CITY HIGHLIGHTS, MARCH 2008

INDIANAPOLIS CITY HIGHLIGHTS
Luke Wessel, David Reed, Steve LaMotte and Tim Murray

Indianapolis Industrial Market

Indianapolis continues to build on its reputation as a major regional and national distribution hub. Last year, the city’s stature grew, as 1.2 million square feet of industrial space was absorbed; it was the sixth consecutive year of growth, but off the pace of previous years’ levels.

The market’s growth included the highest level of construction in the past 10 years, with 39 projects completed, adding 7.1 million square feet to the city’s industrial base. In the past 5 years alone, the industrial sector has grown by 27.4 million square feet.

Modern bulk distribution led the charge, as developers built 5.3 million square feet of product, marking the second straight year that more than 5 million square feet of modern bulk space was brought online.

Additionally, developers actively brought other industrial product types to the market, including medium distribution (916,000 square feet), manufacturing (412,000 square feet), office/showroom (341,000 square feet) and flex (140,000 square feet).

Such activity was far from isolated to one area — the southwest quadrant continued its reign as the leading submarket, with approximately 4 million square feet of new space brought online in 2007. The east (932,000 square feet), northwest (883,000 square feet), west (805,000 square feet) and northeast (526,000 square feet) submarkets also were active players in this building boom.

The southwest submarket also was the most active leasing market, registering 901,000 square feet of positive absorption. Major deals included Whirlpool’s 425,000-square-foot sublease; Ditan Distribution’s 251,000-square-foot deal; BFS Diversified’s 226,000 square-foot transaction; and Sunrise Medical HHG’s 180,000-square-foot lease.

Quaker Oats is set to occupy a 1.1 million-square-foot build-to-suit facility in Indianapolis this year.

Expect the same level of action this year in the southwest, as Prime Distribution Services is set to occupy 1.2 million square feet and Quaker Oats moves into 1.1 million square feet in the area; both new spaces are build-to-suit facilities.

In the east submarket, Mount Comfort, Indiana, remains a hot spot for development along Interstate 70, with developments such as Precedent Real Estate Services’ 594,000-square-foot spec, modern bulk building, which was completed early last year. The property was sold to KTR Capital Partners, and CVS Indiana leased approximately 25 percent of the space in February, followed by a second lease by Adidas. Precedent has another spec building underway — a 245,000-square-foot medium distribution facility set to open by mid-year.

Other notable developments in Mount Comfort include University Loft’s 508,000-square-foot build-to-suit headquarters and manufacturing facility. This building is located in the 160-acre, master-planned Eastpoint Business Park. Verus Partners is holding 200 acres that are set for development near the Mount Comfort Airport. If the rumored dedicated truck lanes come to fruition on I-70, anticipate heated demand for land in this area.

In the Northwest, deal velocity has been brisk, with eight of the Indianapolis industrial market’s top 15 lease renewals and expansions occurring in the area. Along with new developments from Verus Partners (a 624,000-square-foot speculative modern bulk facility) and ProLogis (a 502,000-square-foot speculative modern bulk facility), AllPoints at Anson opened in early 2007. The huge industrial park was kicked off by a 631,000-square-foot speculative modern bulk distribution facility, which is available for lease. The 616-acre AllPoints development will welcome its first tenant when ASI Limited moves into its build-to-suit facility in April. The development of Medco’s 340,000-square-foot distribution center was announced in December.

Mid-size build-to-suit buildings are popular in the northwest submarket, where six such facilities opened last year. This trend will continue in 2008, as WF Industrial Properties is planning to develop three spec, mid-size facilities totaling 78,000 square feet.

Even with all of the new development, the year ahead will give the market a chance to catch its breath. Last year’s new inventory hiked the industrial vacancy rate up to 8.6 percent from 6.2 percent. Approximately 2.6 million square feet of construction is currently in the pipeline for this year, of which 2 million square feet is build-to-suit product. This should allow vacancy rates to return to lower levels by year-end.

Colliers Turley Martin Tucker is currently tracking approximately 3.5 million square feet of build-to-suit activity either in the works or being planned for this year. This trend, and the existing supply, will slow down the construction of speculative modern bulk distribution space.

Average gross lease rates vary by product and submarket: office/showroom, $7.10 to $7.60 per square foot; medium distribution, $4.40 to $5.50 per square foot, traditional bulk, $2.75 to $3.25 per square foot; modern bulk distribution, $3 to $3.50 per square foot; manufacturing, $3.70 to $3.90 per square foot; and flex, $7.60 to $9.60 per square foot.

Medium distribution and office/showroom rents should remain stable, and developers may look to build this type of product, since there is a favorable supply/demand ratio. Modern and traditional bulk distribution space is expected to face rent challenges since there is a healthy supply available. Developers may look to raise rates in certain product types to cover increased real estate taxes and operating expenses. The occupancy rate for the entire market is running at approximately 91 percent. Compared to other major metropolitan cities, the overall lower business occupancy costs, lower cost of living and centralized location will help Indianapolis keep its reputation as a primary choice for industrial users.

— Luke Wessel, principal and senior vice president, is based in Colliers Turley Martin Tucker’s regional office in Indianapolis.

Indianapolis Office Market

David Reed Managing Director CB Richard Ellis

The office market in Indianapolis was influenced by multiple factors in 2007. There were several large office deals, with activity focused on Class A space in the central business district (CBD), and on new construction along the North Meridian Corporate Corridor in Carmel and the Keystone submarket. Recent expansions in the CBD include growth from the City of Indianapolis and the State of Indiana, which combined to sign leases for more than 105,000 square feet, as well as Wellpoint’s 93,000-square-foot renewal at the 299,040-square-foot Landmark Center. 

Another trend impacting the Indianapolis office market is the shedding of space by mortgage and title companies, financial institutions, and homebuilders. Huntington/Sky Bank is currently marketing sublease space, and Fifth Third Bank recently subleased some of its local space. National City Bank renewed its lease in the National City Center but downsized by 45,000 square feet. Meanwhile, Indiana Mortgage Funding, Countrywide Mortgage and Colonial Mortgage have vacated smaller offices, and developer KB Homes has exited the Central Indiana area entirely.

Wellpoint recently renewed its 93,000-square-foot lease at the 299,040-square-foot Landmark Center in Indianapolis’ central business district.

A healthy sign in the CBD market is the historically high occupancy being enjoyed by the top-tier properties in the market, including Chase Tower, One American Square and Market Tower. It will be interesting to see if the enviable occupancy levels will tempt landlords to increase rental rates.

Tenant flight to quality is increasing the vacancy in older Class A and B properties. As vacancy rates in the suburbs hover around 17 to 18 percent, some owners are left wondering why office development continues. The answer lies in the success that developers have had in persuading the city’s current tenants to leave older properties and lease space in attractive new buildings. Since Indianapolis has benefited from historically low cap rates the past 2 years, it is lucrative for new developers to attract these tenants with free or discounted rent in the front of the deal, while negotiating to ensure that the property’s net operating income will include the pro forma asking rents over time. As competition from these newer properties increases and their occupancies rise, effective rates for older Class A and B properties are slipping.

While there were multiple large transactions in 2007, the majority were the result of organic, in-town growth, and the moves left considerable vacancies. However, the CBD ended the year with a total of 212,189 square feet of positive absorption, which is the most the submarket has experienced since 1998. The suburban market closed with 248,050 square feet of positive absorption, approximately half the amount of the average absorption over the last 3 years. 

The widening of 146th Street in the Fishers and Noblesville, Indiana, submarket north of the city has increased development momentum in the area. In Saxony, which is lead developer Republic Development’s expansive mixed-use community along Interstate 69 in Fishers, construction has begun for medical office buildings for the Clarian Health, St. Vincent and Community Health Network healthcare networks. Clarian Health is planning for a 40-bed, 250,000-square-foot hospital and medical office building on the northwest corner of Saxony at I-69 and Exit 10. The $180 million development will be built in phases, and was designed by HKS Inc. The 26-acre St. Vincent Medical Center Northeast is also underway along Exit 10, and is the state’s first stand-alone emergency center. Additional phases call for 100 to 150 beds and a medical office building.

In addition, Verus Partners and Republic Development have completed several projects in the area that feature office, retail and flex space. In the Northwest, locally headquartered developer Lauth is completing more space in Intech Park, and is doing well in its pre-leasing efforts. Occupancy at Corporate Center North, which is located at the intersection of 71st Street and Corporate Drive in Indianapolis, has reached more than 90 percent. Expect substantially fewer projects to gain financing for construction in 2008, which will sharply decrease the new supply in 2009. This will create opportunities for landlords to increase occupancy and push rents, which will ultimately create value.

— David Reed is managing director of the Indianapolis office of CB Richard Ellis.

Indianapolis Multifamily Market

The Indianapolis area multifamily market is now entering its third year of recovery. In 2007, Indianapolis area apartment owners experienced upward trends, as well as the best operating performance in several years. The market indicators, both micro- and macro-, are now pointed in the right direction.

Gross rents in the market climbed 1.7 percent from 2006 to 2007, and occupancies market-wide for the same period measured 90.2 percent, a 0.4 percent increase. Embedded in this gross rent increase is a continued concession burn-off, accounting for an estimated effective rent growth of 2.5 percent for the same period.

Downtown Indianapolis led rent growth at 3.5 percent for 2007, and rents in that submarket now average .93 cents per square foot. Occupancy downtown has reached 91.5 percent, up approximately 2 percent compared to 2006. The continued success of the downtown market is due in large part to a scarcity of rental product, the addition of retail services and other amenities to the area, and the growing demand for housing in the urban core. The north and south sides of the Indianapolis market also posted strong rent growth in 2007 of 2 percent and 2.2 percent, respectively. The north side had perhaps the largest concession burn-off, while the south side experienced firming due to a long awaited slowdown in new multifamily construction. As in many other parts of the country, both of these submarkets attribute much of their improvement to sluggish single-family home sales and construction activity.

Improving fundamentals, steadily improving jobs and household income figures, and a slowdown in single-family home sales have encouraged continued new multifamily construction, which is expected to last into 2009. Roughly 2,800 units are planned for 2008 and 2009 throughout the Indianapolis area. The availability of debt and equity remains high for multifamily construction, in spite of the capital markets issues faced this past summer.

The north side of the metro area is the new focus of developer interest, and much of it is located along the 146th Street corridor spanning the middle of Hamilton County. Hamilton County is home to the state’s highest wage earners, with a median household income of $82,556, which is $36,341 higher than Marion County’s median income. A critical extension of 146th Street was completed in October 2007, encouraging development on what is arguably Hamilton County’s most significant emerging corridor. While the pipeline in Hamilton County, stretching across the loosely defined 146th Street corridor, exceeds 3,000 units through 2009, there is sufficient household and job growth to absorb the influx.

Within the Indianapolis MSA, more than $450 million in apartment investment sales traded in 2007. This is an 18 percent decrease in volume compared to 2006. While the capital markets generally are expected to become a bit more restrictive — with lenders more astutely underwriting deals — investors will maintain a strong preference for premium locations and true value-add plays. Cap rates for premium opportunities have increased less than 25 basis points. Less unique opportunities have experienced increased upward movement during the past 12 months. Now, having adjusted to the departure of cheap, full-leverage conduit financing, cap rates should remain fairly stable, with Fannie Mae and Freddie Mac still pumping volumes of capital into the market.

 East Coast investors comprised 76 percent of the $235 million in total multifamily sales volume in CB Richard Ellis’ Indianapolis office in 2007. The majority of this capital was institutional in nature, and a continued flow of money is anticipated through 2008. There is now sound reason for increased institutional exposure in the Midwest. The outlook on all fronts is bright for Indianapolis and many other surrounding Midwestern markets. While many coastal markets have begun to contract, Indianapolis is poised for continued expansion for the foreseeable future.

— Based in Indianapolis, Steve LaMotte is a senior vice president in CB Richard Ellis’ Multi-Housing Group.

Indianapolis Retail Market

The burgeoning suburbs of north Indianapolis house an affluent demographic that demands greater retail choice and a new environment in which to shop. As a statewide leader in population growth and new retail construction starts, the north Indianapolis suburbs of Carmel, Westfield, and Noblesville, Indiana, will now host some of the state’s newest experiences in retail shopping.

Lantern Commons

Lantern Commons, an upscale lifestyle center incorporating natural wooded areas and streams with urban retail, is coming to Westfield. The $83 million project from Pine Tree Commercial Realty will consist of 430,000 square feet of retail on the northeast corner of U.S. Highway 31 and East 161st Street. The lifestyle center will feature a main street Americana feel, including fountains, gazebos, street lamps, tree-lined walkways, brick and masonry façades sporting colorful awnings, planters, public art, and a clock tower.

Simon Property Group and Gershman Brown & Associates have partnered to develop Hamilton Town Center, a 950,000-square-foot, open-air lifestyle center in Noblesville, Indiana.

Not to be outdone, Indianapolis-based Simon Property Group and Gershman Brown & Associates have partnered to develop Hamilton Town Center, a 950,000-square-foot, open-air lifestyle center. Located at the eastern edge of Noblesville, Hamilton Town Center will boast an impressive array of restaurants and entertainment tenants, as well as fashion and specialty retailers including Ulta, Bachrach, Chico’s, Coldwater Creek, White House|Black Market and Zumiez. Hamilton Town Center will open in May.

There is a growing movement to update older shopping centers to include new lifestyle center additions. Locally-based Kite Realty Group Trust has redeveloped the once-dim Glendale Park Mall into Glendale Town Center. Located at 62nd Street and North Keystone, the center will boast a new Target, as well as existing anchor tenants Macy’s and Lowe’s Home Improvement Warehouse. 

National coffee and baked goods chain Dunkin’ Donuts has opened four new Indianapolis locations, and a host of fitness chains, including Lifestyle Fitness, Anytime Fitness and  24 Hour Fitness, have opened new locations in the city, as well. Many other national brands have found Indianapolis an attractive market in which to set up shop. With retail sales on the rise, developers, regional retailers and national brands are continuing to show confidence in the metro Indianapolis retail market.

— Tim Murray is a senior advisor and team leader of the retail team at Indianapolis-based RESOURCE Commercial Real Estate.

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