Large Suburban Blocks of Space Hit the Market
The U.S. economy, while off to a slow start in 2017, is exhibiting positive indicators in relation to office real estate fundamentals. Nearly 800,000 jobs in office-using industries were added nationwide in the last 12 months. Indiana’s unemployment rate ended the quarter at 3.9%, the lowest since 2001, and down from 4.5% in the last six months. The local financial activities sector grew by 2,900 jobs – a metric parallel to office activity. Negative absorption resulting from a few large, north suburban users caused the local office vacancy rate to tick up to 15.6%. Still, market-wide asking rates and leasing activity are stable year-over-year.
Fundamentals in the CBD office market strengthened in Q1 17. Downtown’s direct vacancy rate ended the quarter at 17.0% – falling 120 basis points since Q1 16. An additional 300,000 sf of tenants occupied space in downtown buildings over the last 12 months, building momentum to start the year.
Three main factors led to positive direct net absorption of 35,259 sf and a 79% year-over-year growth in new leasing activity. Aprimo’s move from the Meridian Corridor submarket into a 20,454-sf space in BMO Plaza highlights the first trend: the burgeoning of downtown as a tech-centric submarket. Second is the growth of co-working operations and flexible lease terms, marked by the success of The Union 525 and a Q1 pre-lease by Industrious at the nearly-built Marietta on Mass. Third, the repositioning and refresh of office towers, is contributing to rising occupancy rates in core product.
New vacancies in the north submarkets resulted in 161,333 sf of negative direct net absorption in Q1. Two main events led to the class A north suburban vacancy rate rising up to 14.8% from 13.3% at the end of 2016. First, Liberty Fund moved from 60,000 sf into a new owner/occupant headquarters building in the Meridian Corridor. Second, the collapse of ITT Tech and restructuring of the recently-acquired Interactive Intelligence led to large blocks of vacancy across north suburban product.
The new vacancies create an opportunity for tenants looking to lease big blocks of space who mainly had either troubled assets or pricy new construction from which to choose. At the end of Q1 17, nearly double the number of contiguous spaces above 40,000 sf are available compared Q1 16.
Solid investment activity was balanced across the market in Q1. The sale of Hamilton Crossing and One West Parkwood gave suburban class A activity a lift, while the downtown sales focus was on creative/character set buildings. A slowdown is likely to take place through 2017 as other owners seek asset stabilization before putting more product on the market.
Indiana ranked near the bottom of a venture capital report in Q1 – a metric worrying to many start-ups important to the local office market. The Indiana General Assembly is set to address this issue in the final weeks of the 2017 legislative session. Legislation aimed at encouraging venture capital investment should positively affect the Indianapolis office landscape.