One of the many national economic indicators is the overall health of the office/ showroom real estate market. Though the vacancy rate for what is often called “incubator space” was essentially unchanged during 2002, the prospect of a national economic recovery may spell growth in this market segment next year.

Consider what is happening in Indianapolis. There is approximately 7.7 million square feet of office/showroom product in the Indianapolis area. This product type commonly has up to 18-foot ceiling heights and 30 to 40 percent office finish. According to Colliers Turley Martin Tucker (CTMT), the current overall vacancy rate for office/showroom product is 7.6 percent.

In general, supply and demand for office/showroom product is in a state of equilibrium. Last year, only 143,000 square feet of new, first generation office/showroom space was delivered to the market. Growth of the entire industrial real estate market is poised to take place. As bulk warehouse industrial development continues to grow, office/showroom product will certainly follow to support the larger industrial users.

“Demand for the office/showroom product is directly related to the state of the overall economy,” says Andrew Morris, managing director for Indianapolis-based Insignia Meridian. “Smaller local companies or growing divisions of larger national companies look to this product type to grow their operations. As Indianapolis’ bulk warehouse market continues to expand, demand for flexible office/showroom product will follow. Start-up or support companies will want to be located near their clients — the bulk distribution users.”

Don Wahle, an industrial leasing representative with Duke Realty Corporation, agrees. “The overall economy tells us the growth in this product type is best in prosperous times. However, even in an economic recovery, there is enough tenant turnover to drive leasing activity,” he explains.

Wahle reports that last year, about 719,000 square feet of office/showroom space was leased in Indianapolis. When compared to the 1 million square feet leased in the mid-sized distribution/warehouse product type, and 4 million square feet leased in the bulk warehouse product type, the office/showroom market fared relatively well.

“There were more individual transactions in the office/showroom market than in all others combined last year,” Wahle says. “This product type allows growing companies the flexibility they need at an affordable price.”

According to CTMT’s 2002 Market Study, the asking rental rates per square foot for office/showroom space between 5,000 and 12,000 square feet is between $5.50 to $7.25 for new construction; $5.50 to $6.50 for second-generation space; and $5.25 to $6.25 for third-generation space. For users needing flex space of 1,200 square feet or greater, the rates for new construction range from $8.50 to $14.00 and $7.50 to $13.00 for second-generation space, depending on the percentage of office build out.

According to Wahle, the average lease term for the office/showroom transaction is typically 3 to 5 years.

“The office/showroom product provides an incubator for small businesses,” says David Reed, senior industrial leasing representative for Duke. “The flexibility to combine office with open warehouse for light manufacturing, service or distribution works well for many businesses.”

Examples of companies that thrive in this product type include painting contractors, computer repair companies, copier companies and auto parts wholesalers, to name a few. Other uses for office/showroom product include companies with business plans that call for real estate to accommodate changes in operations.

“Take air freight handlers that broker out their daily work. They may be housed in a traditional multi-tenant office building and decide to start handling their own shipping,” Reed says. “Now they have a need for a building with 30 percent office finish and warehouse area to move goods. This product type creates the flexibility needed for companies to alter their business plans.”

Success in the office/showroom market is typically found by developers that understand the product type’s role in a master-planned business park. Morris explains that, historically, it has been difficult to get a healthy return from office/ showroom real estate.

“Developers like to build big box buildings that have a single tenant,” Morris adds. “In the typical office/showroom building, there can be eight tenants to manage. Lease turnover is much greater, [and] the risk and reward is much more difficult to manage. However, there is definitely an appetite for this product type when it is combined with mid-sized and bulk industrial buildings.”

For example, Duke Realty leases approximately 11.2 million square feet of industrial real estate ranging from bulk warehouse space to office/showroom space at its 19-million-square-foot, mixed-use park, called Park 100. On the south side of Park 100, Duke has about 1 million square feet of flexible office/showroom product that is 96 percent leased. Additionally, there is a total of 2.2 million square feet of office/showroom product near Park 100 that is owned by other real estate companies, including GE Capital and ProLogis Trust.

The majority of the remaining 7.67 million square feet of office/ showroom property is in the northeast and southwest submarkets. The northeast submarket contains the largest concentration of office/ showroom product consisting of 3.48 million square feet. Business parks that contain office/showroom product include Hillsdale Technecenter, Meridian Tech Center and The Precedent. The southwest submarket of Park Fletcher Business Park and Country Club contains about 891,000 square feet of office/ showroom product.

The north side of Indianapolis, along with the southwest/airport submarket, is getting a lot of attention as the desired location for most office/showroom real estate. The southwest provides access to a large labor pool and airport-related industries.

Over time, the Indianapolis industrial real estate market has seen significant change. According to CTMT, new development in the bulk warehouse product has signified the shifting from a manufacturing-based economy to a distribution-based economy.

It is unclear what the future of our national economy will hold, but the stable occupancy overall and steady lease transaction volume is a good indicator that the economy is recovering. Development for the office/showroom product has been modest, which has resulted in reasonable supply for the product type. As the economy continues to recover, demand in Indianapolis will increase for flexible office/ showroom facilities.

Jay Archer is senior vice president with Duke Realty Corporation, based in Indianapolis.


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