2020 is now history, but the relentless year's events will impact the economy for years to come. More than 350,000 Americans died as a direct result of COVID-19, with thousands more dying every day. The nation essentially shut down in early spring, causing the U.S. economy to shrink by an unprecedented 33% annual rate in Q2, and snapping the longest economic expansion on record. In Q3, the passage of the blockbuster CARES Act and a relaxing of restrictions helped the economy to rebound. In Q4, a raucous presidential election, another congressional relief package and a post-holidays case surge put the country in precarious economic and political conditions moving into 2021.
Despite or perhaps as a result of these events, the Indianapolis industrial market achieved record growth in 2020. New yearend leasing activity nearly reached 19.0 MSF - exceeding the record level set in 2019 by 8.4%, while the year-end direct net absorption of 10.4 MSF was just shy of last year's total. A record 14.3 MSF of new product, concentrated in speculative supply, was completed and pushed the direct vacancy rate up to 5.7%.
The spring lockdowns temporarily disrupted the supply chain but gave jet fuel to the e-commerce industry - a growing occupier in the local bulk market. Notably, Amazon doubled its presence in Indianapolis, and e-commerce only operations accounted for 24% of all new bulk transactions in 2020. For now, though, 3PL and packaging users are still the dominant occupiers. XPO Logistics, operating for Apple, leased a new 1.1-MSF speculative building and will take occupancy in summer 2021. A couple other key factors bode well for future absorption: the average size of bulk transactions increased by 20% to 265,879 sf, and with 78% having been signed for new-to-market or expanding operations, there is no end in sight to the market's growth.
Nowhere is this growth more visible than the construction boom happening across the Indianapolis metro. Nearly 90% of the record 14.3 MSF delivered in 2020 began on a speculative basis, and 57% of those projects were either fully or partially preleased by the time of their completion. Massive BTS distribution centers are underway in burgeoning submarkets, including a 2.2-MSF project for Walmart in Mount Comfort and a 997,656-sf facility for Cooper Tire in Whiteland. Overall, 12.2 MSF of new product is under construction moving into 2021, and nearly 60% of that space is already accounted for by tenants.
Traditional Warehouse & Flex
While new bulk construction continues to cause the total market vacancy rate to fluctuate, traditional warehouse and flex product continue to see vacancy rates fall to record-low levels and asking rates climb to record highs. The vacancy rate for nonbulk warehouse space dropped to 2.8%, a 1.3pp decline from last year. The flex market vacancy rate fell to 5.3%, which is its fist time below the total market. This tight flex occupancy has led to an average 6% annual rent growth for the past five years.