CBD Vacancy Rate Falls to Eight-Year Low


Market Overview

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. Both state and metro unemployment rates are nearing record lows, causing job growth in office-using industries to slow down as a result of nearly full employment.

The market vacancy rate stood at 15.8% midway through 2017, and increases in average asking rents were nominal. New construction is affecting the suburban office market, and tenants are justifying higher prices for new product. A few significant events in suburban properties pulled absorption levels into the red, while the CBD had another strong quarter.

CBD

The downtown Indianapolis market was at the center of both new leasing activity and positive absorption through Q2 2017. The shift and expansion of Salesforce into its namesake tower contributed to 133,159 sf of positive net absorption in class A CBD properties. Substantial absorption pushed the CBD vacancy rate down to 16.9% – it’s lowest level since 2009.

The increase in class A occupancy is causing vacancy rates to level out across all property types, creating a more balanced downtown office market. Average asking rates in top tier office towers increased to $24.76 psf by quarter-end.

North Suburbs

Office space in new construction is in high demand, accounting for nearly half of all new leasing activity in class A north suburban product during the last 18 months. Rental rates in new buildings are driving market rents up, and owners of older buildings are following suit with higher asking rates.

Northwest is the only northern submarket not experiencing an influx of new construction. Still, the area leads all suburban submarkets in 2017 new leasing activity, accounting for nearly half of all class A square footage leased. Healthcare tenants IU Health, MedXcel and Caresource stabilized vacancy that jumped when Genesys acquired Interactive Intelligence, leaving behind 175,000 sf in Woodland Corporate Park.

Investment Market

All investment activity in Q2 2017 occurred in the form of single building or two-property suburban portfolio sales. Omaha-based Metonic Real Estate Solutions entered the Indianapolis office market by acquiring the 243,271-sf portfolio of One and Two Penn Mark Plaza from True North.

Market Outlook

A growing trend, known as domestic outsourcing, is bringing more skilled tech jobs to the local office market. An article in The New York Times recently profiled companies who are opting to add outsourced operations domestically, including an announcement by Indian-based Infosys to bring nearly 2,000 jobs to Indianapolis by 2021. A larger skilled workforce is of paramount interest as tech-based operations becomes a more important sector in the Indianapolis office landscape.