Industrial Market Expanding South, Northwest
The U.S. economy surged in Q2 18. The 4.1% growth in GDP marked the best quarterly growth in nearly four years. Many economists credit tax cuts, deregulation, and government spending, but warn that retaliatory Chinese tariffs and interest rate actions by the Fed could threaten sustainability. Regardless, economic confidence by both businesses and consumers is at a 20-year high, which is positively affecting consumer spending and business investment, both of which have positive impacts on real estate markets.
The local industrial market vacancy rate ended Q2 18 at a record low 4.7%. Limited construction deliveries and strong absorption of 2.9 MSF were key factors in the major drop in vacancy. Both absorption and leasing activity are posting strong figures on par with last year's activity. A new flurry of construction is poised to break ground by the end of summer.
By the end of July, 16 modern bulk projects totaling 6.3 MSF were under construction with another seven projects totaling 2.4 MSF set to break ground in July. With a low vacancy rate of 7.1%, the development spurt is necessary to keep up with demand. The majority of new construction can be found in the South and Northwest submarkets where developers are taking advantage of lower land costs. The sheer volume of new bulk development is not showing any signs of slowing down.
Q2 18 marked another slow quarter for investment activity in bulk product with the exception of Blackstone Group who purchased four buildings as part of a national portfolio from Cabot Properties at near-record low capitalization rates.
Availability in traditional warehouse buildings with lower clear height is limited as the vacancy rate for this product type tightened to 5.2% in Q2 18. The East submarket continues to lead in occupancy growth in older buildings, contributing nearly 500,000 sf of positive direct net absorption.
Unaffected by new construction. light industrial and flex product reached 93% occupancy in Q2 18, which is the tightest on record. The Southwest led all submarkets in 13.5% yearover-year rent growth; the Northwest was not far behind with a 13.3% increase. The East submarket led in occupancy gain with an increase of 3.2pp. The majority of investment activity took place in those submarkets. Grey Street Properties grew its portfolio with the acquisition of Post/33rd Business Park and several building in Park 100 and Park Fletcher, while Maplestreet Investments acquired Inner Park from
Industrial demand is expected to stay strong through 2018. E-commerce sales. a key factor in industrial output. rose at rates five times faster than traditional retail sales. Rental rates, while at all-time highs nationwide, are still lower than transportation costs. Indianapolis, with its central location, is able to benefit from its proximity to other major markets and rents lower than primary markets. Labor is still the biggest barrier, but it is not a challenge unique to the local market. Statewide and local government are active in combating any workforce issues. All of these factors put the Indianapolis market in a strong position throughout 2018.