building is more conducive to remain an office.”

“Because of its location and size, the Peyton building is the number one project for people in downtown,” he said.

Designing a home

Sometimes, older buildings don’t make good candidates for a remake.

Peter Kolaczynski is the associate director of Commercial Edge of Santa Barbara, California. That company has a team of researchers who study commercial real estate trends.

His team determined about three-quarters of office buildings in Spokane would not work for conversions.

Commercial Edge took into account a building’s age, size, dimension, floor shape and ceiling heights.

“It’s true that office-residential conversions are hard,” Kolaczynski said, “but with destruction of value of office space and the more subsidies these projects get, the more reasonable they become.”

The largest buildings often make the poorest candidates, he said. That’s because it’s more difficult for developers to generate enough revenue per square foot to justify the overall conversion expenses.

For example, apartments need enough exposure to windows for natural lighting.

More than 40% of planned units in the Crescent Building are long, narrow apartments with three and four bedrooms, with some larger than 2,000 square feet.

The Peyton project, for instance, will be composed of about 88% studio or one-bedroom units.

Berg’s design incorporates two lightwells that stretch though its top six floors. Those features minimize what he called “dead space,” or the areas in the center of buildings that cannot be made into apartments.

Berg is also using the area of the lightwells to add what he called “stacking amenities,” where they plan to add the climbing wall and library.

“Its a really unique feature that most buildings wouldn’t have,” he said.

Spencer Gardner, planning director for the city, said plans for the Peyton building could be replicated in several other structures.

“There’s a lot of potential in downtown Spokane,” Gardner said. “We have a lot of historic buildings that would also be good candidates.”

He said the 16-story U.S. Bank building stands out.

“You’ll notice when you look at the top stories there, the floor plan of the U.S. Bank building is more like a horseshoe,” he said. “It makes it easy for you to cleanly separate those out into living units that get good exposure to windows.”

The historic structure has 21 office spaces available for a combined vacancy of about 80,000 square feet, according to a listing by Kiemle Hagood. That means about half the building isn’t currently being used.

A visit last week confirmed its current state.

The granite halls of the 1918 building are lined with doors that no longer hold the name plates of engineering companies and law firms like those at the Washington Trust Bank or the Paulsen buildings.

Owners of the U.S. Bank building, 2030 Investors, are based in Portland and efforts to reach them last week were not successful.

Gardner, the planning director, said he is unaware of any discussions about the future of the U.S. Bank building.

“From a basic design standpoint, I think it’s a good candidate, but the financial problems can be significant,” he said. “Ultimately, it’s developers who are the ones who need to make those decisions.”