CITY HIGHLIGHT, MARCH 2009

INDIANAPOLIS CITY HIGHLIGHTS
Ryan Conrad, Michael Cagna, Luke J. Wessel and Scott Pollom

Indianapolis Office Market

The Indianapolis suburban office market continues to thrive in 2009 despite increasing national unemployment and a tightening credit market. Submarkets like Carmel, Indiana’s North Meridian corridor, and Fishers and Geist, Indiana, have experienced significant office development growth in recent years and a parallel boom in upscale housing development and affluent residences. Since 2003, more than 2.3 million square feet of office space has come online in suburban Indianapolis.

The Indianapolis suburban submarkets can expect little construction this year. Because of tight credit and low demand, developers will likely curtail speculative office development. Good credit and strong lending relationships will prove advantageous to local developers should opportunities arise.

Edgeworth Laskey LLC is a great example of a local developer that has bucked the economy and continued large office developments. The company has completed construction and started leasing Lake Pointe Center 5, a new 150,000-square-foot, Class A+ office building in the Castleton submarket. Additionally, the company has broken ground and started leasing Concourse at Crosspoint One, a 110,000-square-foot, Class A office building in the Interstate 69 Corridor. Concourse at Crosspoint One is the first of five buildings slated for the new Concourse at Crosspoint office park, which will encompass more than 600,000 square feet of space on 26 acres upon completion. Both of Edgeworth Laskey’s new buildings have already landed large tenants, including Nyhart Inc. and USA Funds, respectively.

Developer J. Greg Allen has completed a $12 million redevelopment of the former Jefferson Plaza. The 90,000-square-foot office building located on Pennsylvania Street in Indianapolis’ CBD is now known as Allen Plaza.

While many downtown buildings received much-needed renovations in 2008, and more such projects are planned for this year, no new office building has been constructed in the central business district in several years.

The Indianapolis downtown central business district remains vibrant. Several major redevelopment endeavors were completed in 2008, including the renovation of Allen Plaza, formerly known as Jefferson Plaza. Local commercial developer J. Greg Allen has given the 90,000-square-foot foot former bank building along Pennsylvania Street a $12 million facelift, including facade restorations and new condos on the top five floors. The second, third and fourth floors feature office space, and locally owned Scotty’s Brewhouse has opened a second, 10,000-square-foot Indianapolis location within Allen Plaza’s first floor.

The Broadbent Building.

The Broadbent Building, formerly known as the Zipper Building, also received a complete renovation courtesy of local retail developer and building namesake, the Broadbent Company. The firm occupies the top two floors of the 56,000-square-foot building and has leased the first floor to Brazilian steakhouse Fogo de Chão. Located a short distance from the rehabbed Allen Plaza, the building has brought some much needed improvement to the southeast corner of Washington and Pennsylvania streets.

Local certified public accounting firm London Witte Group purchased and completely renovated a downtown/midtown Indianapolis landmark: The seven-story, 86,000-square-foot office building now known as One Independence Center, which is located at 1776 North Meridian Street. London Witte Group has hired locally based Lynn Hines Design Associates to revitalize the space and preserve its retro appeal. Plans call for the addition of vintage-inspired fixtures, flooring, wall coverings and furnishings. Energy efficient windows and new mechanical systems have been installed throughout. London Witte Group occupies 20,000 square feet on floors four, five and six. Clarian Health Plans is moving into 24,000 square feet on floors two and three in an effort to maximize efficiency and establish an office closer to the downtown Clarian campus.

In the fourth quarter of 2008, office space in the overall Indianapolis market had an average vacancy of 18.73 percent, which is a 1.63 percent increase from fourth quarter 2007. Vacancy in the Indianapolis downtown central business district realized a negligible increase of only .02 percent, while the suburban submarkets increased substantially from 18.05 to 20.23 percent year-to-year. The suburban submarket vacancy increase is a direct result of the new office product delivered by Edgeworth Laskey in Castleton and along the I-69 corridor.

— Ryan Conrad is an advisor for Indianapolis-based Resource Commercial Real Estate, LLC.

Indianapolis Retail Market

Like many other sectors of the commercial real estate market, the retail sector endured tough times in 2008, and all indications are that it will get worse before it gets better. This should hardly come as a surprise given the current economic climate. Consumers were hesitant to spend money in early 2008 and only cut back further following the announcement of a recession later in the year. Several national retailers like Linens ‘N Things and Steve & Barry’s have been forced to shutter operations as a result of this economic downturn.

Central Indiana was hardly immune to the affects felt across the nation. Overall vacancy among tracked Indianapolis retail properties increased by approximately 4 percentage points from 13 percent year-end 2007 to 16.9 percent year-end 2008. This occupancy loss has shifted the market in favor of the tenant, causing average asking rental rates to become volatile. Half of the submarkets tracked in Indianapolis experienced rent increases, while the other half saw rents decrease. Overall, the average asking rental rate for retail properties in Indianapolis has declined by 40 cents since the end of 2007, moving from $13.95 to $13.55 per square foot.

In response to this downturn, many retailers have gotten creative in their attempts to entice shoppers to spend money. Several retailers have offered steep discounts in hopes of moving merchandise off the shelves, with some mark downs offering as much as 60 to 70 percent off all store items. Restaurants, ranging from fast food to fine dining concepts, have also gotten in on the act by creating value menus featuring meals that cost less than $5 or featuring lunch and dinner specials. Regardless of the angle, all promotions have the same intention: Retailers are trying to tread water in the wake of one of the worst holiday shopping seasons in recent memory.

The news wasn’t all bad in 2008 for the Indianapolis retail market. High-profile projects such as the opening of Hamilton Town Center and the redevelopment of Castleton Square Mall and Glendale Mall were completed, and each project brought numerous new shopping choices to area residents. Additionally, many new fitness centers and restaurants opened throughout the Indianapolis metropolitan statistical area. Finally, drug stores and discount retailers such as Aldi and Wal-Mart have continued to fare well.

Nevertheless, due to the confluence of challenges facing the commercial real estate market — the economy still mired in a recession, the ongoing housing slump, the restricted access to capital and the multiple reports of national retailers shuttering their operations — retail activity is expected to be very slow this year. In fact, CB Richard Ellis does not expect the retail market in Central Indiana to bottom out until the third quarter, whereupon we may begin to see some relief in the region.

— Michael Cagna is the research coordinator in the Indianapolis office of CB Richard Ellis.

Indianapolis Industrial Market

The Indianapolis industrial market posted a strong showing last year despite the economic challenges impacting the nation. More than 4.3 million square feet of space was absorbed in 2008, and the region’s industrial vacancy rate closed at 7.4 percent, a decrease of 1.1 percent from the start of the year.

Several factors contributed to the area’s ability to move forward, not the least of which is the area’s long-standing stature as the Midwest’s crossroads for distribution.

Construction continued, but on a more restrained level. Approximately 1.9 million square feet of new industrial space was completed last year, which is only a quarter of the volume — 8.8 million square feet — of new space added in 2007. A significant component of this new inventory was build-to-suit or expansions by existing owners or users.

Additionally, rental rates for industrial space remained level; rents have not moved in either direction since 2007. The rates have remained low compared to other Midwest cities, which has attracted new regional and national players while encouraging local businesses to maintain and renew their existing leases.

As in past years, modern bulk distribution space has led the charge of new activity. Approximately 4.3 million square feet of modern bulk was absorbed last year, primarily driven by seven new companies deciding to stake a position in Indianapolis. Nearly all of this activity occurred in the Southwest submarket, which is the region’s largest industrial submarket with 59 million square feet of product. The submarket continues to be a driver in the industrial arena and its stature has been significantly heightened by the completion of a new terminal at the Indianapolis International Airport last November. The terminal is expected to spur industrial, as well as office and retail, development in this submarket. Its location near four major interstates positions this area as a key to the region’s future growth.

Three buildings are underway in the Southwest. Browning Investments and Duke Realty Corporation are nearing completion of a 534,000-square-foot speculative facility in All Points Midwest, an industrial park in Duke’s Anson mixed-use development. OKI Systems Limited will add 60,000 square feet of office showroom space in Plainfield, Indiana, and Graybar has broken ground for its 65,000-square-foot facility in Sunbeam Development Corporation’s AmeriPlex Business Park along Interstate 70. There is another 6.7 million square feet of proposed development in the Southwest submarket, including several large projects on 1,500 acres just 9 miles west of the airport.

Other active submarkets include the Northwest and East. As in the Southwest, these submarkets offer developers 10-year real estate tax abatements and easy access to major interstates. The East submarket will see considerable new space when Browning Investments finishes two of four buildings planned in Axcess 70, a 153-acre industrial park in Mount Comfort, Indiana. Scheduled for completion in early spring, the first buildings will offer 423,000 and 250,000 square feet of space.

New construction underway in the Northwest includes a 340,000-square-foot facility for Medco Health Solutions. Two other projects will be completed this year, including a 300,000-square-foot building by US Cold Storage and a 40,000-square-foot building in the Lebanon Industrial Center.

Other significant developments currently underway include Cooper Tire’s 804,000-square-foot building in Franklin Tech Park, which is located in the South submarket. When it is complete in 2011, the facility will replace the company’s current warehouse in Dayton, Ohio. Several major projects are coming out of the ground in the Northeast submarket, including Monarch Beverage’s 475,000-square-foot facility in Lawrence, Indiana; SMC Corporation of America’s 625,000-square-foot building within the Noblesville Corporate Campus; and Verus Partners’ 90,000-square-foot project in the Saxony corporate campus in Fishers, Indiana.

While the pace of speculative construction has slowed considerably, several owners and developers remain active in Indianapolis. Across the market, 4 million square feet of new space is underway, with another 15 million square feet proposed. Moving forward, early numbers for the first quarter point to approximately 1.1 million square feet of positive absorption and no significant changes in the area’s industrial vacancy rate. Lease rates could inch up slightly as owners look to recoup the impact of new tax assessments in 2009. As for construction, developers will be very selective and look for joint venture projects with REITs. The slowdown in speculative construction will continue into 2010.

— A principal and senior vice president in Colliers Turley Martin Tucker’s regional office in Indianapolis, Luke J. Wessel, SIOR, specializes in industrial sales and leasing throughout the greater Indianapolis metropolitan area.

Indianapolis Multifamily Market

The struggles in the capital markets that began to take hold during the second half of 2008 have put the brakes on much of the investment sales activity across all asset classes, but multifamily sales in Indianapolis have weathered the financial storm better than any other sector.

Investment sales of multifamily housing in Indianapolis fared reasonably well when compared to other major Midwest cities. Last year, 19 major properties were sold in the Indianapolis area for just less than $200 million and at an average cap rate of 7.98 percent, according to Real Capital Analytics and Colliers Turley Martin Tucker. While the average U.S. cap rate for multifamily sales stood at 6.2 percent during the first three quarters of 2008, Indianapolis posted an average cap rate of 7.4 percent.

The 12-month average price per unit for higher quality assets in Indianapolis is $61,022, compared to $100,792 for similar sales throughout the United States. Sales of properties categorized as Class B to non-performing assets have pushed the average unit price down and cap rates up into the 8.5-to-10 percent range. Multifamily properties that needed a total repositioning were trading in the 10-to-12 percent range based on pro-forma.

In 2007, two major multifamily portfolios traded in Indianapolis, which was a big factor in the approximately $367 million in multifamily investment sales in 2007. Last year, one such transaction took place: In September, a private investor acquired a five-property, 1,885-unit portfolio for $80.4 million from AIMCO.

The top two transactions last year were the sales of Reflections, a 582-unit rental community situated in the city’s northwest side, for $31 million, and the 616-unit Village of Bent Tree near Zionsville, Indiana, which was sold as part of AIMCO’s portfolio disposition for $23.4 million.

Unlike other property types, investor interest in multifamily properties did not wane during the second half of the year. The major difference in the nature of the transaction mix was in the availability of financing. Highly leveraged institutional deals are a thing of the past; the current search is for distressed properties, assumable loans and seller financing.

Additionally, cash is king for buyers looking for bargains among distressed properties that are facing cash-flow problems, the inability of the current owners to refinance and lingering deferred maintenance issues.

In the foreseeable future, lenders that foreclose on such properties will prefer to sell at a discount rather than finance such acquisitions with an uncertain future.

A large number of properties were on the market as the new year started, and four Central Indiana apartment complexes changed hands in January: two Hampton Court buildings (92 units each); Westlake (1,381 units) in Indianapolis; and Loper Commons (146 units) in Shelbyville.

The fundamentals of the Indianapolis multifamily market remain stable. Occupancy levels increased by one point last year to approximately 91 percent, as home foreclosures continued to mount, increasing the pool of high-end renters. Average rental rates are at a healthy $657 per month in the metropolitan area, and there is very little new construction coming online.

The big question remains: When will the capital and credit markets return to normalcy? Once financing options return to a more typical pattern, we expect the Indianapolis multifamily investment environment to take off and to regain pricing stabilization.

— Scott Pollom is a principal and senior vice president in Colliers Turley Martin Tucker’s regional office in Indianapolis. He specializes in investment sales of income-producing properties and is a member of the Colliers Multi-Family Advisory Group team.

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