CITY HIGHLIGHT, MARCH 2006

INDIANAPOLIS CITY HIGHLIGHTS
Zane Brown Jr., Tracey Holtzman, Albert Donato III, Steve LaMotte Jr.

Indianapolis Office Market

In the past 3 years, Indianapolis has seen limited speculative development of Class A multi-tenant office buildings. However, as 2005 drew to a close, things were changing. Indianapolis' suburban markets attracted an influx of investors in 2005 and developers paid attention to this trend. With almost 40,000 square feet of Class A product delivered to the market in 2005, more than 500,000 square feet slated to open this year, and another 400,000 to 500,000 square feet on developers' drawing boards for 2007 and 2008, it is easy to see why big name developers such as Duke Realty Corporation, Lauth Property Group and Opus have confidence in the Indianapolis office market.

One of the buildings delivered in January of this year was Duke's Nine Parkwood Crossing, a 205,000-square-foot Class A office building located in its Parkwood Crossing development in Carmel, Indiana. The construction of Nine Parkwood Crossing began immediately following American Family's commitment to a 60,000-square-foot long-term lease in the building. Since then, the new building has attracted numerous tenants and is now more than 50 percent leased just 3 months after opening.

Just north of Parkwood Crossing, Lauth has broken ground on Meridian Corporate Plaza II. The new project comprises a four-story, 135,000-square-foot, multi-tenant office building, which is scheduled for completion during the third quarter of the year. Lauth has also been successful in its pre-leasing efforts, signing Walker Information to a 45,000-square-foot lease. Pillow Insurance will take 16,500 square feet and Lauth will retail approximately 33,000 square feet for its own use. Meridian Corporate Plaza II is the first of two new buildings planned for the park, which includes Lauth's headquarters building, Meridian Corporate Plaza I.

Further north along U.S. 31, Opus has broken ground on the first of two Class A speculative office buildings, Landmark at Meridian Building One. The three-story, 105,000-square-foot building is slated for completion late in the second quarter of the year. Assuming Building One is well received, Opus is expected announce plans for Building Two in late 2007 or early 2008.

While the northern submarkets have been very popular with tenants and developers, they are not alone in attracting new development. Lauth recently announced its plan to expand INTECH Park, which the Indiana Economic Development             Corporation has designated as a Certified Technology Park. The new building, INTECH III, will bring another 230,000 square feet of speculative Class A space to the west side of Indianapolis. It is expected that Lauth will break ground this spring with some pre-leasing in place.

The Indianapolis market is nearing occupancy levels not seen since late 2000 [see graph, “Indianapolis Suburban Office Vacancy”]. Approximately 1 million square feet of Class A product will be delivered during the next 18 to 24 months. And existing, well-leased buildings are trading at record prices. This combination is expected to drive an increase in Class A suburban office rents. Recently, the Indianapolis office market has been very tenant-friendly, with rent abatement and additional lease concessions commonplace. Should vacancy rates continue to decline and rents increase as forecasted, Indianapolis office developers may soon see the tables once again turn in their favor.

— Zane Brown Jr. is an associate in brokerage services specializing in tenant representation in the Indianapolis office of CB Richard Ellis.

Indianapolis Retail Market

One trend presently seen in the Indianapolis area is the emergence of small and first-time developers taking advantage of the opportunity to develop retail centers in a strong, high-growth retail market. This trend has created a large amount of small shop space, primarily on the north side, and in northern suburbs such as Westfield, Fishers and Noblesville. The affluent population, coupled with the high residential growth, has created a market for retail that wasn't there just a few years ago. For example, Kite Realty Group and Flynn and Zinkan Realty Company are both developing centers at 116th Street and Olio Road in the Fishers/Geist area where there was no retail only a short time ago. Flynn & Zinkan also have developed the Kroger-anchored Westfield Marketplace at State Road 32 and Carey Road in Noblesville, creating another retail market in an area that was once cornfields.

Noblesville is quickly becoming a regional destination for many corporations as well as retailers. Simon Property Group and Gershman Brown & Associates recently announced the construction of Hamilton Town Center, a 1 million-square-foot lifestyle center to be completed in late 2007. Expect to see growth in that area's retail and residential sectors. With 146th Street due to open from Cumberland Road to Interstate 69, it paves the way for development of all kinds, including residential, retail and corporate office uses. There has been some development in that area already. Prairie Lakes Shops, which is shadow-anchored by Marsh Supermarket at 146th Street and State Road 37, is being developed by Kevin McKasson, a local developer who has several other retail centers in the Indianapolis market.

Indianapolis' west side is also experiencing an influx of new retail development. Metropolis, Premier Properties' new 850,000-square-foot lifestyle center in Plainfield, opened at the end of 2005 and includes such retailers as Barnes & Noble, Old Navy, Dick's Clothing and Sporting Goods and Rave Motion Picture Theatre. In total, the project includes approximately 60 retailers that are new to the west side of Indianapolis, such as J. Jill and Coldwater Creek, which have only been found on the north side of the city until now.

Downtown Indianapolis is thriving due to a new stadium as well as the expansion of the convention center and a large number of residential/condominium projects underway. Retail is sure to follow in the way of restaurants and convenience-oriented type businesses to serve that fast growing area of the city.

We've seen many retailers enter the market in 2006, including Ashley Furniture, Crate & Barrel, Beauty Brands and The Fresh Market. Some have absorbed existing space, such as Ashley, which located in some of the former Galyan's Sporting Goods stores. This use of existing space has contributed to a relatively low vacancy rate, keeping rental rates in the high teens to mid-twenties overall.

With the emergence of three lifestyle centers — Clay Terrace in the Carmel/Westfield market, Hamilton Town Center in Noblesville and Metropolis in Plainfield, which together total approximately 3 million square feet of new retail space — as well as many other smaller developments, it is evident that retail is thriving in this market, and will continue to do so as the economy and employment rates grow and improve.

— Tracey Holtzman is a partner with Indianapolis-based NAI Olympia Partners.

Indianapolis Industrial Market

The Indianapolis industrial market has been plugging along steadily for the past few years with little change. With the industrial inventory at approximately 240.56 million square feet, the overall vacancy rate rose only slightly from 9.3 percent to 9.8 percent in fourth quarter 2005.

Development continues to be found primarily on the southwest side of the city, in the Plainfield/Brownsburg submarket. According to CoStar, there is currently 1.2 million square feet of industrial product under construction in the Plainfield market. Duke Realty Corporation is constructing 650,000 square feet of industrial space that is 100 percent pre-leased and Panattoni Development Company is building 500,000 square feet of industrial space, which is currently 48 percent pre-leased.

There is some movement out of the east side of Indianapolis at Mount Comfort Commercial Park, where The Precedent Companies is developing a 577,000-square-foot, ground-up spec building.

However, the biggest news is that local developer Browning Investments plans to invest $700 million for a new proposed business park that will be located between U.S. 40 and U.S. 36 in Plainfield adjacent the Indianapolis International Airport. The park will be developed on 882 acres and will be known as CentraLogistics Park. With a proposed square footage in the range of 10 million to 15 million square feet, if approved, it will be the second largest business park in central Indiana behind Park 100, and it will bring approximately 6,000 jobs to the area. Plainfield has established itself as an industrial crossroads for bulk distribution, as developers have built more than 22 million square feet of product since 1994. Town officials believe that the number will grow to approximately 40 million square feet by 2015.

If the industrial market is broken down into flex and warehouse space, one can see the effect that the bulk distribution product throughout the city is having on the data. According to CoStar data, the flex market consists of approximately 19.89 million square feet in 687 projects, with a vacancy rate of 15.3 percent at the end of 2005. The warehouse sector consists of approximately 220.67 million square feet in 3,913 projects and had a vacancy rate of 9.3 percent at year's end. Of the total inventory, there are approximately 1,513 owner-occupied buildings accounting for 87.78 million square feet of industrial space.

In the Indianapolis area, the average asking rental rate for available industrial space was $4.05 per square foot at the end of fourth quarter 2005. This represented a 3.3 percent increase in quoted rents from third quarter 2005. The average flex sector rent was $6.96 per square foot at year's end, while warehouse rates ended at $3.60 per square foot.

In 2006, keep an eye on the southwest sector, as bigger and better distribution facilities continue to be developed.

— Albert Donato III is vice president of operations, sales and marketing, for Indianapolis-based Acorn Group Inc.

Indianapolis Multifamily Market

Multifamily investment activity in Indianapolis has been dominated by the private capital sector of the market for the last several years. During the past 2 years, acquisitions have been split between locally and regionally based buyers. The majority of sales of premium properties and/or premium locations or deals with legitimate value-added components have sold to local investors. The larger Class B and C grade deals are generally selling to non-local, regionally based buyers.

The 1031 exchange and tenant-in-common (TIC) investors became more visible in 2005. Approximately 75 percent of the Indianapolis-area multifamily transactions completed by CB Richard Ellis in 2005 had a 1031 component. It is likely that 1031 investors, both on the individual level and through TIC sponsors, will continue to actively pursue Indianapolis — and other midwestern — acquisitions as aggressive pricing in coastal and other higher growth regions continues to drive many investors away and the Indianapolis market gains greater acceptance from regional and national investors.

During the past several years, turnover in Indianapolis was due to the move to affordable single-family housing. Fortunately for those in the apartment industry, the number of single-family permits declined in late 2005. Median single-family sales prices increased 3.4 percent in 2005, fueled in part by an estimated 7,600 new households formed that year. The decline, and therefore stabilization, in new single-family construction, as well as continued new household formation, should equate to higher occupancies in multifamily this year. Occupancy in the area declined from 93.8 percent in 1997 to 87.4 percent in 2003, rose slightly in 2004 and then increased to 88.9 percent in 2005.

Concessions began to burn off in 2005. Several of the larger owners of Indianapolis-area properties, such as AIMCO, Equity Residential and AMLI, have begun a program called “right pricing.” With this leasing strategy, frequent adjustments are made to market rents based on factors such as availability of certain unit types, traffic, the time of year and vacancy. Continued concession burn-off and the beginning of some effective rent growth are expected throughout this year.

Since 2002, new multifamily construction in the Indianapolis area has averaged fewer than 2,200 units per year. In 2005, new construction fell to just below 1,300 units. New multifamily product is being built on all sides of town, with a heavy concentration on the south side. Most of the new inventory is Class B+ to A grade construction, the majority of which has been conventionally financed. However, there have also been several Section 42 communities built and there are more planned.

The Indianapolis multifamily rental market has entered a recovery phase in the past 12 months, due in large part to improving market fundamentals. In 2005, there were 8,600 jobs created in the Indianapolis metropolitan area, and multifamily occupancy increased citywide. With improving demographic and economic factors such as these, the Indianapolis market should continue strengthening in 2006.

— Steve LaMotte Jr. is first vice president in the multi-housing properties division with CB Richard Ellis. He is based in Indianapolis.

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