The retail market in Indianapolis has been performing well. However, new trends, such as redevelopments, an increase in the number of lifestyle center developments and growing suburban areas, are affecting the site selection process for retailers and developers. The Indianapolis office market is poised for a good recovery thanks to market fundamentals such as limited new construction, increased absorption and a decline in available sublease space. The industrial sector has been growing due to Indianapolis’ central U.S. location, its economic incentives and low land costs. The multifamily market, while soft last year, is expected to stabilize this year due to job growth and a slowdown in home buying.

Retail

Sunnyside Shoppes, a 50-acre retail center developed by Indianapolis-based Mann Properties, is anchored by Kohl’s and Kroger.

The Indianapolis retail market proved to be robust throughout 2003, and it will likely remain that way during 2004 and beyond. The overall retail vacancy rate last year was a little more than 9 percent, with the vacancy rate for properties 5 years old or less at approximately 3 percent. Several new trends are emerging in the Indianapolis market that will influence the site selection process: the popularity of lifestyle centers; the redevelopment of obsolete facilities in stable submarkets; and the appearance of new neighborhood submarkets fueled by strong new home sales.

The lifestyle center concept will arrive in Indianapolis this year with the opening of Clay Terrace in the Carmel-Westfield submarket. At more than 500,000 square feet, Clay Terrace, which is a joint venture between Simon Property Group and Lauth Property Group, will be the first significant retail destination segregating the north suburban mall market. There are two more lifestyle center developments planned for the Indianapolis area, and they are attracting retailers that did not previously consider Indianapolis.

Site redevelopment in more mature and still viable trade areas has reached full swing. This trend varies from providing existing structures with a facelift, thus meeting the needs of national retailers, to rebuilding from the ground up by big-box retailers introducing a more up-to-date footprint. Co-branding is also being used more often when outlot opportunities are not available.

In the last several years, the local market has generated between 13,000 and 15,000 single-family home permits per year, which is a significant amount considering Indianapolis’ relative size. This housing growth has generated new submarkets that retailers cannot ignore. Suburbs such as Westfield, Brownsburg, Avon, Plainfield, Fishers, Noblesville and Greenfield, where just a few years ago shoppers would have had to travel into Indianapolis for anything more than basic goods and services, have become fully served trade areas. Growth in these submarkets, and in others like them, will continue as long as single-family home development remains strong. However, job growth will have to rebound to maintain the home and retail development growth in these areas.

Among the area submarkets, Carmel-Westfield will provide the most attractive market for developers. Its solid growth in population, coupled with restrictive zoning practices, has intensified tenant demand. Infill sites in Greenwood, Fishers and Lawrence will be able to command premium rents.

Saks Fifth Avenue’s entry into the Indianapolis retail market, at the Fashion Mall at Keystone at the Crossing, has helped strengthen the city’s image as a destination for upscale retailers. Other retailers that continue to be active in the area include Target, Designer Shoe Warehouse, Wild Oats Supermarket, Wal-Mart, Kohl’s and Kroger. Outlot demand is led by casual dining restaurants, banks and pharmacies attempting to augment their positions in new markets and improve their positions in existing markets. Other new users to the market include Dick’s Sporting Goods, Charter One Bank, Eddie Merlot’s, Maggiano’s, Oceanaire and Mo’s, A Place For Steaks.

— J. Brian Mann is managing partner for Indianapolis-based Mann Properties.

Office

The burgeoning economic recovery is the start of real gains this year for the Indianapolis office market. Despite office occupancy levels decreasing in 2003, rents are stabilizing, and limited new construction has set the stage for diminishing vacancy rates.

Although occupancy declined in the suburban office market by about 45,000 square feet last year, it is an improvement from 2002’s occupancy loss of more than 100,000 square feet. The Indianapolis office vacancy rate at the end of last year was 19.2 percent, up from 18.3 percent 1 year earlier. However, even though the overall vacancy rate increased, it declined in the central business district by almost 2 percent.

New construction remained limited last year, which gave the market time to absorb space in new buildings as well as some of the vacant space in existing buildings. New office building completions added nearly 500,000 square feet of inventory last year. Two of these buildings, Interactive Intelligence in the Northwest submarket and Eight Parkwood Crossing in the North/Carmel submarket, account for more than half of the new space built last year. The total square footage for the office buildings under construction and scheduled for completion this year is about 250,000 square feet. As a result of this limited construction, the market will have more time to absorb existing vacancies.

The amount of sublease space in Indianapolis is continuing to decline from its highest point of 1.2 million square feet in 2001. During 2002, available sublease space declined to 875,000 square feet, or 16 percent of the available space. By the end of 2003, available sublease space had fallen to less than 700,000 square feet, representing only 12 percent of the total space available to users in the Indianapolis market.

Shadow space, which is difficult to quantify because it consists of empty desks in otherwise occupied office space, could accommodate many of the thousands of Indianapolis-area office jobs lost during the recession. Businesses that have downsized in the past 3 years will lease less space when they renew or relocate, or they will remain in their current space and backfill empty desks as they rebuild toward previous staffing levels.

Building upon improved economic fundamentals, evidenced during the last half of 2003, the general economic recovery should occur throughout the year and into 2005. This recovery will mean office employers will be re-hiring and will need an average of 200 square feet of space per employee. Demand for new space will be created once the shadow space is backfilled.

To achieve a vacancy rate of 10 percent, about 2.7 million square feet of new space will need to be leased. Reaching this goal will require the addition of 13,500 new jobs in the Indianapolis metropolitan area. With all of the other fundamentals in place, job creation is key to the future success of metropolitan Indianapolis office space.

— Jeffrey Henry is the managing principal of Colliers Turley Martin Tucker’s regional office in Indianapolis.

Industrial

Central Indiana is embracing the logistics industry like never before. State and local government leaders have recognized the economic impact that high-tech national distribution operations have brought to the region and are actively pursuing strategies to keep it coming. The first meaningful statewide initiative to recruit high-tech logistics to Indiana was kicked off last year when the Indiana Port Authority organized the 21st Century Logistics Symposium. Public and private industry leaders met for 1 day of discussions to create awareness about the importance that the logistics industry brings to Indiana.

The strength of the Indianapolis industrial real estate market and its rapid growth during the last several years can be attributed to a few key factors. First, the city’s central U.S. location is the primary reason national distribution operations put it on their short list. Sixty-five percent of the nation’s population can be reached overnight from central Indiana via the interstates. Second, aggressive economic incentives, including real property tax abatement and infrastructure grants, are routinely offered to new and expanding distribution operations. Third, relatively low land costs and an abundance of developers available to build speculative distribution buildings (some as large as 800,000 square feet), have made it easy for logistics companies to locate in central Indiana.

During 2003, net industrial absorption in central Indiana totaled 3.2 million square feet. Big contributors to this absorption included companies such as Electrolux (363,000 square feet), MD Logistics (313,000 square feet), Bombay (300,000 square feet), Quaker (300,000 square feet), Sur La Table (198,000 square feet) and Genco (198,000 square feet). Each of these companies are performing national or regional distribution operations, and they have signed new leases on facilities originally built as speculative space by national developers such as Duke Realty Corporation, Keystone Property Trust, Browning Investments, Opus and Lauth Property Group. In addition to these new leases, Case New Holland recently moved into 1.1 million square feet of new space built by Duke in Lebanon, and Brylane is moving into a new 741,000-square-foot facility built by Opus in Plainfield.

Overall industrial vacancy has hovered around 8.5 percent for the last 3 years. Signs indicate, however, that it should improve this year because of earlier efforts by second- and third-generation industrial building owners to offer low rates and abatements. In addition, developers of speculative space have remained cautious of overbuilding.

The Northwest submarket has performed the best in terms of vacancy reduction. Some portfolios in this area have seen double-digit reductions in their vacancy rates in the last 12 months. The Southwest submarket, which includes Plainfield, with its proximity to the Indianapolis International Airport, remains the top performer in terms of inventory growth. More than 1.6 million square feet have been constructed in the last 6 months, and an additional 2 million square feet are planned for construction this year.

Several market dynamics emerging in some Indianapolis submarkets will create interesting opportunities for investors, developers and users of industrial space during the next few years. Explosive residential growth in the far Northeast submarkets will eventually breathe new life into a historically slow-growing industrial area. The construction of a new midfield terminal at the Indianapolis International Airport, and the creation of the Ronald Reagan Parkway connecting Interstate 70 and Interstate 74 on the west side, will be the principle drivers of economic development activity in Hendricks County for years to come. And, the continued efforts by developers to capitalize on the access and assets of the workforce in Greenwood should continue to fuel the strong inventory growth that this submarket has recently experienced.

The outlook for industrial real estate in central Indiana is strong. The flurry of activity since the beginning of the year indicates that vacancy could improve significantly and that rates may be poised to finally experience some modest growth.

— Thomas Theobald is director of industrial development and leasing for Indianapolis-based Browning Investments.

Multifamily

Last year, the Indianapolis apartment market was a tale of two markets that were moving in opposite directions. The capital markets, as evidenced by the supply of debt and equity, were flush, aggressive and expansive. The rental market was soft and contracting but also hopeful. Together, these two dynamics helped preserve property values in a declining revenue environment.

Investment demand for multifamily properties remained high in 2003. Local, regional and national private investors were active, while real estate investment trusts (REITs) and institutional investors mostly sold properties or stayed on the sidelines. The combination of low alternative yields and 1031 tax-deferred exchange equity drove cap rates lower and prices higher. Many investors sold older assets and paid aggressive prices for newer properties to defer capital gains taxes.

Last year’s transactions showed further evidence of the REITs selling out of non-core markets and reinvesting in markets perceived to pose a higher barrier to entry. In Indianapolis, the number of REITs with an ownership position declined from 16 in 1998 to five: AIMCO, AMLI Residential, Equity Residential (Lexford Division), Associated Estates and Century Realty Trust.

The lack of job growth last year, combined with the continued construction of multifamily and affordable single-family housing, kept rental rates flat from 2002. In addition, market-wide occupancy fell from 89.6 percent in 2002 to 88 percent in 2003.

Despite a soft rental market, the supply of new apartments did not slow down significantly. About 2,200 units were delivered in 2003 compared to 2,345 in 2002. Looking forward, the amount of construction should decline this year, with an expected delivery of between 1,700 units and 2,000 units. Further declines are expected next year. The balance of new development has shifted from primarily upscale, conventional projects to a larger concentration of Section 42 tax-credit developments.

The projects completed last year were highly concentrated in the north and west suburbs, with few projects to the south and east of Indianapolis. In 2004, much of the new construction will be on the south side of the city. Of the 23 properties in the construction or planning phases, 11 are on the south side. The balance of new construction is scattered throughout Indianapolis.

A.G. Spanos Companies is developing Crescent at West Clay, a 186-unit multifamily project, in Indianapolis.

Historically, most of the developers who are active in the Indianapolis market are locally based. California-based A.G. Spanos Companies, which is developing Crescent at West Clay, is the only current non-local developer. The list of developers is long, but the most active include Pedcor, JC Hart and Flaherty & Collins.

New construction rents for conventional properties average at 84 cents per square foot ($836 per unit). Gross rents per unit range from $695 for a one-bedroom/one-bath unit to $1,001 for a three-bedroom/two-bath unit.

The expectation in Indianapolis is that the rental market will stabilize this year due to the combination of job growth and a slowdown in home buying. The first evidence of this trend is beginning to appear in lower physical vacancies. If the trend continues, concessions will begin to abate as well. Further firming of rental market conditions will occur as an increasing number of college graduates enter the workforce. In the meantime, transaction velocity should remain brisk as private investors continue to snatch up available multifamily properties in the Indianapolis area.

— George Tikijian III is senior vice president in the Indianapolis office of Los Angeles-based CB Richard Ellis. Stephen LaMotte Jr. is first vice president in the same office.


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