HEARTLAND SNAPSHOT, MAY 2006

Indianapolis Retail Market

While population in most of Indiana has stabilized, Indianapolis continues to grow, making it one of the brightest stars in the Indiana sky and a darling among retail developers.

Suburbs to the north and west of Indianapolis are driving the primary population and retail growth. To the north, the market leader is Hamilton County, the 18th fastest growing county in the country, and home to towns such as Carmel, Fishers and Noblesville. According to the Builders Association of Greater Indianapolis (BAGI), in 2005, Hamilton County pulled 3,608 new home permits and has a projected demand for 17,000 new homes during the next 5 years.

Hendricks County to the west is another growth submarket, with towns such as Plainfield and Avon. In this area, BAGI reports 1,934 new home permits pulled in 2005 — a 6 percent increase over 2004 — and a projected demand for 9,000 new homes during the next 5 years. While home prices in Hamilton and Hendricks counties may range higher than the metro average, they build on Indianapolis’ median home price of $125,000, which is the most affordable in the United States, according to a third quarter 2005 report by the National Association of Home Builders/Wells Fargo Housing Opportunity Index.

As a result of these factors, retail is thriving in several northern and western Indianapolis hot spots. In these markets, 616,230 square feet of new construction is projected for delivery in 2006 and more than 1 million square feet is projected for delivery in 2007. Among this activity, strip centers and lifestyle centers seem to be the retail development types of choice.

In the entire metro area, more than 1.1 million square feet of new retail space is underway in the second quarter alone, compared to approximately 1.5 million in all of 2004 and 1.2 million in all of 2005.

One of the largest retail developers in the industry, Indianapolis-based Simon Property Group Inc., is also one of Indianapolis’ leading local retail developers. In 2004, Simon, with joint venture partner Indianapolis-based Lauth Property Group, introduced lifestyle centers to the market with the opening of Clay Terrace, a property featuring 510,000 square feet of retail with 70 retailers and 75,000 square feet of office space. The project is located at the intersection of U.S. 31 and 146th Street in Carmel. Simon’s latest project, in a joint venture with Gershman Brown & Associates, is Hamilton Town Center, a recently announced open-air retail project that will bring 950,000 square feet to the Exit 10 corridor of Interstate 69 and Route 238.

In the same submarket, another active retail developer, Toledo, Ohio-based Republic Development, is building Saxony, a 700-acre mixed-use community with a significant retail component. The property is located along the I-69 and Olio Road corridors in Fishers, a community that has expanded by five times in the last 12 years. In the next 5 years, it is estimated that as many as 6,000 additional new homes will be built in Saxony’s immediately neighboring communities.

In late 2005, Indianapolis-based Premier Property opened the first phase of Metropolis, an 850,000-square-foot open-air lifestyle center in Plainfield that includes a 95,000-square-foot prototype JC Penney, an 18-screen Rave Motion Pictures theatre, and a 66,000-square-foot, two-level Dick’s Clothing and Sporting Goods.

One of the area’s largest developments in the pipeline may be Anson, a 1,700-acre master-planned project west of Indianapolis along I-65. Virtually the size of a small town, Anson will include everything from single- and multi-family residential to more than 500 acres of industrial development. The heart of the property will include office space and a significant retail component. The developer is Duke Realty Corporation.

As all of these well-respected developers build high-quality retail product, they are attracting upscale tenants as never before in Indianapolis. The proof of this evolution is no more apparent than on the north side of the metro market.

In December 2005, Crate & Barrel opened at The Fashion Mall at Keystone Crossing, a Simon property located at 86th Street and Keystone Avenue. The popular national retailer joins Saks Fifth Avenue, which arrived at the mall a little more than a year ago, and the promise of Tiffany & Co., which has announced it will join the mall as well. Other recently arrived tenants include Williams-Sonoma Home, Restoration Hardware, and restaurants such as Maggiano’s Little Italy, PF Chang’s China Bistro and The Cheesecake Factory.

Upscale grocer The Fresh Market recently opened a store in Kite Realty Group’s Cool Creek Commons in Carmel. Another upscale grocer, Wild Oats, along with Orvis, Sur La Table and White House | Black Market have opened stores at Clay Terrace in Carmel.

In all of Indianapolis, the vacancy rate is at an attractive 11 percent but can dip as low as 3.6 percent in the more in-demand north and west submarkets. Average retail rents sit in the neighborhood of $12.78 per square foot market-wide, with a range from $2.65 to $40.80 per square foot. Space in more popular areas will rent closer to $20.00 per-square foot and have a range from $7.50 to $40.80 per square foot. With average cap rates in the mid-7 percent and an average price through the last 12 months of $121 per-square-foot, according to Real Capital Analytics, Indianapolis also remains attractive to investors looking to affordably trade out of low-cap markets.

Those in the industry may want to keep an eye on some of Indianapolis’ most promising retail development corridors: Michigan Road from 86th to 116th streets — Duke is building a major center in the area, JC Penney and Home Depot recently entered the market, and Wal-Mart is working to develop a Supercenter — and the Exit 10 corridor of I-69 in Noblesville. As rising stars go, these may be the brightest ones in this city’s retail future.

— Bob Horn is a senior investment advisor with Sperry Van Ness’ Zionsville, Indiana, office.

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