Q1 2021 Indianapolis Office Market Report
The ongoing COVID-19 pandemic is having a dramatic effect on the national office market in the short term. More than a year has passed since the first cases of the virus was discovered in the U.S., and many workplaces are still not operating at full capacity. With vaccines now being rolled out on a wide scale though, a steady return to the traditional office place is beginning to take place. Still, the surging mix of remote work and commuting to a physical office is leading decision-makers to reevaluate the traditional office footprint while also weighing the value that a face-to-face interaction can bring to a company’s culture and productivity. This hesitancy has led to a drop in the total of new leases signed to start the year, and negative net absorption exceeded 200,000 sf for the first time.
The downtown Indianapolis office market experienced a large quarterly jump in vacancy in 21Q1, moving from a direct vacancy rate of 16.5% to 17.6%. At the same time, average asking rents were basically flat, increasing by 0.9%. Salesforce, which occupies a significant portion of its namesake tower, announced in February that it would let most employees nationwide work remote indefinitely. The lingering effects of these type of decisions on the downtown Indianapolis office market by large occupiers are still too soon to predict. Nationwide, vacancy is not expected to plateau until mid 2022. Still, as the weather warms up and a sense of normal begins to creep back, the ability of downtown companies to draw workers should increase in 21Q2.
The first few months of 2021 were slow from a leasing perspective, but the highest concentration of activity took place in the north suburban markets. Healthcare related companies accounted for much of the activity, including iA , a pharmacy automation company that signed a 12,272 sf lease in Keystone at the Crossing. Asking rents in that building are still at $30.00 FSG, one of the highest in the market. Overall, asking rents in class A north suburban properties continued their climb to record high levels, albeit at a slowed down pace. Owners are investing in these assets to compete with new construction in the Carmel submarket, which has been mostly leased up. There are currently four owner/occupant construction projects underway for local headquarters locations, including First Internet Bank, Zotec Partners and SEP. These will likely create additional vacancy when their existing spaces go on the market.
Since the onset of the pandemic, the most common trend nationwide for office markets has been an increase in sublease space. The work from home dynamic led to a jump in unused office space, and in Indianapolis, sublease availability has more than doubled in the past year. In 1Q21, Salesforce put its 86,776 sf Gibson Building space in the CBD on the market, while STANLEY Security offered up a 52,000 sf portion of their location in Fishers. The asking rent gap between a sublease space and the building’s direct asking rent is typically around $4.00. With an average remaining lease term of 36 months, these spaces, which are often furnished, can be enticing to decision makers unsure of what the future holds for their workforce.