Office Tenants Paying a Premium to Attract Talent
The U.S. economy grew by 1.9% in Q3 19, extending the longest economic expansion on record and pushing the rate of unemployment down to 3.5% - its lowest level in 50 years. While still positive overall, slow business investment amid uncertainty surrounding the trade war and a weakening global economy are hampering growth. Unemployment is also at its lowest rate since 2000 on both a statewide and local level: 3.2% and 2.6% respectively. As Indianapolis nears full employment though, office-using sectors have been losing jobs.
The local office market direct vacancy rate jumped up to 16.4% in Q3 19, primarily due to tenant movement in the suburban markets. Year-to-date new leasing activity was strong, up 10.7% from last year, and rental rates continue to rise, albeit slightly less than the past couple years - up 2.6% market wide.CBD
Downtown Indianapolis office building asking rents rose higher than the market average for another consecutive quarter. Class A properties saw 7.5% year-over-year rent growth, the largest in the market, and ended Q3 19 at $25.13 FSG. The local tech industry's expansion fueled new CBD leasing activity in Q3 19. HomeAdvisor signed on to lease two more floors at 130 E Washington and Salesforce expanded again in its namesake office tower, adding 34,802 sf and 21,283 sf respectively to their existing footprints. Traditional tenants in the financial and legal industries took some of that momentum away by downsizing, causing negative direct net absorption by quarter's end. Still, the ability of Indianapolis to draw new industries to its downtown core is adding to significant momentum in the overall market and is expected to bounce back in Q4 19.North Suburban Markets
More than 45% of new leases signed since the beginning of the year have been in class A north suburban office buildings. Despite this concentration of activity, the north suburban vacancy rate has been ticking up - ending Q3 19 at 16.1%. Three of the largest leases signed during the quarter were by tenants moving to nearby buildings within the north suburban market. KAR Auction Services also officially moved into their newly construction 253,500-sf BTS. leaving behind a 181.733-sf vacancy at Hamilton Crossing. These moves are having a mixed effect on suburban vacancy and absorption.Investment Market
Investment sales activity was minimal in Q3 19. Cornerstone acquired Shadeland Station, a quasi-medical/flex portfolio, and Equity Investment Group purchased Directors Row. Both point to a strong market for value-add product. Stabilized assets did not see as much as activity, especially downtown where many properties are being refinanced. There is a large amount of product on the market, and sellers are hoping to achieve strong pricing as rents rise but vacancy concerns grow.Market Outlook
Employee recruitment and retention is key to a company's success. and record low unemployment is making hiring tough. Companies are paying a premium in real estate to differentiate their workspaces and draw talent, whether that added value be in new construction, on-site amenities, or an expensive interior build-out. As competition grows among employers to attract talent. buildings owners will need to invest to attract tenants, especially as large vacancies hitting the market in the next 12 months will add competition.