Indianapolis, like other cities in the Midwest, has experienced its fair share of troubles during 2002. However, the retail market is strong, and the office and industrial markets both look bright for 2003. While the multifamily sector is still weak due to increased home purchases, the rental market is strong in the city’s suburbs.

Office

Major corporate consolidations and mergers have led to some difficult times for office landlords in Indianapolis. For example, recent mergers have included Sallie Mae’s purchase and downsizing of USA Group; Cardinal Healthcare’s purchase of Bindley Western, which put approximately 55,000 square feet of space on the sublease market; and Valspar’s purchase of Lilly Industries leading to the closure of its 65,000-square-foot Carmel, Indiana, headquarters.

The Indianapolis office market has also taken blows from Acterna’s 140,000 square feet of surplus space that has come online for sublease; Bank One’s continued downsizing in Fishers and the closing of its downtown operations center; and Conseco’s downsizing, which appears to have stabilized. However, many of these firms have been successful in moving much of their surplus space.

For every high-profile merger that has led to downsizing, there have been 10 lower profile space reductions by smaller firms that have contributed to higher vacancies and declining effective rents. Indianapolis has been staggered, but the office market keeps fighting back — despite a large amount of sublease space on the market, which totals more than 1.2 million square feet in the suburbs and more than 300,000 square feet downtown.

Meridian Real Estate (MRE) recently represented ALLETE Automotive Services (140,000 square feet) and ITT Educational Services (43,000 square feet) in build-to-suit projects at Hamilton Crossing in the North Meridian corridor. These projects will add 55,000 rentable square feet of available space to the already soft market. Duke Realty is building one of the few new speculative projects in the suburbs, the 200,000-square-foot, five-story Parkwood Eight. MRE represented Pearson Education in its upcoming 82,000-square-foot relocation to Parkwood Eight. However, the relocation will result in more than 100,000 square feet of vacant space.

Medical office activity has been a major impetus in the suburbs including The Care Group of Indiana’s new 190,000-square-foot facility in Carmel; and the Indiana Heart Center’s 210,000-square-foot facility on the northeast side of Indianapolis. This trend is expected to continue as Clarian Health Partners is proposing to build a 375,000-square-foot hospital on North Meridian Street in Carmel. The facility is expected to open in July 2005. Riverview Hospital is also opening its Women’s Pavilion late this summer, and St. Vincent’s 106,000-square-foot, three-story office building opened in March.

Downtown, there has been no new multi-tenant office building construction for the last 5 years. However, the previously mentioned corporate downsizings by Bank One and USA Group added more than 700,000 square feet of vacancies to the downtown market during the past several years. Success stories include One Indiana Square, leasing more than 150,000 square feet and 30 South Meridian leasing more than 200,000 square feet in the past 12 months. Because these owners were able to buy at extremely favorable prices, they have been able to be competitive in the marketplace, thus resulting in a strong lease up.

Downtown vacancies are falling slightly as these spaces get absorbed. For example, the vacancy rate dropped from 17.78 percent in the first quarter of 2002 to 16.3 percent in the fourth quarter of 2002. Additionally, suburban vacancies dropped from 19.15 percent in the first quarter of 2002 to 18.9 percent in the fourth quarter of 2002.

Effective rental rates have fallen in the past 6 months, but quoted rental rates have not. Concessions are up by 10 to 20 percent of the gross lease value. Free rent is now a staple in the market in virtually every transaction.

Indianapolis will continue to make a slow comeback, which will not be easy considering the slow national economy, an especially hard hit local economy and the situation in Iraq. However, Indianapolis has proven itself to be resilient in previous office market recessions.

Concessions will be heavy during the next 12 months as landlord’s fight for too few tenants. However, vacancies should fall slowly during the next 18 to 36 months and stabilize at 12 to 15 percent. As the market approaches equilibrium during this time period, concessions should also fall.

— Samuel Smith II is CEO of Indianapolis-based Insignia Meridian.

Industrial

Like most markets around the country in 2002, the Indianapolis industrial real estate market had a modest year when considering overall leasing activity and general market conditions. While more than 2.5 million square feet of bulk distribution space was built in 2002, less than 500,000 square feet of Type I and Type II space was developed during the same time. The majority of leasing in the Type I and Type II space occurred in second- and third-generation buildings due to their lower costs. Opus, The Pizzuti Companies, Duke Realty Corporation, Lauth Property Group, Precedent and Browning/Keystone all have built speculative buildings totaling 400,000 square feet or more in the last 12 months, with the majority of them being located on the west side of Indianapolis. These state-of-the-art facilities are designed for large regional and national distribution centers, and they offer gross rental rates competitive with any market in the Midwest. This development continues to help make the Indianapolis market a recognized distribution hub.

The Plainfield submarket, which is dominated by bulk distribution product, has seen the most activity in the recent past, and it will continue to do so. One of the more critical issues facing this market will be the effects of property tax abatement. While some of the older buildings (built in the mid-1990s) are burning off their tax abatement, new construction is taking place to capitalize on tenants wishing to jump ship to take advantage of a new 10-year tax abatement in a neighboring building. It will be cost prohibitive for many of the tenants to relocate to a new building due to racking/relocation costs, but other tenants will undoubtedly make the move to save the money.

In accordance with national trends, investment activity in the Indianapolis market has been characterized by a larger amount of capital-seeking investments than the supply of available product. This trend has forced the cap rates below 9 percent for credit tenants.

While the past 12 to 18 months have provided landlords with lower rental rates, short-term leases and higher vacancy levels, the outlook of local real estate professionals seems to be fairly optimistic for 2003. Most predict a slow recovery year for the real estate market, but 1.9 million square feet of large bulk deals have already been signed, and another 2.5 million square feet of deals were floating around the market in the first quarter of 2003. Rents should remain flat for the rest of the year and vacancy rates will slowly fall as the economy strengthens. As for construction, less speculative development will take place in 2003 than in previous years. However, a strong first half of the year will lead to ground being broken in the third and fourth quarters.

— Brian Seitz is director of the industrial advisory team for Indianapolis-based Insignia Meridian.

Retail

Despite the economic downturn, retail development in Indianapolis continues at a steady pace. Vacancy rates currently range between 8 percent and 9 percent, and rental rates for small shops range between $15 per square foot and $23 per square foot.

The hot trend in retail development is open-air, lifestyle centers, which are offering expansion opportunities for many of the traditional mall tenants. The majority of this development is occurring outside Interstate 465 in the suburban areas.

Development activity in the State Road 37 corridor in Noblesville continues to be brisk. Lowe’s Home Improvement Warehouse and The Home Depot have both opened stores within this market. Stoney Creek Marketplace, developed by Duke Realty, is currently under construction. When completed, it will have a GLA of approximately 400,000 square feet, anchored by Meijer, Linens ‘n Things, T.J. Maxx, Barnes & Noble, and Pier 1 Imports.

The area near U.S. 36 in Avon has seen significant retail development activity in the past couple of years, and it continues to be a hot market. The majority of big box retailers have already opened stores in Avon, such as Target, Meijer, Lowe’s Home Improvement Warehouse, Barnes & Noble, T.J. Maxx, Best Buy, Michaels and Office Depot. Wal-Mart currently has a site under contract to build a new SuperCenter store. The construction start date has not yet been announced. In the same corridor, there are additional large parcels of land currently under contract to various developers. These sites will accommodate continued big box development within this corridor.

Greenwood continues to see significant development activity; most recently in the State Road 135 corridor where Target, The Home Depot and Menards have all opened new stores. On U.S. 31, Galyan’s Trading Company is in the process of relocating and constructing a prototypical store directly across from Greenwood Park Mall.

The suburban north side of the Westfield market is seeing significant development activity. Lauth Property Group is currently marketing Clay Terrace, a 500,000-square-foot lifestyle center, with construction set to begin this summer. Kite Development is also actively marketing a new project, Cool Creek Commons, which will be approximately 200,000 square feet. Together, these two projects total approximately 700,000 square feet of additional retail space that will open in late 2004.

Indianapolis also has new retailers such as Saks Fifth Avenue, Dick’s Clothing and Sporting Goods, and The Home Depot Expo set to enter the market. In addition, restaurants like Eddie Merlots Steakhouse, Bonefish Grill, Bahama Breeze, Smoky Bones BBQ and Sports Bar, and Baja Fresh have made their way into Indianapolis.

— Scott Gray is vice president with Indianapolis-based The Linder Company.

Multifamily

The multifamily market in Indianapolis has been affected by similar factors as those affecting other markets across the country. For example, rental demand has lessened in the Indianapolis market because the entry-level housing “affordability index” is great, and builders are making financing easy and attractive for the customer to purchase a home rather than rent. Also, the normal cycle of building and overbuilding has had an effect on the market, as we seem to be in the overbuilding stage at this time.

Nevertheless, the rental market is still strong in the city’s suburbs. In these areas, the lower end apartments seem to be filling up quicker than the upscale apartments. However, the upscale apartments seem to appeal to young adults who work and play in the rapidly growing downtown area.

According to REIS Services, Indianapolis currently ranks 44th in the nation’s top 50 metropolitan areas in terms of rent growth during the fourth quarter of 2002, with a rent growth of 0.2 percent. Indianapolis, hovering at 9.3 percent, also ranked 43rd in terms of vacancy rates.

During the past 35 to 40 years, the northern area of Indianapolis has seen rapid and steady growth of both single-family and multifamily housing. As a result, growth has spilled over from Marion County into surrounding counties. For example, communities such as Carmel, Fishers and Westfield have sprung up in Hamilton County. In the southernmost portion of Boone County, single-family homes have been a booming building trend with multifamily building taking place mostly during the past 7 to 10 years.

The southern side of the city has experienced similar growth during the past 20 to 25 years, with growth spilling out from Marion County into Johnson County — especially in the Greenwood area, which has an exploding population. The western side of the metropolitan area has also expanded into the bedroom communities of Avon and Brownsburg in Hendricks County. Additionally, the Plainfield area is now showing rapid growth due to its close proximity to the Indianapolis International Airport and a new industrial park in the area.

AMLI has developed several apartment complexes, mostly on the north side, in the Indianapolis metropolitan area, and The Gene B. Glick Company owns and operates several apartment complexes in the area. On the south side of the city, the major multifamily developers are Crossman Communities, Zion Properties, and Mainstay.

— Tom Ailes is a sales representative with Coldwell Banker Alliance, Commercial Division in Indianapolis.

The Heart of the Midwest Beats On Indianapolis Downtown, Inc. (IDI), a not-for-profit organization focused on developing, managing and marketing downtown Indianapolis, is celebrating its 10th anniversary this year. IDI was first created in January of 1993 in an effort to strengthen the city’s downtown area. Since then, the organization has been involved with every element of downtown’s revitalization, including 47 major projects, says Tamara Zahn, president of IDI. The organization works with developers to ensure the smooth integration of a project into downtown by providing information on zoning requirements, building codes and other aspects of the development process. IDI also works with the city and county governments, and other not-for-profit organizations. “We work closely with the Indianapolis Convention and Visitors Association, and Indy Partnership, which is a separately formed, not-for-profit economic development group,” Zahn says. One of the first projects IDI ever got involved with — the development of Circle Centre — was also its largest. The $300 million, mixed-use entertainment center had lingered on the drawing board for years, and was in danger of staying there since a number of factors hindered its development. The country was emerging from a national recession at the time, and the consolidation of the department store industry lead to several planned anchor stores closing their downtown locations, Zahn explains. “Furthermore, a lot of the financial institutions were not financing such large projects,” she says. However, the city, after undergoing an administration change, reconsidered the project and determined that it was an essential element in bringing traditional shopping back to downtown Indianapolis. IDI teamed with Simon Property Group, the city of Indianapolis and an equity partnership of 19 corporations, to put together the financing for the project. Simon then secured Nordstrom and Parisian as anchors to Circle Centre. The 800,000-square-foot project, which celebrated its grand opening in September of 1995, has been successful, according to Zahn. “Circle Centre accounts for about 12 million visits downtown each year,” she says. “It has been important not only for our central Indiana residents, but also in terms of the conventions and tourists that are drawn to downtown Indianapolis.” Circle Centre has also acted as a catalyst for other downtown projects. “It was key in creating momentum for downtown revitalization,” Zahn explains. “There has been about $3 billion invested in downtown in the last decade, so it was a turning point that created some synergy.” For example, several new hotels have been developed in the area. “We’ve also seen new residential growth and some smaller amounts of new office investment,” Zahn says. Within the past several years, IDI also established a wayfinding program for easier pedestrian navigation throughout downtown. “We found that people liked being downtown, but did not know how to find their way to all of our attractions,” Zahn explains. “So, we created a sign system that divides downtown into four quadrants to help people find the various museums and destinations.” Despite these major projects, IDI’s work is nowhere near finished. The biggest challenge for the organization, according to Zahn, is continuing to build a competitive downtown. “We are no longer just competing with other cities in the Midwest or cities in the United States,” she says. “I think we are competing now with cities around the world.” To stay competitive, IDI is in the process of creating The Regional Center Plan 2020, which will form a vision for downtown Indianapolis to follow during the next 20 years. “It is a community-based plan to envision how we want downtown to be from the standpoint of a place to live, a place to work and a place to learn,” Zahn notes. IDI is also busy with The Cultural Tourism Initiative, which was developed to enhance five cultural districts in Indianapolis. Zahn attributes the success of downtown Indianapolis to the many partnerships that exist between the public and private sectors. “Our goal is to create a strong heart for central Indiana.” — Misty Reagin

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