The U.S. is facing a tremendous challenge, the scale of which is unprecedent in recent history. By mid-2020, approximately 130,000 people had died from complications of COVID-19. The spread of the disease is significantly altering day-to-day life and the economy, which shrank by an abysmal 9.5% in the second quarter. The industrial real estate market is also being impacted by forced facility closures and disruptions to the supply chain. Despite all these challenges, the Indianapolis industrial market finished Q2 2020 in a very strong position.
Indianapolis ranked in the top ten of all metro areas in three key metrics: year-to-date (YTD) net absorption, market growth, and product under construction. YTD direct net absorption nearly reached 5.0 MSF, a 50% year-over-year increase from 2019’s already historic-high level. Industrial developers also appear undeterred by the disruption in the economy. A record 13.6 MSF is under construction, including 12 projects totaling 4.6 MSF that broke ground in Q2 2020.
E-commerce and third-party logistics (3PL) companies each made up 20.9% of occupier activity nationwide in Q2 2020. In the Indianapolis modern bulk market, e-commerce and 3PL users made up 29.7% and 32.1% respectively of new activity. More than 75% of modern bulk leases signed this year were for new-to-market or expanding operations. The strong demand in the Indianapolis market will need to be sustained to absorb the 7.1 MSF of speculative modern bulk construction on track to be completed by the end of the year. Developers are still keen on breaking ground on several additional projects this year, showing increased optimism in tenant demand and the Indianapolis industrial market’s ability to bounce back from any future setbacks caused by the continuing pandemic.
Traditional and Mid-Sized Distribution
Traditional warehouse and mid-sized distribution availability remains especially tight. Outside of the manufacturing sector, which is primarily owner/occupant, vacancy for non-modern bulk warehouse maintains the market’s lowest rate at 3.7%.
The volume of investment sales activity in the first half of 2020 was concentrated in single-tenant net lease investments and mid-sized distribution buildings. Conversely, user sales activity is at very low levels as a result of minimal supply.
While COVID-19 and its effects on the economy could hurt small business operations and their ability to pay rent, the flex market maintained an incredibly strong position in Q2 2020. Flex product occupancy ended the quarter at 94.1%, a minor quarterly decrease of 50 basis points. The increase in vacancy can primarily be attributed to negative absorption events triggered by occupiers directly affected by COVID-19 dynamics, including densely built-out office/flex users, struggling fitness facilities and underutilized back-office and healthcare operations. Still, flex product vacancy is at near-record low levels after steadily decreasing over the past decade.