Indianapolis Industrial Market Leads the Midwest
The U.S. economy boomed in 2018, boasting record-low unemployment rates, the 2nd longest economic expansion in history and the longest streak of monthly hiring on record. Economists credit a mid-year boost in GDP to tax cuts, deregulation and government spending, but disputes over a border wall shuttered the federal government at year’s end.
The Indianapolis MSA unemployment rate in December was 3.1%, and the biggest job gains were in sectors that directly affect real estate occupancy: construction, trade, transportation and utilities, and professional and business services.
Indianapolis led the Midwest in terms of industrial inventory growth (3.2%) and absorption as a percentage of the total market inventory (3.7%). The local vacancy rate ticked up to 4.6% in Q4 18 after reaching an all-time low of 4.2% in Q3 18. The direct vacancy rate for the Indianapolis market is still down 0.6pp year-over-year, and asking rents rose across all sectors.
A diverse array of industries contributed to the top five largest new transactions in modern bulk buildings: e-commerce, 3PL, automotive, food/drink, and consumer products. The modern bulk inventory grew by 7.5% in 2018 as a result of 18 new construction projects totaling 6.7 MSF being completed. Nearly half of the 5.0 MSF of new speculative projects were leased by year-end, helping to maintain a low vacancy rate of 8.0%. The South submarket was a hub for growth in 2018, accounting for nearly one-third of all modern bulk completions. Another 2.1 MSF of new construction is taking place in the Northwest submarket in 2019, where Whitestown along I-65 is being developed into a sizable industrial corridor.
The bulk of new construction is weighted towards buildings with higher clear heights, but demand for older product is still strong. Vacancy for traditional distribution buildings is extremely tight: down to 4.0% from 5.6% last year. The lack of available product also pushed asking rents up 11.8%. The East and Northwest submarkets led 2018 in occupancy growth as available options became increasingly limited.
Strong economic conditions and high business confidence are causing small business and expanding companies to flood flex spaces. The vacancy rate for flex product has fallen to a record 5.9%, down 200 bps since Q4 17. The amount of vacant flex space has been cut in half over the last five years. Rental rates jumped by 4.3% to $7.02 NNN, led by Park 100 in the Northwest submarket. Pricing still makes new construction hard to justify in most areas, so occupancy will keep improving.
Steady leasing activity and another year of near-record net absorption is boosting developer confidence. The amount of buildings currently under construction guarantees that a record amount of new product will be delivered by the end of 2019. Rental rates for high-demand spaces between 150,000 and 200,000 sf are up 10.7% year-over-year, the largest annual increase among size ranges. Expect more small-to-midsized developments to break ground as developers seek to capitalize on these metrics. Industrial real estate is on track for another record year, and the health of the central Indiana industrial market is not expected to fade in the next 12 months.