CITY HIGHLIGHT, MARCH 2011

INDIANAPOLIS CITY HIGHLIGHTS
Steve LaMotte Jr., Scot Courtney, Bart Jackson, Jon Owens, Fritz Kauffman

Indianapolis Multifamily Market

With a convincing and somewhat unexpected improvement in multifamily fundamentals in 2010 in the Indianapolis market, there is much optimism regarding the city’s outlook for multifamily while at the same time there is mounting confidence that the greater economy is on the verge of post-recessionary expansion. The firming of multifamily demonstrates that Indianapolis, like many other markets, can enter recovery on household creation alone.

Occupancy trends among Indianapolis’ top 50 communities, located throughout the city, posted notable gains in 2010. The group posted a record fourth quarter 2010 occupancy of 94.4 percent; maintaining the strong gains posted throughout 2010 and positioning the group for a strong 2011. Weighted down by the snow and bitterly cold winter, the to-be-expected seasonal dip was observed; however, occupancy dipped a mere 1.0 percent from the third quarter high of 95.4 percent, which was up from dramatically from 91.4 percent in fourth  quarter 2010.

Rent levels among this subset were also record-setting among historical Indianapolis fourth quarter performances. Fourth quarter rents, despite declining from an all-time high of $0.89 per square foot ($887 per unit) in the third quarter, shed only $9 per unit. By third quarter 2010, Indianapolis rents were up 1.7 percent year-to-date. The two-bed/two-bath unit type led rent growth with a 0.4 percent gain from third quarter 2010 to fourth quarter 2010. Despite a quarterly decline of 3.5 percent for the one-bed/one-bath unit style, the popular unit finished the year with a gain of 1.1 percent over the prior year. 

Additional optimism lies in the top 50 subset’s declining concession activity. Among the 50 communities, only 18 reported offering a concession in fourth quarter 2010. This marks the lowest historical fourth quarter concession-community count and three consecutive quarters with less than 20 communities offering a concession.

Amidst a national perception of pent up demand for new multifamily product, several Indianapolis developers are answering the call. The exclusively local group of developers are delivering a mix of conventional and affordable (LIHTC), suburban and urban, in predominately the north, south and downtown submarkets. A flurry of urban new construction is fueled by an historically tight submarket, lack of new product during the past 15 years, increasing demand to be part of the dramatic expansion of the city’s core and a growing Indiana University-Purdue University at Indianapolis. Developers currently under construction in the Indianapolis market include Buckingham, Flaherty & Collins, Gene B. Glick Company, Herman & Kittle, J.C. Hart, Keystone Construction, Pedcor and Trinitas Ventures.

2010 marked the year in which many investors returned to a core acquisition model, which was reflected in nearly 40 offers received on the first to core offerings of this new cycle. Transaction volume was $157 million in the Indianapolis MSA in 2010, down from $464 million at the peak of activity in 2007.

Newcomers prevailed in 2010 in several notable transactions. St. Louis-based Thiemann Real Estate made its first investment in Indianapolis with its purchase of the 444-unit Scandia from a large national REIT. Chicago-based Oak Residential made its first investment in Indianapolis with its purchase of the 146-unit Grande Reserve at Geist, and Chicago-based LT Group entered the market with its purchase of the 167-unit Cityview, one of few Indianapolis high-rise properties. Also, locally based Gene B. Glick Co. and Milhaus Ventures LLC initiated their joint venture structure with its purchase of the 105-unit mixed-use Maxwell. The latter two urban transactions were among the few quality REO sales of the year.

The Indianapolis market has certainly attracted a diverse pool of bidders with acquisitions from local, regional and bi-coastal sources, investing both private and institutional capital. The stability, diversity and growth in certain sectors (namely bio/life sciences, logistics and convention/sports/CBD development) has afforded Indianapolis offerings favorable investor attention and puts Indianapolis on solid footing as the economy moves out of recession. Headline victories such as Indianapolis’ hosting of the 2012 Super Bowl and regular hosting of NCAA tournament events combined with responsible government, fiscal responsibility, stability and diversity are confirmation of Indianapolis’ rise and provide the foundation a bright future for this growing Midwestern market.

— Steve LaMotte Jr. is a senior vice president in the Indianapolis-Cincinnati Multi-Housing Group and a member of the CBRE Major Accounts Group at CB Richard Ellis’ Indianapolis office.

Indianapolis Retail Market

Moving forward in 2011, the greater Indianapolis area will see several major retail and mixed use developments take shape, with others looking to gain traction in leasing and financing efforts.

The Keystone/Clearwater market on the city’s northside has seen a flurry of recent redevelopment activity and the entry of several significant retailers to the Indianapolis market. Darden is scheduled to open its first Seasons 52 location near Simon’s Fashion Mall in Indiana in March, making it Season 52’s sixteenth unit to open nationwide. Immediately to the east on 86th Street, PK Partners recently unveiled redevelopment plans for the mixed-use project called Five River Crossing, which will include 38,000 square feet of retail on the first and second levels, with Class A office space on levels three and four. Further to the east, Kite Realty is scheduled to complete its redevelopment of River’s Edge Shopping Center in October. The 152,000-square-foot project is highlighted by the entry of Nordstrom Rack, Container Store and Jason’s Deli to the market. The project is currently 99 percent pre-leased. Other retailers looking to locate in the Keystone/Clearwater trade area include Christmas Tree Shops and REI.  

Further north in the Carmel submarket, Pedcor Companies will be delivering retail space this summer in the first phase of its Carmel City Center mixed-use project in downtown Carmel. Anticipated retailers will include an array of local favorites that will hope to play off the $126 million, 1,600-seat Palladium performance hall, which recently opened next door. The first phase will contain 62,000 square feet of retail space, while the overall project will include 230,000 square feet of retail, 170,000 square feet of office space, a 160-room boutique hotel, and 300 apartments, lofts and condos.

Buckingham Companies continues to transform the downtown landscape, breaking ground on The Avenue, located at 10th Street and Indiana Avenue near the Indiana University-Purdue University Indianapolis campus and Wishard Hospital. The project, which is scheduled to deliver space in the fourth quarter of 2011, will have 20,000 square feet of retail space on the ground level with four stories of apartments above. Buckingham also anticipates approval on the sale of municipal bonds in the amount of $86 million to help finance their North of South project at Delaware and South streets, adjacent to pharmaceutical giant Eli Lilly’s corporate headquarters. The mixed-use project’s total cost will be approximately $155 million and will include retail and office space, a hotel and a YMCA.

While positive, this development and expansion activity belies a continued softness in much of the local retail market. There is still potential fallout looming as some landlords remain hampered by overleveraged assets and continue efforts to restructure existing debt loads. Recent increases in the real estate tax burden carried by retail properties are also acting to stifle the likelihood of any real rent growth in the near term.

— Scot Courtney is president and Bart Jackson is a senior advisor with Lee & Associates in Indianapolis.

Indianapolis Office Market

Current trends in the Indianapolis office market show vacancy down and trending lower with no new development coming on line for the foreseeable future. Consequently, the existing inventory of space will continue to be leased, driving down the vacancy rate further in 2011. Leasing activity and absorption are trending up, as modest job growth drives occupancy of the existing inventory of space. The tenant sectors primarily driving occupancy growth are education, information technology, healthcare, life sciences, government and professional services.

The Indianapolis office market experienced positive absorption of 80,000 square feet in 2010 compared with negative 418,000 square feet of net absorption in 2009. The overall vacancy rate was 20.6 percent at year-end 2010, with the vacancy rate at 16.9 percent in the central business district (CBD) and 22.9 percent in the suburban market. Construction remained unchanged in the market with no new multi-tenant office buildings larger than 20,000 square feet built in 2010, and no new speculative construction planned.

Notable lease transactions occurred across the market in 2010. The CBD saw the federal government lease 75,000 square feet in M & I Plaza for the Department of Defense; Harrison College leased 34,000 square feet at 500 North Meridian Street; PriceWaterhouseCoopers leased 22,000 square feet at PNC Center, Indiana University Health took 16,500 square feet at 714 North Senate Avenue; BackHaul Direct inked a deal for 16,500 square feet at Allen Plaza, and USA Football leased 12,300 square feet at Huntington Plaza.

Overall, the CBD outperformed the suburban market in 2010 with a net gain of 81,000 square feet of positive absorption for the year, compared with a negative 1,000 square feet of net absorption in the suburbs. Note that in the fourth quarter of 2010 alone, the overall market experienced 230,000 square feet of positive absorption, making for two consecutive quarters of positive absorption, but we have a long way to go to compensate for the seven-quarter trend of negative absorption.

Some of the significant lease transactions in the suburban market in 2010 includes Strayer University leasing 20,000 square feet in River Road II at Keystone at the Crossing; Arcadia Resources taking 19,000 square feet in the Precedent Office Park; Hoffmaster Group leasing 18,000 square feet at Heritage Park III; Ducharmen, McMillen & Associates leasing 17,500 square feet in Lake Pointe Center III; Community Hospitals of Indiana inking a deal for 17,000 square feet in Castleton Park; and Members United Federal Credit Union leasing 17,000 square feet at Lake Pointe Center III.

In addition, Ascension Health signed a lease for approximately 92,000 square feet at Fortune Park XI, located at 4040 Vincennes Circle and will occupy almost four floors of space in that building in the first quarter of 2011. These transactions completed in 2010 and pending transactions early in 2011 provide reason to believe that the multi-tenant office market is beginning to rebound.

The CBD appeared to be the most active submarket in 2010 by virtue of its vacancy rate dropping to 15.4 percent and experiencing positive absorption of 81,000 square feet for the year. In the suburbs, only four of the seven submarkets had decreased vacancy in 2010. The Northwest submarket vacancy rate declined 4.1 percent; the North/Carmel submarket vacancy rate diminished by 1.7 percent. The Fishers submarket declined by 1.4 percent, and the Northeast submarket vacancy rate fell by 0.8 percent.

Active players in the Indianapolis office market include a mix of tenants, owners, investors and developers.

On the tenant side, the most active players include government, healthcare, education, information technology, life sciences and professional service firms. We anticipate continued growth in these sectors in the greater Indianapolis metropolitan area for 2011. One indicator that bodes well for future job growth in the state is found in a report from the Indiana Economic Development Corporation, which identified 200 companies that are projected to create more than 22,353 new jobs in Indiana.

Owners continue to do what is necessary to lease new space and hold onto existing tenants. In a market with more than 20 percent vacancy, some owners find themselves offering significant concessions to lure new tenants to their buildings and often have to compete to retain existing tenants who have many options in the market.

Investors are generally still on the sidelines as it relates to office buildings, given the high vacancy rates and general inability to acquire debt from banks and lenders to buy product. Other more desirable investment sectors like multi-family projects and well-located and leased retail projects are drawing investors compared to office.

Developers remain on the sidelines as demand for office has been relatively weak the last two years, and there is enough vacancy in the market to accommodate several years of average absorption.

Overall vacancy in the metro market stands at 20.6 percent as of the end of 2010 with 6.5 million square feet of vacant space. The CBD had 2 million square feet of vacancy and a 16.9 percent vacancy rate. The suburban market had 4.5 million square feet of vacancy and a 22.9 percent vacancy rate. Class A space experienced the largest vacancy decrease from the previous year with a drop of about 1 to 19.5 percent overall. Rental rates in the CBD range from $26 per square foot for Class A space down to $14 per square foot for Class B space. In the suburbs, high-end Class A space goes for between $21 and $23.50 per square foot, and Class B space runs $12 to $17 per square foot, depending on the submarket and individual buildings.

 The CBD, in my opinion, is positioned well to benefit from the anticipated growth of the Indiana University-Purdue University Indianapolis campus, Indiana University Health, and state and federal government requirements that will generate additional job growth in the downtown area. Traditional CBD office space users, like law firms, financial services, and business services, will expand as the general economy recovers and serve to absorb much of the existing inventory of vacant office space. No new office construction will take place in the foreseeable future, and the leverage enjoyed by tenants today will eventually shift to building owners as vacancy decreases and large blocks of space diminish. At the moment, we are monitoring talks between Lilly, the City and Rolls Royce, which is contemplating a consolidation of its employee base of around 2,500 people to the former Faris office campus on the south side of downtown. In addition, the City’s Metropolitan Development Commission is looking at plans for North of South, potentially a $155 million mixed-use project that would serve to connect the south end of downtown with the Lilly campus, Lucas Oil Stadium and the Faris campus. With the prospect of Indy hosting the 2012 Super Bowl and the exposure the city will enjoy from that event, who knows what new opportunities will arise for the CBD?

— Jon R. Owens, SIOR, is principal/senior vice president office services at Cassidy Turley’s Indianapolis office.

Indianapolis Industrial Market

Last year saw the beginning of positive activity in Indianapolis’ industrial market with increased absorption. Notable leases larger than 50,000 square feet increased significantly. The market experienced 4.7 million square feet of new leases and 7.3 million square feet in lease renewals last year.

Absorption or net new growth was 3.1 million square feet, up 37 percent over 2009’s numbers. The number of leasing transactions was greatest in the medium distribution category. However, because of the size of transactions, the greatest amount of net new absorption was in the bulk distribution category. Addtionally, the Indianapolis market experienced very little new development for speculative construction in 2010.

The most significant transaction in 2010 was the completion of the Johnson & Johnson distribution center in Monrovia, at State Road 39 and Interstate 70, west of Plainfield. This 1.1 million-square-foot building is the first building to be constructed in the expansion of the southwest submarket.

Westpoint Business Park and 70 West Commerce Park are both new developments at this interchange on I-70, offering sites as large as 17 million square feet of industrial build-to-suit and speculative development space over the next decade.

Other significant transactions in 2010 included the sale of more than 500,000 square feet at All Points Midwest to Brightpoint.

Again, the majority of the square feet leased has been in the bulk distribution type of product in the southwest submarket. The majority of the transactions in 2010 were in the medium distribution type of space, and this activity has been spread across the entire Central Indiana market.

The most active players in the Indianapolis market include brokers, including Cassidy Turley, CB Richard Ellis and Summit Realty; developers and tenants. Although there has not been any speculative development in the last year due to the economy, most local developers have been aggressive in filling the space that they have.

The largest transactions involved Nicepak Products Inc., which consolidated two or three locations into one 813,000-square-foot location. Other notable tenants include Caterpillar Inc., Genco, Sara Lee, Life Sciences Logistics, Stanley Black and Decker, Southern Wine & Spirits, Ener 1, STF Worldwide and Hat World.

Indianapolis’ industrial market’s current vacancy rate stands at 6.7 percent, which is well below the market’s 7-year average of 7.3 percent. We believe this is the lowest vacancy rate in the Midwest. Vacancy did however vary by submarket from 3.8 percent in the southeast to 11 percent in the south. Vacancy also varied by product type from 3.3 percent for manufacturing space to 14.3 percent for flex space. Rental rates have remained flat and competitive throughout the region. However, rents did vary by submarket and product type, based on the differences in vacancy rates mentioned above. Some landlords with larger vacancies in their portfolios have been pressed to keep rental rates low in order to attract and retain tenants. On average, rents have remained flat to slightly down, and incentives remain steady at amounts similar to the last 2 to 3 years.

The expansion of the southwest submarket into the Monrovia area offers a significant amount of new land available for build-to-suit and speculative development. In terms of product type, keep an eye on new construction or speculative construction in the medium distribution type of product. As demand increases, the market’s short supply of product in both medium distribution and bulk distribution may dictate that we will see the return of speculative development and increased build-to-suit activity in our market in 2011 and beyond.

— Fritz Kauffman, SIOR, is principal/vice president industrial services at Cassidy Turley’s Indianapolis office.

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