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. More workers are returning to the office, but remote work is still an ongoing reality facing many companies and building owners. New sublease availability, while slowing, is at record-high levels, and the full impact of pandemic-era work settings will linger as employers evaluate their policies. After a sluggish start to the year, leasing activity in the Indianapolis office market picked back up in 21Q2 amid growing confidence. Negative absorption still increased overall vacancy, but at a slower pace than 21Q1, and the 17.7% vacancy rate is much lower than its height following the Great Financial Crisis.
The downtown Indianapolis office market posted positive direct net absorption in 21Q1 for the first time since 2019, mostly as a result of two new, unique buildings completed along the CBD’s perimeter: The Box Factory, anchored by Lewis Wagner LP, and The Union 601. Still, the downtown vacancy rate continued its climb, ending the quarter at 18.4%. Rolls Royce also announced plans to shift most of its Meridian Center employees on the south end of downtown to remote work, effectively adding 200K sf of vacancy by mid-2022 unless backfilled. Large occupiers are mixed on whether to shift remote, retain their footprint or a blend of both. While approximately half of downtown offices are still sitting empty, experts predict the percentage of workers back in seats will grow steadily over the next 12 months.
New leasing activity rebounded in 21Q2 – up 52% compared to 21Q1. The north suburban office market accounted for 73% of that activity. Two companies with existing footprints in the local market and in industries seeing a surge in demand as a result of the pandemic signed leases to increase their local footprints. Quantigen, a medical diagnostics company, announced plans to double its workforce in Fishers by leasing 46K sf at Gateway One. Kinetic Advantage, which specializes in floorplans for auto dealerships, will more than double its Carmel footprint at Three Meridian Plaza. The CEO of the latter cited the area’s “educated workforce… and pro-business climate” for its expansion. Asking rents in north suburban properties rose 5.3% year-over-year to record-high levels, but rental costs are still well below the nationwide average. These dynamics and the increase in availability of space provide opportunities for recruiting users.
The remote work dynamic led to a jump in unused office space, causing sublease availability to more than double from prepandemic levels, but that trend may be slowing. Less than 50K sf
of sublease square footage was added to the Indianapolis office market in 21Q2 – the least amount since the beginning of the pandemic. The average rental gap between sublease and direct asking rents is $4.20, and with an average remaining term of 38 months, these sublease options in mostly furnished spaces may entice users unsure of their workforce’s future. So far, not much sublease activity has materialized. Through 21Q2, 43K sf has been signed, and many users are opting to either withdraw their subleases entirely or reduce their offered footprints.