Despite ongoing supply and labor shortages, inflationary concerns and other factors triggered by the COVID-19 pandemic, the industrial sector remains red hot. The growing demand for e-commerce, third-party logistics providers and big-box industrial real estate is boosting Indianapolis industrial market fundamentals. New leasing activity totaled nearly 24 MSF in 2021, while the market achieved a record 18.5 MSF in direct net absorption, a 77% year-over-year increase. The vacancy rate reached its lowest point in 21Q3 and ended the year nearly unchanged at 3.8%. The new construction pipeline is larger than ever as developers continue to expand the boundaries of the traditional industrial footprint by developing in virtually every direction to keep up with outsized user demand.
The Indianapolis industrial market ranked 5th nationwide for new construction completions in 2021. Year-end net absorption levels outpaced the 13.5 MSF of new supply by nearly 5 MSF. Despite the concentration of speculative construction over the past several years, the Indianapolis market vacancy rate is at 3.8%, its lowest year-end level. Occupier activity is high, and developers are clambering to keep up with demand. Based on projects with projected timelines, new supply in 2022 is set to dwarf previous records. Most speculative construction in the pipeline is in burgeoning submarkets that were much less active prior to the new wave, especially in Mount Comfort and far south business parks in Whiteland and Franklin. Combined, these two areas account for nearly half of all future projects.
The availability of speculative product is drawing new-to-market operations to Indianapolis, which accounted for 77% of the overall square footage leased in modern bulk buildings. Nine leases were signed in speculative facilities larger than 500,000 sf in the first half of 2021 alone, including Walmart’s notable lease of CT Realty’s 1.0-MSF Crossroads Logistics Center in Whitestown. These type of transactions led to a third straight year of record-high leasing volume in Indianapolis, up 24% from 2020’s high-water mark of 19.0 MSF. The local industrial market experienced record absorption levels as a result of this surging activity. Indianapolis accounted for 3.2% of nationwide absorption, while only representing 1.75% of overall inventory. Despite already being an established logistics hub, the metro area continues to emerge year after year 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 and manufacturing space is around 1% for each type. In the last five years, the total flex market vacancy rate has fallen from 9.8% to 3.6%, which is another record low. During that same timeframe, asking rental rates increased by 36%. Investors are taking note. The largest two investment-sale transactions in 2021 were both 1.1-MSF light industrial portfolios purchased by new-to-market buyers Arden Group and Cardinal Industrial. Flex rental rates will continue to rise as a result of microeconomic factors such as the lack of supply and macroeconomic factor such as inflation.