HEARTLAND SNAPSHOT, MAY 2005

Indianapolis Office Market

The “S” word is finally returning to Indianapolis’ office market, according to Samuel Smith II, CEO of Indianapolis-based RESOURCE Commercial Real Estate. “Duke Realty is building Parkwood Nine, a 204,000-square-foot Class A office building in the North Meridian/Carmel submarket, on spec for a January 2006 delivery date,” he says. Duke has already secured American Family Insurance as an anchor tenant for 53,000 square feet.

Downtown office vacancies fell three full percentage points to 12.5 percent by year-end 2004 and should fall further in 2005, Smith says. Suburban office vacancies dipped slightly in 2004 to 18.5 percent. This trend has continued in the first quarter of 2005. “Carmel/North Meridian’s vacancies fell nearly 4 percentage points in 2004 as 260,000 square feet of office space was absorbed,” Smith says. “Carmel continues to experience further absorption activity in the first quarter of 2005.”

Medical office development is also hot now in nearly all quadrants of the Indianapolis MSA. Recent major medical projects currently under construction include Clarian’s 650,000-square-foot multi-building complex at 116th and Meridian (U.S. 31) and Lauth Property Group’s 90,000-square-foot medical office project at 122nd and Meridian (U.S. 31) in Carmel.

“The announcement last October that homegrown retail REIT Simon Property Group will build a 15-story, 250,000-square-foot world headquarters downtown was followed by the city of Indianapolis and Indianapolis Colts announcement of negotiations for plans for a new downtown stadium, along with an expansion of the convention center on the current site of the RCA Dome,” Smith says. “These planned public projects, though awaiting a funding plan, have stimulated additional hotel development to serve the stadium and convention center needs.” For example, Kite Development is building a new upscale 23-story, 243-room Conrad Hotel, which will have residential condominiums as well as retail.

Other downtown developments include the $42-million, 167,000-square-foot Indiana University Medical Information Sciences building at Canal Walk and 10th Street and the conversion of an existing 62,000-square-foot downtown building for its Emerging Technology Center, which are results of the state's commitment to a life sciences initiative, called BioCrossroads. “Other healthcare-related news is the merger/acquisition by Indianapolis-based Anthem of Wellpoint Health Networks, making downtown Indianapolis the home of the nation's largest health benefits provider,” he says.

“A big question downtown is who will fill up the vacant towers,” Smith says. “Several buildings still have or can put together large blocks of space, despite the drop in vacancies to 12.5 percent.” The Class A office vacancy rate downtown is 14.5 percent and 17.5 percent in the suburbs.

The North Meridian Street Corridor in Carmel and Interstate 69 Corridor continue to demonstrate vibrant growth. North Meridian/ Carmel is the most desirable suburban submarket due to its location and new construction. Saxony, a 700-acre residential, office and retail development by Toledo-based Republic Development Corp., will continue to spark growth in northeastern Hamilton County.

“Indianapolis is exploring a regional public transportation solution that could involve a light rail/monorail system and/or combination of bus service connecting the downtown to the suburbs, such as Carmel and Fishers, and possibly to the airport,” Smith says. “This could have a major future impact upon both suburban and downtown development.”

Overall, Indianapolis’ office market has picked up, according to Smith. Vacancies are falling, and rents and concessions have stabilized. Tenants who are in the market should lock in now, as rents will rise in the future. Landlords have experienced substantial increases in material costs and land costs, so new construction will be more costly. As interest rates rise, eventually CAP rates and investor returns will, too. “The worm is slowly turning and we may see a landlord’s market return within the next 24-36 months,” Smith says. “Tenants still have a window of opportunity, but that could begin to close soon.”

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