HEARTLAND SNAPSHOT, DECEMBER 2005

Indianapolis Industrial Market

Leasing activity in the Indianapolis industrial market has been strong during the past 2 years and will continue to be so for the foreseeable future. Large, modern bulk space is the driving force behind this activity as Indianapolis cements its position as a major logistics hub for a variety of goods.

The primary reason that modern bulk space has been a key driver is that the logistics industry (the primary tenant of modern bulk) is critical to Indianapolis' industrial market. However, every product type — office/showroom, medium distribution, traditional bulk and manufacturing — have shown signs of strength throughout 2005. Only flex space has failed to benefit from the market's strength, due to an influx of speculative space and a relatively stagnant office market.

Modern bulk facilities are leading the market by attracting companies that are looking for centrally located distribution facilities. Distributed products run the gamut from heavy equipment to retail signage to soap powder to computer supplies. Logistics companies are also leading the way, with several large leases completed in the past 18 months, including Logisco (813,000 square feet), Stonepath Logistics (459,000 square feet), Point to Point Express (459,000 square feet) and Caterpillar Logistics Inc. (400,000 square feet).

Medium and traditional bulk properties are also attracting tenants. The resurgence of medium bulk space shows that smaller businesses continue to expand; traditional bulk space attracts tenants with reasonably priced space.

New construction in 2005 will not match the pace set in 2004 — 4.4 million square feet compared to 5.6 million square feet, respectively. However, 2004 was a record year for new construction and much of this new product carried over as available space into early 2005. Still, rental rates will move upward as vacancy rates decline thanks to six consecutive quarters of positive absorption and the increasing costs of building materials and energy. Rental rates vary significantly across product type: modern bulk space is going for $3 to $3.75 per square foot, new medium distribution space rents range from $5.50 to $6.25 per square foot, and new flex product comprising one-half industrial and one-half office space ranges from $8 to $9.50 per square foot.

Partially because of demand and low interest rates — which remain low despite the federal government's measured increases — build-to-suit facilities are a reasonable alternative, especially as rental rates creep up. In fact, nearly 400,000 square feet of build-to-suit space will be completed by year's end, with another 800,000 square feet to come on line next year.

The strength of the Indianapolis industrial market has drawn attention from outside developers, including Panattoni Development Company and AMB Property Corporation, both of which entered the market in 2004. These newcomers, along with existing players, had approximately 10 million square feet of new space on the drawing board during 2005.

The southwest and northwest submarkets continue to be the leading industrial areas, as these submarkets have established industrial parks with excellent infrastructure. The southwest has attracted attention with a new interchange and its proximity to Indianapolis International Airport.

In the southwest submarket, developers are taking advantage of infrastructure improvements around the airport. The new interchange, located in Plainfield, Indiana, opened up opportunities for MetroAir Park, which is being developed by Horn Properties and McShane Corporation, and Sierra Crest Equities' Sierra Gateway Park. Both of these parks will offer unique product that caters to smaller industrial users. Tenant spaces will typically range from 10,000 to 100,000 square feet with a large percentage of office space included. Until now, this submarket had been primarily composed of bulk distribution product.

The east and southeast submarkets also seem to be gathering some momentum with the success of a few large logistics projects for companies such as Caterpillar Logistics and Phoenix.

The industrial market's momentum continues to favorably impact the vacancy rate, with six quarters of positive absorption. Overall, the vacancy rate at the end of third quarter 2005 stood at 7.5 percent, a half point lower than when the year began.

Looking ahead, Indiana has set up the market to further draw industrial development through two key initiatives. The first expands the state's brownfields program, offering a wealth of incentives such as low-interest loans, tax credits, and state and federal funding, to redevelop such sites. This new program will benefit many areas, not just those with available and affordable land. The second initiative is the Shovel Ready Development Act, which benefits builders that are looking to develop quickly. By pre-permitting sites for development, it removes much of the red tape once associated with development in Indiana.

Indianapolis remains poised to take further advantage of its central location and excellent transportation system, making it a sound choice for distribution and logistics. The favorable laws passed by the state legislature will attract developers looking for opportunities, incentives and a fast track to completion.

— Bart Book is a principal, senior vice president and manager of the industrial division of Colliers Turley Martin Tucker's Indianapolis office.

©2005 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.