Indianapolis Office Market Strong in 2018
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.
The local office market vacancy rate ended Q4 18 at 15.6%, a year-over-year drop of 40 bps. Class A occupancy gains in the CBD and Keystone Crossing submarkets helped total year-end direct net absorption reach 256,431 sf. Asking rents rose again but slowed to 2.8% year-over-year growth.
Downtown Indianapolis office vacancy ended the year at 14.2% – down from 15.7% in Q4 2017. Tech-related and service-based companies continue to dominate the headlines and affect real estate fundamentals in the CBD. The highly anticipated Bottleworks project broke ground at the end of Massachusetts Avenue and signed its first major office tenant, High Alpha, in Q3 2018, while ANGI Homeservices companies expanded operations in the Marott Center and shifted from Landmark Center to 130 East. Large blocks of space set to open up in the next quarter, including Anthem’s Monument Circle location and Salesforce’s sublease in the Century Building, are likely to be filled quickly as new-to-market and growing companies are drawn to downtown Indianapolis.
North Suburban Markets
A similar story is taking place in the north suburban office market with a few key exceptions. Insurance giant GEICO expanded call-center operations at 101 W 103rd Street, helping to backfill space vacated by Technicolor. Unlike the CBD, the majority of leasing activity in the suburbs consists of tenants shifting from nearby product. In Q3 18, the Carmel submarket benefited from the relocation of MJ Insurance from Keystone Crossing to its new Midtown Carmel development. The space left behind was mostly backfilled by Healthx, who shifted from a neighboring building. Duke Realty Corporation also began construction on a new 78,000-sf headquarters and will vacate Parkwood. Even with the musical chairs of some large tenants, owners are able to push rents to figures that were until recently only quoted in new construction projects.
Local office assets investment volume was down in 2018 but is excepted to climb, especially in the suburbs, in 2019. Growing rental rates have pushed pricing in investment sales activity by 30-40% in the past three years. 2018 activity was dominated by investors doubling down on the Indianapolis market. Zeller Realty Group, following its repositioning and sale of Market Tower, acquired Capital Center. Redico and Black Salmon also bought BMO Plaza, while DRA Advisors and M & J Wilkow purchased the three-property Meridian Plaza.
The biggest story for the office market in 2018 was rent growth. Despite large blocks of space set to come on market, tight class A vacancy in the CBD and new construction in the suburbs should push rents to new heights in 2019 and beyond.