Large Users Dominate Indianapolis Office Activity
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 local office market direct vacancy rate ticked down slightly from last quarter to 15.8%. though still up from year-end 2018 due to high negative absorption in 01 19. Leasing activity is strong halfway through the year, up 8.3% from last year, and rental rates continue to rise - up 3.3% market wide.
Downtown Indianapolis office buildings continue to see rents rise at above-market paces. The 6.6% year-over-year growth puts CBD rent at $22.79 FSG, which is still below peer cities' downtown markets. Top-tier class A towers have the lowest vacancy in more than five years and highest asking rents on record for the second consecutive quarter. Rental rate increases have been driven in part by new owners investing capital and pushing rents. Vacancy was also driven lower by several tenant moves, the most notable of which was online auto-auction firm TradeRev absorbing two floors in the Century Building that were formerly occupied by Salesforce.
North Suburban Markets
North suburban vacancy rates were flat year-over-year, with large blocks of available space (including a new 85,000-sf direct vacancy in Eight Parkwood) offset by large users flooding the suburban market in Q2 19. This quarter alone, State Auto moved into 29,989 sf in Hamilton Crossing, lnktel took 21.054 sf at Keystone at the Crossing, the Pyramids drew two multi-floor users, eHealth subleased 56,276 sf at Lakefront in Keystone. More high-profile users are in the market and expected to lease up additional large blocks of space this year. The high demand is allowing rents to grow, with popular submarkets like I-69/Shadeland, Meridian Corridor, and Keystone Crossing experiencing year-over-year asking rental rate growth ranging from 4.9% to 5.7%.
Investment sales volume through mid-2019 outpaced early 2018 levels, even as varying interest rates leave investors wary. In Indianapolis, the most significant sale was Equus' disposition of the premier Keystone at the Crossing office park to ORA Advisors and M&J Wilkow. The joint venture, which entered the Indianapolis office market in 2018, now controls 11.5% of the suburban market's class A office product.
A notable emerging trend is the influx of developers eyeing 30,000 to 60,000-sf new buildings. Most require preleasing and are tied to nearby new developments, such as the Yard and Nickel Plate District in Fishers. These mini-urban markets in suburbia are helping to raise rents across products and offer users unique opportunities outside of a traditional office park.