The U.S. and the world at large are facing a tremendous challenge, the scale of which is unprecedented in recent history. The spread of the novel coronavirus CCOVID-19) is significantly altering day-to-day life, impacting society, the economy and, by extension, commercial real estate. This report will focus primarily on the health of the Indianapolis office market in Q1 20, which had not yet seen the inevitable effects of the shutdown orders and impending economic downturn. Even so, many statistical market indicators were negative to start the year. With no large new lease signings, leasing activity was down 32.5% year-over-year and marked the slowest start since 2013. Negative direct net absorption also led to an increase in the market vacancy rate to 16.7%.
Despite a rise in the direct vacancy rate, the amount of overall space available was actually less than in Q1 19. Two major factors contributed to this paradoxical dynamic in the CBD. Salesforce terminated their lease at the Century Building, which had already been physically vacant for the past year, thus adding to direct vacancy in statistics only. Secondly, IU Health's 142,235-sf lease at the end of 2019 removed a significant amount of available space from the market, but the healthcare system will not take occupancy until later this year.
In Q1 20, the Indiana Department of Health leased an additional floor at 2 N Meridian Street, aiding in an otherwise slow start to CBD activity. This comes on the heels of several traditional business services tenants downsizing last year. As these users decrease their overall space usage, tech and healthcare-related companies are increasingly growing their downtown footprints.
North Suburban Markets
New ground up construction is having a major impact on the suburban office market by drawing tenants out of traditional office parks, especially in the Meridian Corridor. The Parkwood Crossing vacancy jumped up to 24.2% in Q1 20. Conversely, in the Keystone Crossing submarket, vacancy tightened to 11.0%. Duke Realty Group's move from Parkwood into its new headquarters in Keystone Crossing aided to that submarket's direct net absorption of 93,911 sf. Owners of traditional office parks are increasingly making capital improvements to amenity centers and other shared facilities to attract and retain tenants.
In a departure from the norm, the largest user transactions in Q1 20 were all building acquisitions. Most notably, Knowledge Services bought the former Marsh Supermarkets headquarters along 1-69 and will relocate its operations from Castle Creek. With rental rates at historic highs, owner/occupant acquisitions are increasingly becoming viable possibilities for owner/users. Investment sales activity in Q1 20 continued 2019 trends, focusing on suburban value-add product and the closing of deals that began last year. The rest of 2020 will depend on the timing of the credit markets' return to normal functionality.
The Indianapolis office market recovered quicker than most metro markets following the last recession. Even so, the extent, length and severity of this pandemic is unknown and continues to evolve at a rapid pace. The scale of the impact and its timing varies between locations. To better understand trends and emerging adjustments, please subscribe to Colliers' COVID-19 Knowledge Leader page for resources and updates.