The U.S. economy is more open than it has been since the onset of the pandemic, and despite ongoing supply chain restraints, the industrial sector is red hot. The Indianapolis market is benefiting from the increase in consumer confidence and this return of economic activity. More than 20 MSF of new leases have been signed in 2021, a record amount of activity which has already surpassed all previous year-end levels. The market vacancy rate ended 21Q3 at 3.7%, which is the lowest in more than a decade. A record amount of new construction is currently underway to keep up with this lack of supply and unprecedented user demand. Developers continue to expand the boundaries of the traditional industrial footprint by purchasing land to develop in virtually every direction.
The Indianapolis industrial market ranked 3rd nationwide for product under construction at the end of 21Q3, only trailing mega markets Dallas and Atlanta. Most buildings currently underway are being constructed on a speculative basis, but 34% of the square footage is for build-to-suit projects or has already been pre-leased. Despite the concentration of speculative construction over the past several years, the Indianapolis market vacancy rate is at 3.7%, its lowest on record and below the national average of 4.5%. Tenant demand is high, and with pricing also much lower than the national average, Indianapolis will continue to see a surge in new product. Approximately 16 MSF of new construction is set to be completed in 2021 and even more is on track for 2022 to meet demand.
New leasing activity reached a then-record high level of 19.0 MSF in 2020. That momentum has continued throughout 2021, with activity already surpassing 20.0 MSF. Twelve tenants signed leases for speculative building larger than 500,000 sf through 21Q3. The ready availability of these 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. Compared to other markets smaller than 300 MSF, Indianapolis ranked 1st for YTD direct net absorption. The metro area accounted for 3.2% of nationwide absorption, while only representing 1.7% of overall inventory. Despite already being an established logistics hub,
Indianapolis continues to emerge as a top ten growth market nationwide in terms of absorption and inventory.
Traditional Warehouse, Manufacturing and Flex
Modern bulk remains the focus of development, but traditional warehouse, manufacturing and flex product continue to boast virtually full occupancy. Vacancy for traditional warehouse space dropped to 2.1% at the end of 21Q3. Manufacturing vacancy is even tighter, ending the quarter at 0.8%. As a result, asking rents for warehouse space and manufacturing buildings are up 8.0% and 7.8% year-over-year respectively. Despite all the uncertainty surrounding COVID-19 and its effect on local industry, the flex market in Indianapolis maintained record-high occupancy for a fourth consecutive quarter. In the last five years, the total flex market vacancy rate has fallen from 10.3% to 4.0%. During that same timeframe, asking rental rates increased by 22.4%.