The U.S. office market is still feeling the effects of the pandemic two years after the first domestic cases of COVID-19. At the end of 2021, Indianapolis posted positive net absorption for the first time since 3Q20 but dipped into negative territory again in 22Q1. Despite this negative statistical indicator, which led to increased vacancy, signs of stabilization are emerging. Companies are implementing back-to-work policies for 22Q2 after evaluating this new normal. New leasing activity grew in each quarter of 2021, and 22Q1 posted a 67% year-over-year increase – another sign of a rebounding office market. Sublease availability, while still high, is lower than its peak. The 18.2% market vacancy rate remains below its Great Financial Crisis peak and is expected to stabilize by year’s end.
As with most downtowns, the coronavirus outbreak had a disparate impact on the CBD office market. Rolls Royce vacating more than 200k SF at their Meridian Center campus in 22Q1 led to negative quarterly absorption. This space and the Monument Circle 214k sf vacancy account for 27% of class A vacancy in the CBD. Despite recent setbacks, the three largest transactions in 22Q1 occurred downtown, leading to the most active quarter since 2019. Spot Freight leased 42k SF in Capital Center following the owner’s $8 million investment to reenergize the asset. Top tier class A properties and new developments have garnered the most activity and above average rental rate increases. The CBD is increasingly seeing a return of workers physically in the office, boding well for the overall health of the city’s downtown.
Fishers and Carmel, two north suburban cities with a spur of mixed use, urban developments, continue to draw occupiers. Their respective submarkets, I 69/Shadeland and Carmel, are seeing occupancy gains with increased tenant demand. Asking rental rates are up across the board except for Carmel. That submarket saw a drastic drop in average rates, but that is solely due to the lack of top tier available space, where the vacancy rate ended 22Q1 at a mere 3.7%. The lack of available quality space is leading to new construction. Two projects, 1 st on Main and The Collective at Midtown, are breaking ground this spring. Elsewhere in the north suburban markets, Raytheon Intelligence & Space is taking occupancy in an 86,965 sf office building at Keystone Crossing’s Lakefront business park. The move helped the overall vacancy for that submarket decrease to 17.3, which follows six consecutive quarters of negative absorption.
The remote work dynamic triggered a jump in underutilized office space, causing sublease availability to surge from pre-pandemic levels. In late 2021, overall sublease availability dipped for the first time since 20Q1. That trend reversed slightly in 22Q1 due to a 25% increase in CBD subleases. Subleases accounted for three of the largest new transactions and absorption events, highlighting the competition between move in ready spaces and direct options. In addition to free rent and other concessions, landlords are increasingly building out speculative office space to compete with sublease offerings. The average rental gap between sublease and direct availabilities is approximately $4.00. Expect the sublease trend to slow down this year.