New Wave of Construction on the Way


Market Overview

The U.S. economy, while off to a slow start in 2017, is exhibiting mixed indicators in relation to industrial real estate. Though industrial output is low, surveys from the Institute of Supply Management show positive attitudes among purchasing managers in industrial-related sectors. Job growth is showing positive signs. Indiana’s unemployment rate ended the quarter at 3.9%, the lowest since 2001, and down from 4.5% in the last six months. Industrial-using industries added 7,800 jobs year-over-year, a metric parallel to industrial activity. Industrial real estate activity started slower than in 2016, but vacancy is at a low 5.1%, with asking rents steady and construction booming.

Modern Bulk

Lease-up of speculative construction pushed the vacancy rate for modern bulk product down to 7.6%. A new wave of projects broke ground in Q1 in light of limited new construction completions and a steady demand of nine to 10 million square feet (MSF) of tenants shopping the market. Overall, 5.2 MSF is under construction at the end of Q1 – nearly twice the total amount of new product delivered in all of 2016. Developers are likely to keep a keen eye on the level of activity given the 4.6 MSF of speculative product under construction at quarter-end.

Investment activity was strong in Q1, and modern bulk core assets experienced solid pricing. The largest transaction was DRA Advisor’s acquisition of a national fund from Cabot Properties, which included a 925,800-sf local bulk building. The sale of a 741,880-sf building occupied by Continental Tire rounded out Q1 modern bulk investment activity.

Medium Distribution

New leasing activity in Q1 was dominated by medium-distribution users. Eight of the ten largest new transactions fell between 50,000 sf and 150,000 sf. Nearly half of all medium- to large-sized tenants shopping the market are in that range. Shreveport-based Sealy & Company plans to capitalize on the strength of traditional, medium-distribution product with its Q1 acquisition of the North by Northwest portfolio from Biynah Industrial Partners. The 1.1 MSF-purchase is the group’s first venture into Indianapolis.

Light Industrial/Flex

Light industrial/flex product shed vacancy across all submarkets, dropping the market average to 9.2% - the lowest rate on record for another consecutive quarter. The Southwest flex submarket, an area with a wave of new owners in the past 24 months, saw vacancy decrease 4.9 percentage points since Q1 16. On the other side of Indianapolis, the Northeast submarket continues to boast the highest flex occupancy: 94%.

Following a very active 2016, minimal flex investment activity occurred in Q1. Expect more portfolios to hit the market in Q2 as sellers aim to capitalize on early value-add investments.

Market Outlook

Indiana’s reputation as the “Crossroads of America” is a moniker highlighted by the strength of the logistics and transit business through its roads and highways. The Indiana General Assembly is poised to tackle the issue of a deterioration of these crossroads with a state road funding package in the final weeks of the 2017 legislative session. If passed, the result is a boon to an infrastructure required by industrial market users.