Industrial Vacancy Reaches Another Record Low
The U.S. economy grew by 2.1% in Q2 19, marking the longest economic expansion on record. The growth was driven by a 4.3% increase in consumer spending and a 5% jump in government spending. The stock markets also reached yet another record high. Despite these records, growth was slower than previous quarters, tempered by a drop in exports and increased tensions over ongoing trade disputes with China.
Low unemployment remains a high point among economic indicators. Indiana's jobless rate was steady year-over-year and is the lowest of all neighboring states. ending Q2 19 at 3.5%, while the Indianapolis MSA boasts 3.1% unemployment.
The Indianapolis industrial market vacancy rate fell 40 bps from Q2 18, up slightly after reaching a record low of 4.1% at the end of 01 19. New leasing momentum in the first half of 2019 totaled 9.6 MSF. up 41.4% year-over-year. The strong user activity boosted year-to-date net absorption to 3.2 MSF and is expected to climb to record levels by the end of 2019.
Increasing levels of new construction are underway, with an estimated 9.0 MSF set to be completed this year. The increase in supply is dominated by speculative projects, many being preleased prior to completion. In the last five years, 85% of speculative projects have been leased, the majority of which are modern bulk. Build-to-suit activity remains strong, with several high-profile users adding to their existing operations. The increase in supply is being absorbed, with 2.8 MSF of YTD direct net absorption. and an additional 8.3 MSF in signed leases and BTS projects will be absorbed by year's end.
Traditional distribution buildings, which are generally older with lower clear heights than modern bulk buildings, saw vacancy drop by 180 basis points and asking rental rates jump 16.4% in the last year. A joint venture between Weston and Arcapita hopes to capitalize on those strong dynamics with its Q2 19 investment in a nine-building portfolio. The 1.5 MSF Park Creek portfolio was 97% occupied at the time of the $17.1 million sale.
The trend of tightening vacancy and rising asking rents has been a consistent theme for flex product in the Indianapolis MSA throughout this economic expansion. Midway through 2019, that narrative remains intact. The flex market maintained its record low vacancy rate of 5.8% and experienced a 3.6% year-over-year increase in rental rates. Rental rates jumped by 10.3% in the Northwest submarket, home to Park 100, and by 11.5% in the Southwest submarket, home to Park Fletcher.
Industrial real estate is arguably the most dynamic commercial real estate market in the Indianapolis MSA. as seen by the high rate of development, user activity and investment. The Indianapolis market ranks in the top ten nationwide on the amount of net absorption as compared to total inventory. More and more companies are looking at Indiana's centrality, highway infrastructure, greenfield development opportunities, and business-friendly environment and choosing to locate operations in the area. As more and more consumers become reliant on e-commerce in their daily lives, the central Indiana industrial market is poised to capitalize on these dynamics.