Speculative Construction on the Rise
The U.S. economy rebounded in Q2 2017 after a slow start to the year. A 2.8% uptick in consumer spending, which accounts for 70% of all economic activity, helped trigger a 2.6% boost in the nation’s GDP growth. The Indiana unemployment rate fell to 3.0%, and the Indianapolis metro area boasted a 2.9% rate at the end of June. Even as the state and local metro area near full employment, growth in industrial-using industries continues to grow – up 11,200 jobs since June 2016.
The market vacancy rate stood at 5.2% midway through 2017, and average asking rents are flat year-over-year. The influx of new construction, heavily weighted towards speculative projects, is on the rise. Absorption is down 49% from this time last year when absorption reached a record high by year-end.
A wave of new construction is underway as developers seek to capitalize on the strong fundamentals of the Indianapolis modern bulk market. Tenants have already committed to more than one-third of the 5.2 MSF of modern bulk product under construction, the majority of those projects broke ground on a speculative basis. Best Choice Products signed the largest new lease in Q2 17, committing to occupy a 702,000-sf speculative building at GreenParke in Plainfield. Moderate new leasing activity totaled 3.8 MSF through Q2 17, and another 2.5 MSF of new leases are set to be signed in early Q3 17. The volume of new modern bulk construction and subsequent lease-up is the primary contributor to year-to-date absorption, adding 2.9 MSF of positive net absorption to the market.
Traditional & Medium Distribution
Leasing activity was balanced between large, bulk deals and those signed for small to mid-sized warehouse/distribution operations. The average size of a new warehouse lease signed through Q2 17 was 84,000 sf. Developers continue to ask premium rent for spaces less than 150,000 sf in newly constructed buildings. Gross asking rents for these spaces rose to $5.52 psf – up 3.4% from January and 48% higher than rents in availabilities larger than 600,000 sf.
Exeter Property Group acquired a two-property, 480,524-sf portfolio in Park 100 from Pinchal. Otherwise, investment sale activity of traditional distribution product was light in Q2 17, especially compared to the strong activity in Q1 17.
The vacancy rate for light industrial/flex product fell to another record low by the end of Q2 17: 8.4%. Strong occupancy growth across all major flex submarkets caused the vacancy rate to drop 2.5 percentage points since Q2 16. In the Southwest submarket, the vacancy rate fell 5.6 percentage points over the same timespan, while asking rents were steady.
The majority of year-to-date flex investment activity occurred in the East submarket, which is leading all submarkets in year-over-year asking rent growth of 3.5%.
Developers are full speed ahead with new construction. Once the product is complete, vacancy will tick up, but the local market is in a great position to capitalize on a healthy logistics and distribution industry bringing more jobs to the region.