Indianapolis Office Market Rents on the Rise
The U.S. economy was full steam ahead in the first quarter of 2019. Despite signs of a global economic slowdown, the U.S. GDP expanded by 3.2%, marking the best start to the year since 2015. However, economists expect growth to slow, as much of the economic expansion can be accredited to companies restocking their inventories from the holiday season and high government spending. The job market remains one of the strongest in history. The national unemployment rate ended Q1 2019 at 3.8%, the lowest March figure in the last 50 years.
The Indianapolis MSA unemployment rate remains below the national average, ending the quarter at 3.5%. Office-using industries posted overall net job losses, the largest of which were in information and financial services sectors.
The local office market direct vacancy rate ticked up to 15.9% in Q1 2019, mainly due to one significant negative absorption event that wiped out occupancy gains made in 2018. Leasing activity is off to a strong start, and rental rates continue to rise across all product types - up 3.7% overall.
Downtown Indianapolis office buildings continue to see rents rise at above-market paces. The 5.1% year-over-year growth puts market rent at $22.78, which is still below peer cities' CBD markets. Top-tier class A towers have the lowest vacancy in more than five years (12.3%) and highest asking rents on record ($26.64), increasing the price gap above low/mid-tier rents ($21.37). Vacancy jumped back up to 15.6% in Q1 2019 due to Anthem vacating a 213,609-sf building on Monument Circle. Anthem's move leaves an opportunity for a user seeking to locate along the city's most iconic landmark.
North Suburban Markets
Suburban market rents climbed across all classes in Q1 2019, but three key submarkets achieved more than 5.0% year-over-year growth: I-69/Shadeland, Meridian Corridor, and Keystone Crossing. The latter two submarkets also saw vacancy fall by a combined 197 basis points. Two majors users grew their suburban footprint in Q1 2019: Geico expanded its call center operations by 90,000 sf on the Meridian Corridor, and Allegion acquired a 67,000-sf long-vacant building along 1-69. Both submarkets also now have speculative buildings under construction as developers hope to capture demand.
Investment sales volume was down nationwide in Q1 2019, and the Indianapolis market followed that trend. Economists point to wary investors and varying interest rates, but don't expect the cautiousness to last and activity is expected to pick up late in the year. Despite the overall slowdown, two significant sales took place. The two-property Market Square Center portfolio was purchased by Gershman Partners and Citimark, expanding the joint venture's downtown presence. In Carmel, the newly-constructed Allied Solutions building achieved a record low cap rate for the Indianapolis investment market with its sale to Los Angeles-based Tryperion Partners.
The CBD is expected to return to its trend of tightening vacancy and rising rents in 2019. Large blocks of space are set to become available in suburban submarkets this year, which will likely increase vacancy in the short term. Overall, the high volume of tenants in the market will maintain strong leasing activity and fill large blocks of newly available space.