CITY HIGHLIGHT, MARCH 2007

INDIANAPOLIS CITY HIGHLIGHTS
Bob Horn, Luci Snyder, John Huguenard and Bart Book

Indianapolis Retail Market

A boom in residential development, followed by a surge of successful retail construction, has spurred a new era of retail opportunity in greater Indianapolis. The area’s transition to a major market began with robust interest in the downtown retail sector, marked most recently by the addition of European fashion retailer H&M to Circle Center Mall, a development of Simon Property Group.

The shift continued with the opening of new suburban lifestyle centers. In 2005, this included delivery of Simon and Lauth Property Groups’ 530,000-square-foot Clay Terrace in Carmel just north of the city, which attracted retailers such as Orvis, Sur la Table, White House|Black Market and Wild Oats, and restaurants Kincaid’s and Kona Grill. In 2006, Premier Properties opened the 500,000-square-foot first phase of Metropolis, located on the west side in Plainfield, Indiana. The company recently announced the start of a 400,000-square-foot second phase. Also in 2006, Regency Centers opened the 294,000-square-foot Greenwood Springs, which is 94 percent occupied, and Eclipse Real Estate opened the 275,000-square-foot Noble West Shoppes in Noblesville, Indiana, which is 30 percent occupied.

In 2007, the lion’s share of retail activity is occurring on the north side of Indianapolis, in growing, high-income areas such as Fishers, Carmel and Noblesville. In these markets, the lifestyle approach is being accepted warmly, as is evidenced by projects such as the 950,000-square-foot Hamilton Town Center, scheduled to open in Noblesville in spring 2008, from Simon Property Group and Gershman Brown and Associates, and the Fashion Mall at Keystone at the Crossing, an existing project by Simon Property Group that has been adding new tenants such as The Cheesecake Factory, Crate & Barrel, Maggiano’s, Nordstrom, Saks Fifth Avenue, Tiffany & Co., El Torito Grill and Urban Outfitters.

As the nation’s largest REIT, Indianapolis-based Simon Property Group is among the most bullish local investor/developers. In addition to the projects mentioned above, in the next 2 years, Simon is planning two additional lifestyle centers, one attached to the Castleton Mall to the north and one attached to Greenwood Park in the south end of the market. Both centers will be built on the sites of dark May Company department stores, which were closed when the retailer was acquired by Federated.

Together, new developer activity has kept demand high and, in addition to those mentioned above, has attracted retailers such as Fresh Market, GolfSmith, Lucky Brands, Sephora, Tommy Bahama, Whole Foods, Williams Sonoma Home, Elephant Bar and Toscanos.

According to CoStar, Indianapolis currently has 1,958 properties totaling more than 63 million square feet of retail space, at an attractive 10.8 percent vacancy rate. Average rents range from $12 to $26 per square foot, with newer power centers securing some of the highest rates. On the sale side, slightly older spaces are selling in the high $100s per square foot, while newer, well-located properties are selling between $225 and $240 per square foot. Cap rates currently sit in the 7 percent range for retail transactions.

Investor interest ranges from individual buyers to the bigger players, such as locally based Lauth Property Group, Duke Realty Corporation and Kite Realty Group. Their collective activity has helped raise Indianapolis retail sales 7.9 percent in comparison to the same time a year ago. Leasing also remains strong, with current projects such as Lauth’s 480,000-square-foot Brownsburg Station in the western suburbs 64 percent pre-leased and Duke’s 338,000-square-foot West Carmel Marketplace 83 percent pre-leased. Other properties under construction include Eclipse Real Estate’s 275,000-square-foot Hazel Dell Crossing in Noblesville and Duke’s 175,000-square-foot Marketplace at Anson in Zionsville, Indiana.

If pre-leasing activity is any sign of what is to come in 2007, Indianapolis should have little trouble holding its brisk retail pace and embracing all that is before it as the market hits a new stride.

— Bob Horn is a senior investment advisor with Irvine, California-based Sperry Van Ness

Indianapolis Office Market

It has been an interesting period in the Indianapolis office market. Several large office parks have changed owners, due primarily to the still-favorable cost of money and the reasonable prices in the city.

The Pyramids, a troubled landmark office park in the northwest suburban market was sold to Sterling American Property Inc., which has invested enough money into the financing to bring the aging complex up to date. The new owner is now offering broker and tenant incentives to fill the vacant spaces.

The 1.2 million-square-foot Keystone at the Crossing was developed by Duke Realty Corporation in the 1980s in partnership with TIAA-CREF. Philadelphia-based Berwind Property Group acquired most of the buildings at the end of 2005 and completed the transaction this year with the purchase of the last building. Berwind acquired the north suburban office complex for a total price of $124 million, at a cost of approximately $100 per square foot. They, like Sterling, are pumping money into these well-located-but-aging buildings, and offering incentives to fill the vacancies and entice tenants to renew.

A few years ago, Berwind sold the Precedent Office Park to the HDG Mansur Group Partnership and used the earnings from that disposition to take advantage of the still-favorable interest rates, which allow a purchaser to upgrade, offer incentives and look for future upside. As owners drop rents and offer incentives, other buildings are forced to compete or lose tenants. In this north suburban market, we have seen not only broker incentives and dropping rates, but also tenant incentives employed by owners in order to compete.

The north suburban market is home to all three of these office parks, but the driving force this year in the office market has been the continuing development and expansion of major hospitals. Their presence causes increased ancillary medical development, as well as a trend toward the purchase and redevelopment of office buildings for the medical user. Local company Bremner Health Care partnered with Duke Realty in 2006 to take advantage of the need for both general and specialized medical space in Indianapolis. However, as Duke identified the wealth of real estate possibilities stemming from the aging baby boomer generation, it recently acquired Bremner in order to focus on this trend nationwide.

The greater Indianapolis area office market consists of approximately 70.5 million square feet of space in 3,189 buildings, with a vacancy rate of 12.5 percent. Absorption of office space in 2006 totaled approximately 1.09 million square feet, with delivery of new construction at 1.35 million square feet. Approximately 621,430 square feet of office product that was under construction at the close of 2006 is expected to be delivered in 2007. According to CoStar, the average quoted rental rates for the entire office market in Indianapolis in 2006 measured in at approximately $16.53 per square foot.

— Luci Snyder is a principal of Indianapolis-based Acorn Group/TCN Worldwide

Indianapolis Investment Sales Market

Investors continue to discover that Indianapolis, much like many other second-tier cities in America’s heartland, offers opportunities.

This trend remained intact last year as investors made significant acquisitions in all core property types. The volume of transactions in 2006 remained consistent with those in 2005, as institutional, fund, REIT and private investors found Indianapolis a stable market supported by improving fundamentals and favorable economic conditions that provide steady growth in value.

Two other factors continue to trigger demand. Product quality and tenant integrity often exceed those in other markets. Plus, investors often are rewarded with better returns than those found in first-tier cities and in other midwestern cities of similar size.

These conditions support continued investment in the coming months, as activity remains brisk in industrial, office, multifamily and retail.

Several industrial buildings changed hands last year, with 27 transactions totaling more than 9.3 million square feet. In all, investors purchased 46 industrial buildings, with Blue Real Estate Company purchasing a portfolio of 17 buildings in Park Fletcher from Duke Realty Corporation and the David Mandel Trust buying a four-building portfolio. Other active investors included Inland Real Estate Group’s purchase of the nearly 1.1 million square-foot industrial building on South Mt. Zion Road, two large buildings acquired by Dividend Capital Trust, two buildings bought by Transpacific Development Company, four buildings of various sizes secured by JB Management and two smaller acquisitions by Welsh Investments.

While 2006 saw six more transactions than in 2005, the total square footage sold in the previous year easily eclipsed last year’s total by nearly 2 million square feet — 11.80 million square feet in 2005 compared to 9.35 million square feet sold in 2006.

Quality industrial product with solid leases continues to garner cap rates in the high 6 to low 7 range, while the price per square foot has risen to the $45 to $50 range. Well-leased, multi-tenant big boxes are bringing cap rates in the mid-7s. Flex space offers cap rates between the mid-8s and mid-9s, similar to cap rates for value-added acquisitions.

Moving forward, we expect these cap rates to remain the same for the first 6 months of 2007, but anticipate that rates will begin to drop later in the year as competition for properties heats up.

Institutional, fund and private investors purchased a record number of office buildings last year, acquiring 30 office buildings for $403 million. This built on record dollar volume in 2005, when three mammoth deals among that year’s 15 sales accounted for a good percentage of the nearly $775 million in office investments.

Last year, the three largest deals took place in the central business district (CBD) and included the trading of the 557,000-square-foot Ben Lytle Operations Center, the 436,000-square-foot Safeco Building and the 396,300-square-foot Market Square Center. In all, downtown saw five transactions. The most active markets, though, were the northeast with seven transactions and the north/Carmel submarket with six deals.

Class A suburban properties in particular continue to remain favored investments, as investors look for stability and less expensive pricing as compared to other similar-sized Midwestern cities. High-quality suburban properties traded from $125 to $175 per square foot, with cap rates from the mid-7 to mid-8 percent range.

This brought new investors to Indianapolis last year, including Sun Life Insurance, Triple Net Properties, Blue Real Estate and Hertz Investment. Existing owners such as Westminster Funds, DBSI and Berwind Property Group also increased their stakes in the city.

As office market fundamentals continue to improve, building owners that have sat on the sidelines may see opportunities to capitalize on the strength of the investment market. Indianapolis is well-positioned as investors seek higher returns than those that can be found in tier-one cities.

Despite last year’s interest rate increases, rates have remained historically low. The low rates, combined with a wealth of capital and a rebound in rental market fundamentals, led to an exceptional year for the multifamily investment market. In all, we tracked 31 transactions involving more than 9,900 units in 2006.

Active investors included those with private capital, TICs, 1031 Exchange funds and investors, and institutional investors — the latter group primarily comprised sellers in 2006, but many are now returning as buyers.

Last year, cap rates on stable assets averaged about 7.5 percent, down slightly from 7.7 percent in 2005. We expect these cap rates to remain stable and perhaps even increase slightly as vacancies continue to decline and investors foresee better returns from rising rental rates.

Additionally, Indianapolis continues to offer job growth, community development and quality of life, three ingredients that provide solid fundaments for investments in multifamily product.

Though smaller in size than previous years, activity in the retail sector heated up last year with seven transactions. Private investors led the way in these transactions, ranging in size from 32,000 square feet to 182,000 square feet. This is partially due to the predominance of tightly held retail assets by a few dominant players in the Indianapolis area.

Investors continue to favor retail investment in growing suburban markets such as Noblesville to the north, West Clay/Carmel to the northwest, Center Grove to the south and the Fishers/Geist area to the northeast.

Looking ahead, we anticipate strong interest from out-of-town private, fund and institutional investors that have placed Indianapolis on their radar screens. Owners that previously kept their properties off the market will begin to capitalize on such interest.

Competition for Class A or core assets, especially those of more than $20 million, will remain aggressive, as the number of such offerings is limited. With several new Class A shopping centers completed during the past 2 years, expect developers to become major sellers. Additionally, look for portfolio sales to crop up as owners pare down their holdings and redirect capital into new development projects.

— John Huguenard is a principal and senior vice president in Colliers Turley Martin Tucker’s regional office in Indianapolis.

Indianapolis Industrial Market

Central Indiana continues to be one of the nation’s leading distribution hubs. Last year, occupancy grew an impressive 5.7 million square feet, the third consecutive year of more than 5 million square feet of growth. To put this in perspective, the industrial sector posted growth of more than 17.7 million square feet from 2004 to 2006, nearly two-and-a-half times the 7.1 million square feet of growth from the prior 3-year period.

This growth has been triggered by Indianapolis’ emergence as a major regional and national distribution center. Modern bulk, traditional bulk and medium distribution accounted for nearly all (16.7 million square feet) of the occupancy growth during the last 3 years.

Developers and companies are attracted by the area’s central location and excellent infrastructure. In fact, four interstate highways converge in the area, more than any other metro area in the nation, allowing goods to be delivered to three-fourths of the U.S. population within a 1-day truck drive.

Manufacturing also continues as a bright spot. Indianapolis is witnessing a significant rebound as domestic and foreign investment pours into the area. According to the Indiana Manufacturer’s Association, 48,000 new jobs have been created in Indiana since 2003. During that same time frame, manufacturing has rebounded with 1 million square feet of occupancy growth.

Significant manufacturing growth is forthcoming as well, with the announcement of a new Honda assembly plant on 1,700 acres in Greenwood, Indiana, Toyota’s new Camry line in its expanded plant in Lafayette, Indiana, and Nestle’s construction of an 880,000-square-foot facility on 190 acres in Anderson, Indiana. Rolls Royce, Cummins and BP have also announced plans to upgrade or expand existing facilities in the market as well.

Logistics remain the engine that fuels central Indiana’s industrial sector. The area’s location, infrastructure and the state’s commitment to attract companies with incentives have propelled significant developments.

Last year, developers built 5.5 million square feet of modern bulk, primarily in longstanding strongholds. Much of this construction occurred in the southwest submarket, as Chicago-based The Alter Group delivered its first building in Indianapolis, a 441,000-square-foot speculative modern bulk facility in Plainfield. Duke Realty Corporation, Pannatoni Development Company, Opus North and First Industrial Realty Trust also brought speculative modern bulk facilities on line in Plainfield in 2006.

But as old stand-bys such as Plainfield, Lebanon and Brownsburg, Indiana, continue to be built out, developers are branching out to new locations. Just one interchange west of Plainfield, locally based Lauth Property Group and The Alter Group have announced plans for 550-acre and 353-acre developments, respectively, in Monrovia.

Further north in Whitestown, Duke Realty Corp./Browning Investments’ AllPoints at Anson project is nearing completion of its first 631,000-square-foot speculative modern bulk building. Also in this area, Valenti Held is beginning work on its 400-acre Perry Industrial Park and Denison Property Group/Opus North are teaming up on the 158-acre Whitestown Business Center. Attracted by lower land prices than in Plainfield, these projects may bring up to 15 million square feet of new product, mainly modern bulk, when completed.

This is not a case of overzealous development — while vacancy for modern bulk climbed almost 3.5 percent last year to end the year at 10.9 percent, the market absorbed nearly 3.6 million square feet of modern bulk space. That continued a trend of positive absorption of more than 2.5 million square feet of modern bulk space for 7 years running. Developers have done a good job in managing speculative development, which should lower vacancy rates for modern bulk in the year ahead.

Central Indiana’s growth has steadily lowered the overall industrial vacancy rate from its peak of 9.1 percent in 2002 to its year-end 2006 level of 6.5 percent. Combine this growth with the prudence shown by developers, which have averaged 5 million square feet of new product in each of the past 3 years, and the industrial sector will remain healthy.

Looking ahead, expect manufacturing and logistics to lead the industrial sector in continued growth. This is fueled by the area’s importance as a major air cargo hub, housing FedEx’s second-largest facility, and ongoing construction at the airport to further accommodate freight volume. Ports are being upgraded, and a planned intermodal hub in Plainfield could move railroad freight directly through Indianapolis instead of Chicago.

Indiana’s leadership is emerging in the nascent biofuels industry as well. As energy prices increase, the state has gone from one ethanol plant to 17 plants, as well as four new biodiesel plants, in the past couple years. Look for suppliers to move near these plants, triggering more development in the coming years.

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


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