Economic threats posed by the Omicron variant of COVID-19 faded by quarter-end, leading to an increase in payrolls, mostly driven by leisure and hospitality. Still, there were global pressures on manufacturing and supply issues resulting from China’s zero COVID policy and an escalating war in Europe. Despite these issues, the industrial sector remains red hot. The growing demand for big-box users is boosting Indianapolis industrial market fundamentals. New leasing activity totaled 23.5 MSF in 2021 with another 4.7 MSF in 22Q1, when the market achieved 3.2 MSF in direct occupancy gains. The vacancy rate decreased to 3.67%, a new record low, and the new construction pipeline is larger than ever as developers continue to expand the boundaries of the traditional industrial footprint.
Indianapolis has nearly as much new product under construction as Chicago, a market five times its size. The 28.5 MSF currently underway is a 168% year over year increase, higher than the national average growth rate of 58.9%. Contributing to these elevated construction levels are the five speculative developments larger than 1.0 MSF in Whiteland, Mount Comfort and Monrovia. These areas account for more than half of all planned speculative projects in the market as boundaries of development continue to grow where land is still available. Nearly 35 MSF of new construction is scheduled for completion by the end of 2022, more than double the record amount completed in the Indianapolis industrial market in 2020. Tenant demand is high enough to drive new speculative supply.
New leases signed in speculative construction projects dominated 22Q1 activity. NFI Industries signed the largest user transaction and took occupancy in Mohr Capital’s 827K SF building in Whiteland, one of the fastest growing industrial big box areas in the South submarket. Most new modern bulk leases are in the 500K+ SF and sub 300K SF ranges, accounting for all those signed in 22Q1. In terms of other product types, traditional warehouse/distribution buildings are at near full occupancy at 98.9%. The lack of availability in these buildings is pushing users into new construction. This dynamic is causing asking rents to rise across the board increasing 12.9% year over year for all product types, not just new construction. Investment sales activity was also strong for non bulk assets in 22Q1, including the sale of Franklin Road Business Center, South Tech Park and the Firestone Building Products property
Light Industrial and Flex
Tenants are left with increasingly limited options in flex buildings, where vacancy reached another landmark low rate of 3.54%. In the Southwest submarket, occupancy is at an unprecedented 99.4%, and rental rates are following suit. Market asking rental rate growth is up 6.1% in just three months since the end of 2021 and 17.4% year over year. Hillsdale Business Park, a six building, 445K SF flex portfolio in northeast Indianapolis, sold in January for 50% more than its purchase price in 2015. Annual escalations in leases are climbing above the traditional 2.5-3% to upwards of 5%, signaling a continuation of rent growth in the future. Investors are taking note of these trends in hopes of capitalizing on strong fundamentals.