Industrial Market Steady in Q1 2018
The U.S. economy grew for its 105th consecutive month in March 2018. Despite concerns surrounding financial market volatility and threats of a potential trade war, economic expansion kept unemployment at 4.1% for another quarter. The overall employment market, while slowing in job growth, still added 755,000 jobs to industrial-using industries. The larger-than-normal influx was due to a 3.3% uptick in construction jobs. Indiana's unemployment rate ended Q1 '18 at 3.2%, which is down from 4.7% at the end of 2016 and marks the lowest rate since 2000.
The local industrial market vacancy rate ended Q1 '18 at 5.1%. While absorption was minimal, the lack of new speculative construction deliveries helped to push vacancy down from the end of Q4 '17. Leasing activity is up 20.5% year-over-year, and a new round of speculative projects are under construction, adding new options for a growing tenant base.
New modern bulk development completions were limited to two BTS projects in Q1 '18, causing the direct vacancy rate to tick down to 7.7%. With 11 new projects under construction, vacancy will move back up in Q2 '18, but not by much since nearly half of the 4.2 MSF under construction is preleased. Cold weather at the beginning of the year led to a lack of groundbreakings for new product, but that is also set to change with an additional 10 projects totaling 3.3 MSF in the queue for development. Investment sales activity picked up in Q1 '18, and cap rates reached record low levels for the local market.
Movement in traditional distribution buildings had a larger impact on the market than new construction in Q1 '18. In the East submarket, Mastin & Cain Properties leased 281,584 sf at 2900 N Shadeland and Balsam Brands absorbed a 128,000-sf vacancy at the now 100%-leased Franklin Distribution Center. Older product with lower clear heights and competitive rental rates boasted a vacancy rate of 5.7% by quarter-end, the lowest of all sub-products besides manufacturing buildings.
Light industrial and flex product continues to reach historical low vacancy rates quarter-after-quarter. Before the end of 2016, the flex vacancy rate had never reached single digits. By the end of Q1 '18, the flex vacancy rate fell to 7.1%, while asking rents increased year-over-year by 8.7%. The Southwest led all submarkets again with a 12-month occupancy increase of 350 basis points. The Northwest submarket, where occupancy tightened by 2.1pp, experienced 11.3% year-over-year rent, the largest of all submarkets. Investment activity in Q1 '18 was limited to the East submarket, which also experienced a healthy 9.5% increase in asking rents and a 2.3pp vacancy decrease.
New construction will be the story for the foreseeable future in Indianapolis, as developers continue to be bullish on the momentum of the local market, especially for logistics and distribution operations. Business-friendly state tax policies and incentive-friendly local governments should keep the industrial market as vibrant as ever throughout 2018.