The U.S. economy is more open than it has been since the onset of the pandemic. Local mask mandates have been mostly revoked, and nearly 70% of American adults are vaccinated for COVID-19. Nationwide, the return to near-normal is driving the economy. The Indianapolis industrial market is benefiting from an increase in consumer confidence and this return of economic activity. Nearly 8.0 MSF of new leases were signed in 21Q2, a record amount in one quarter and a 23.1% increase from the previous record high achieved in 21Q1. Developers continue to expand the boundaries of the traditional industrial footprint by purchasing land in virtually every direction. A record amount of new construction is now underway to keep up with unprecedented user demand as vacancy tightens.
The Indianapolis industrial market ranked 6th nationwide for product under construction at the end of 21Q2. Indianapolis was only behind Dallas, Los Angeles and Atlanta for completions in the quarter after delivering 4.6 MSF. A total of approximately 19 MSF of new construction is on track to be completed in 2021, with BTS projects accounting for nearly half. Tenant demand is still high, and with land and property pricing lower than the national average, Indianapolis is seeing a surge in new product. Developers are positioning themselves across the market, but a few areas with excess land continue to draw the most development: Mount Comfort, southern Johnson County and Monrovia. These burgeoning industrial parks account for more than two-thirds of the upcoming speculative developments.
New leasing activity reached a record-high level of 14.4 MSF over the last six months, surpassing recent year-end levels in 2017 and 2018. Nine leases were signed in speculative facilities larger than 500,000 sf, including five in 21Q2. The ready availability of speculative facilities is helping Indianapolis to draw new-to-market operations, which accounted for 78% of the overall modern bulk square footage leased this year. The local industrial market is experiencing record absorption levels as a result of this activity. When compared to other markets smaller than 300 MSF, Indianapolis ranked 1st overall for 2Q21 direct net absorption. The metro area accounted for 4.2% of nationwide absorption, while only representing 1.75% of overall inventory. Indiana’s centrality and business-friendly environment continue to draw development and new operations to one of the fastest growing industrial markets in the nation.
Despite all the uncertainty surrounding COVID-19 and its effect on local industry, the flex market in Indianapolis maintained record-high occupancy for a third consecutive quarter. In the last five years, the total flex market vacant square footage decreased by 55%. Rental rates have grown much faster than the overall market. The trends are most pronounced in the two submarkets with the largest flex footprint: Southwest (home to Park Fletcher) and Northwest (home to Park 100). The Southwest submarket experienced an 8.8pp drop in the vacancy rate (14.9% to 6.1%) and a 33% increase in rents ($5.20 to $6.93). The Northwest submarket experienced a 11.4 pp drop in the vacancy rate (17.3% to 5.9%) and a 26% increase in rents ($6.36 to $7.99).