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Workplaces Adjust to Possibility of a New Normal

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The ongoing COVID-19 pandemic is altering the landscape of the traditional office workplace. The year began with a widespread rollout of vaccines, triggering a steady return to the office. By spring, the U.S. economy was more open than it had been since the onset of the pandemic. Towards the end of the summer, the Delta variant’s emergence stalled many employers’ push for a planned post-Labor Day return to the office. Now, the Omicron variant appears poised to cause similar disruptions. Employers have now had time to evaluate this new normal. New leasing activity grew in each quarter of 2021 as footprint decisions are made. Subleases are having less of an effect on the market. Negative absorption is slowing, and the 18.0% market vacancy rate remains below its Great Financial Crisis peak.

 

CBD

The Indianapolis CBD vacancy grew in 2021, ending the year at 18.9%. Top-tier class A assets outperformed others with minimal occupancy losses and 3.0% rent growth since 20Q1, signaling the remaining demand for high-profile offices. Tech users continue to energize the downtown market, signaled by Wunderkind’s lease of 44K sf in the Century Building. The boundaries of the CBD footprint expanded again in 2021 when The Box Factory and Union 601, both primarily pre-leased, were built. The Stutz complex sold to SomeraRoad, who plans to reenergize the property and draw more activity north of the traditional CBD. Exponential growth of downtown residents appeals to younger workforces, and their outsized demand for amenities bodes well for activity from companies focusing more on recruitment.

 

North Suburban

New leasing activity surged in the latter half of 2021 – nearly doubling the amount leased through 21Q2. North suburban office leasing accounted for two-thirds of the year’s activity. Not included in these statistics are user purchases, which made up the three largest user transactions. Occupiers moving into newly purchased or constructed properties continue to offset activity levels by adding to vacancy in traditional parks. The completion of the new headquarters for Zotec Partners along the Meridian Corridor and the company’s subsequent consolidation led to another bump in vacancy. SEP and First Internet Bank both moved into newly built owner/user buildings, but the spaces they vacated were backfilled by other companies. Overall, class A north suburban rents ended 2021 relatively flat. However, the lease-up of high-rent, top-tier space led to a deceptive decrease in asking rents in some areas, especially the Carmel submarket.

 

Subleases

The remote work dynamic triggered a jump in unused office space, causing sublease availability to surge from pre-pandemic levels. In late 2021, overall sublease availability dipped for the first time since 20Q1. The reason for the decrease is both due to workers coming back to the office and new subleases being signed. Sublease signings accounted for five of the 20 largest new transactions through 21Q3, competing with owners’ ability to draw new tenants and increase occupancy. The average rental gap between sublease and direct availabilities is $4.25. Landlords hope to offset these disparate dynamics by offering more concessions, including longer periods of free rent, to avoid widening the gap too much between asking and taking rents.


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Workplaces Adjust to Possibility of a New Normal

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