CITY HIGHLIGHT, MARCH 2005

INDIANAPOLIS CONTINUES ON ROAD TO RECOVERY
Jeremy Woods, Harry Kennerk, Bob Horn, Scott Pollom, Bill Flanary, Keith Stark

The commercial real estate market in Indianapolis, as in most midwestern cities, continues to recover from the economic draught of the past few years. With no less than seven industrial projects totaling 5.64 million square feet planned, Indianapolis’ industrial market has a healthy outlook for 2005. And while the office market has little development on the drawing board, several announcements made at the end of 2004 should stimulate leasing activity and new development during the next few years. Favorable interest rates and demographics, as well as conservative development, are creating a postive outlook for the continued turnaround in the multifamily sector. And in the retail market, last year’s planning should culminate with a development boom during the next 3 years.

Industrial

Indianapolis continues to bulk up with a high number of modern bulk warehouse projects. Modern bulk space is defined as facilities 100,000 square feet or greater, completed in or after 1994 and having 28 feet or greater clear height. Eighty-four buildings totaling 36.37 million square feet fall into this category. With a total industrial market of 175 million square feet, modern bulk space comprises 20 percent of the base. The vacancy rate is 10 percent, or 3.67 million square feet, for modern bulk space. The physical occupancy rate is significantly better factoring in short term deals at 91.95 percent. Asking net rental rates for modern bulk space range from $2.65 to $3.05 per square foot per annum.

In 2004, thirteen projects totaling 4.57 million square feet of modern bulk space were constructed in Indianapolis. Seven of these were speculative projects totaling 3.24 million square feet: Duke completed Lebanon Building 14, a 688,500-square-foot facility in Lebanon with 306,000 square feet pre-leased by Aurora Parts & Accessories, and Plainfield V, a 425,000-square-foot facility in Plainfield; Panattoni finished a 533,566-square-foot facility in Plainfield; Opus completed Building VI, a 424,828-square-foot facility in Plainfield; Quadrangle completed a 442,737-square-foot facility in Greenwood; Lauth finished Eagle Four, a 405,597-square-foot building in Brownsburg; and Precedent completed a 315,000-square-foot expansion of Building 103 in Mt. Comfort.

Two additional speculative facilities totaling 1.24 million square feet are currently under construction. ProLogis and Browning have partnered to build Airtech IV, an 812,000-square-foot facility in Plainfield, and Precedent has begun its 408,000-square-foot Building 104 in Mt. Comfort. 

Build-to-suits nearly equaled speculative projects in number with six, at a total of 1.34 million square feet. The largest was the 741,092-square-foot Brylane facility, which was developed by Opus in Plainfield. In addition, Dennison’s Franklin Tech Park landed AISIN’s 150,000-square-foot project; Aero Industries completed a 125,000-square-foot building near the airport; the Indiana Department of Administration completed a 115,000-square-foot facility downtown; Lauth developed a 104,000 square foot building for Griot’s Garage in Plainfield; and Duke constructed a 100,000-square-foot facility for Regent Aerospace in Plainfield.

Three build-to-suit projects totaling 925,000 square feet are currently under construction. Sataria has contracted with Greenfield Builders for a 600,000-square-foot building downtown. Duke is building 175,000 square feet for United Refrigeration in Park 100 on the northwest side of the city. Tippmann has a 150,000-square-foot cold storage facility for Interstate Warehousing underway south of Indianapolis in Franklin.

Indianapolis developers have no less than seven projects totaling 5.64 million square feet on the collective drawing board. By adding in the 2.5 million square feet of expansion capability in existing facilities, 8.14 million square feet of space currently is designed. Based on historical construction levels, the next 2 years of activity are already conceived. Many factors will influence when developers will ultimately pull permits, not the least of which is absorption of existing product.

— Jeremy Woods is senior director, industrial services, for Summit Realty Group / A Member of the Cushman & Wakefield Alliance.

Office

The Indianapolis office market continues a slow but steady improvement from its low point in 2001. While there is little office development planned for 2005, several announcements made late last year should help to stimulate leasing activity and new development in the latter half of the decade.

Simon Property Group broke ground on their new 15-story, 350,000-square-foot world headquarters building downtown in October. This could free up as much as 180,000 square feet of existing Class A space in the market by the fall of 2006. Downtown currently has 10.3 million square feet of office space with 15.4 percent vacancy as of the third quarter of last year. Class A rates in downtown remain stable at about $19.25.

In December, the city struck a deal with the Indianapolis Colts football team for a new downtown stadium and the expansion of the convention center on the current site of the RCA Dome. The new $500 million stadium is planned for completion in 2008 and the $275 million convention center expansion for 2010. These will stimulate additional hotel development to serve these facilities and will broaden the base for future downtown office development.

Downtown residential construction continues at a rapid pace. New homes and condominiums are being built while loft conversions are moving significant amounts of Class C office space and old industrial space to new uses. As Indianapolis rapidly moves toward becoming a 24-hour city, a growing population of workers living downtown will generate a stronger market for downtown office space. Small tenants, primarily locally owned businesses, make up the majority of growth and movement in the office market. Eighty percent of the market is space of 10,000 square feet or less. Health care and life sciences are generating the most commercial construction activity and are precursors of future office development.

BioCrossroads, the Indiana life sciences initiative, will have a major impact on Indianapolis development during the next several years. It is currently generating $1.2 billion in new development in Indianapolis. The most visible activity is the $42 million, 167,000-square-foot Indiana University (IU) Medical Information Sciences building at Canal Walk and 10th Street. IU also converted an existing 62,000-square-foot downtown building for its Emerging Technology Center, a life sciences and biotechnology business incubator currently housing 12 new startup companies.

Last November, Indianapolis-based Anthem completed its acquisition of Wellpoint Health Networks making it the nation’s largest health benefits provider. Its corporate headquarters is adjacent to Eli Lilly’s corporate headquarters downtown. Together, they could foster additional growth on the near south side, which has not yet experienced the growth of the core or near north neighborhoods.

Clarion Health Partners is building a new suburban hospital in the North Meridian Street Corridor in Carmel. This submarket, at nearly 6 million square feet, is the largest outside of downtown. There has been significant leasing of Class A space in the Meridian Corridor in 2004 with more than 300,000 square feet being absorbed. This submarket was at 17.6 percent vacancy at the end of the third quarter and is gradually improving.

Parkwood Crossing in the Meridian Corridor, a Duke Realty Corporation development, recently reached 90 percent occupancy by filling Parkwood Eight, a 204,000-square-foot building that was completed in 2003. It is anticipated that Duke could start Parkwood Nine later this year. Lauth Property Group has announced two 90,000-square-foot medical office buildings to be built near the new Clarian Hospital on North Meridian. The Carmel/Meridian Street Corridor Class A rates are steady at $20.

On the northwest side, Lauth Property Group has reached 90 percent occupancy at their 600,000 square feet Intech Park development along Interstate 465. Last October, Duke announced a new 1,700-acre mixed-use development to be called Anson at Interstate 65 and State Route 334 in Zionsville. It will include office, industrial, retail, medical and residential uses. This 15-year project will have an ultimate value of more than $750 million. The northwest submarket remains soft at 27 percent vacancy. This includes the Pyramids, a landmark Indianapolis office development that was purchased in October by Sterling American Properties and is undergoing a $4 million renovation. Class A space in the Northwest submarket is at $17.50.

Development of the new $974 million Midfield Terminal at Indianapolis International Airport continues with the relocation of a portion of Interstate 70 last fall. This opens the new Six Points Road interchange, which will service the new terminal. New office space is planned to compliment the huge amount of industrial distribution space developed during the last few years in Plainfield and the West/Southwest submarket. This submarket currently has about 1 million square feet of office space that carries a 21.2 percent vacancy. Class A rates are the lowest in the market at $15.50.

The Indianapolis office market continues to recover, especially for developers that market aggressively and reinvest in their properties. As vacancy decreases and rates firm up, the market will start to see new development in 2006 and beyond. Downtown and the Meridian Corridor are the largest office submarkets and will continue to be the most active due to stimulation from other growth sectors, including community facilities, healthcare, life sciences and residential growth.

— Harry Kennerk and Bob Horn are senior investment advisors with Sperry Van Ness in Indianapolis.

Multifamily

Increasing interest rates, favorable demographics, restrained development and an improving economy all favor the continued turnaround in Indianapolis’ multifamily market.

The low interest rate environment of the past few years, coupled with aggressive financing packages, favored home ownership over renting, especially for the upper echelon of tenants. But many former renters who bought a home are now finding out the real costs of ownership. When property taxes and maintenance costs finally hit, they find that renting is more in line with their budget than owning that dream house. Plus, attractive financing with little money down and the phase out of buy-downs on interest rates stretch their budgets to the breaking point. And, as interest rates creep up, renting an apartment becomes the affordable alternative for more people.

The turnaround started during the last 6 months of last year. Occupancy rates are starting to go back up, although they are still below historic levels. The overall multifamily vacancy rate is 89 percent for Indianapolis, with some pockets 5+/- percentage points off the normal level.

Renters are slowly returning to the market, and the pace is expected to quicken in 2005. Demographics favor the multifamily market. Children of the baby boomers are now adults ready to leave the nest. With rising interest rates, many will rent until they can afford a house. An improving economy, though, gives these young adults the job opportunities and income to move out on their own.

Rents vary by market, but most renters can find a decent Class B two-bedroom apartment on the north side of Indianapolis for between $625 and $650 per month.

They also are still likely to find incentives, such as 1 to 2 months of free rent. While we are starting to see incentives subside, we expect to see many properties offer inducements until spring and early summer.

The notable exception has been upper-end properties. The area’s newest multifamily properties attract renters with amenities like exercise rooms and fast computer connections.

But the slow pace in the rental market during the past 3 years did not put the brakes on investment sales. Investors have taken advantage of lower interest rates to buy dozens of multifamily properties. In 2003, investors made 25 significant transactions; last year, the pace slowed with 16 major transactions. Despite spending higher dollar amounts reflecting historically low cap rates on these properties, these investors are still in a prime position as the rental market begins to strengthen and landlords gain traction with increasing occupancies and rents later this year.

Constrained new development favors these investors. With supply outpacing demand for rental units, developments have been fewer and farther between.

The real constraint on development, though, is zoning. As the areas around Indianapolis evolve, they are putting a financial burden on the school districts. Apartment dwellers don’t pay property taxes needed to support growing school districts, so many communities are reluctant to zone for multifamily housing.

Most developments are tax-financed, with local developers typically involved. A notable exception is in the Ameriplex area where a 340-unit complex is being built in phases. Approximately 1,500 units were built in 2004, and and fewer than 1,000 units will be built in 2005. That’s well off the pace of 4,000 to 4,500 units in peak development years.

The downtown housing market has been red hot. The opening of Circle Center Mall several years ago, the new convention center and a wealth of restaurants and entertainment venues have ignited the central business district (CBD) housing market. Many of the units though are old office and commercial buildings that have been converted into condominiums. The downtown housing market should double during the next 5 years.

Looking forward, the Ameriplex area is ripe for more multifamily properties. Additionally, Duke is building a mixed-use development in Boone County, just northeast of Indianapolis on Interstate 65. The locally based developer will build office and industrial, with retail, single-family and multifamily closely following, during the coming years.

— Scott Pollom is a senior vice president and multifamily investment specialist and Bill Flanary is a vice president specializing in land sales in Colliers Turley Martin Tucker’s Indianapolis office.

Retail

Last year was a great planning year for retail development in Indianapolis, and the next 3 years are likely to see the dramatic results of those efforts. Retail development culminated in 2004 as Simon and Lauth Property Group opened Clay Terrace in Westfield just in time for holiday shoppers. The 512,000-square-foot center, which is located at the convergence of US 31 and Keystone Avenue, is anchored by DSW Shoe Warehouse, Circuit City and Dick’s Sporting Goods.

After successfully completing Trader’s Point, which is located at Interstate 465 and 86th Street, Kite Realty Group ended the year as a REIT. Kite converted from a privately held company to a public one listed on the NYSE. Trader’s Point, a 277,202-square-foot community center, is anchored by Marsh Supermarket, Kerasotes Cinemas and Dick’s Sporting Goods.

The Noblesville State Route 37 Corridor, likely the region’s most active area of 2004, may see a slow down since Duke Realty signed PetsMart and Best Buy — effectively completing the Stony Brook Commons development.

SAXONY, Indiana’s largest mixed-use development, is located in the region’s most rapidly developing corridor. The 3,600-acre technology park is being developed in phases. The new urbanism portion of the park is being spearheaded as a 745-acre section developed by Toledo, Ohio-based Republic Development. The 745 acres will include residential, office, retail and industrial space. Republic has secured the 745 acres of land for SAXONY, which is bisected by Interstate 69 at Exit 10 and located at the eastern boundary of the Noblesville Corporate Campus. Republic Development and Trademark of Fort Worth, Texas, are teaming up to develop the more than 1 million square feet of proposed retail. SAXONY is split between Fishers to the south and Noblesville to the north. Both communities have focused on bringing planned development to their respective areas as they are likely to continue to be in the epicenter of the highest residential and commercial growth corridor in Indiana for some time. Residential and office space lead the development, and retail space is in the planning stages. The initial developments are scheduled to open in the  spring of 2006.

In western Hamilton and eastern Boone counties, Duke is developing Anson, a 1,700-acre development. Anson, which is in early planning stages, will have various components of retail, residential and office space with a significant concentration of industrial distribution facilities. Anson’s proximity to Interstate 65 make it an ideal location for the seemingly endless flow of large distribution facilities being developed in the western periphery of Indianapolis along the I-65 and I-70 corridors.

Metropolis in Plainfield has had several recent announcements in retail. This 850,000-square-foot retail development was jolted by the Galyan’s and Dick’s merger. However, Premier Properties was able to secure a new Dick’s in what was to be Galyan’s space. Also, JC Penney opened a new freestanding store in the development recently. Metropolis already has a Target and Kohl’s, and a new Wal-Mart Supercenter is under construction adjacent to the development.

Over development in Indianapolis has been kept in check by the strength of the area’s five Simon malls. Significant growth is occurring in the surrounding counties and is in various phases of progress in the metropolitan area. The core downtown market remains vibrant. This is no better evidenced than in the nearly 100 percent leased Circle Center Mall and the continued development of residential, hotel and office space in the downtown central business district (CBD). Hilton Hotels has further cemented the interest downtown with the new Conrad Hilton, which is under construction, the conversion of the former Adam’s Mark to the Hilton brand and the addition of McCormick & Schmick this summer.

Additionally, the opening of the first major phase of the Interstate 70 expansion near Plainfield is likely to add fuel to the exploding commercial development in and around the Indianapolis Airport and the new midfield terminal now under construction.

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