Solid Leasing Activity in Booming Economy
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 office market vacancy rate of 15.9% is up 0.1pp from Q2 17, while rental rates continued their ascent to record levels after years of stagnant growth. Year-to-date direct net absorption ended the quarter just below 100,000 sf, which is up significantly year-over-year. Leasing activity, a positive future indicator for real estate fundamentals, is up 77% as business continue to locate within the Indianapolis market.
The downtown Indianapolis office market had been on a tear in this economic cycle, both in terms of rent and occupancy growth. Rents are still ticking up with room to grow – up 4.2% year-over-year in class A buildings. One large corporate move pushed vacancy up slightly in the CBD from the record-low level set in Q1 18. Angie's List, under new ownership, shifted operations from Landmark Center, to a smaller footprint at 130 East. Benesch, Friedlander, Coplan & Aronoff closed in OneAmerica Tower on the other side of downtown. These additional vacancies are only a hiccup in the resurgent Indianapolis CBD office market, where occupancy has grown to nearly 85% - up 120 basis points from Q2 17.
North Suburban Markets
Rental rate growth is accelerating rapidly in north suburban office buildings. In highly coveted office parks, landlords are pushing rents to figures that were until recently only quoted in new construction projects. Year-to-date class A direct net absorption in Keystone Crossing and Meridian Corridor ended the quarter at 62,304 SF and 29,525 SF respectively. Duke Realty Corporation announced at the beginning of the quarter that it would tear down an existing structure in order to construct a 78,000-SF building to relocate its headquarters. While mostly infill submarkets, developers are searching for any opportunities to capitalize on the tight vacancy and high rent growth in these submarkets.
Investors turned their focus mostly to value-add properties in Q2 18. Notably, a joint venture between lntegris Ventures and Starlight Equity purchased a 50,000-SF building downtown known as the Meridian Centre from longtime owner Corporate Park Development. The sale highlights an ongoing trend of redevelopment and investment in downtown buildings.
Office absorption is closely tied to job growth. As firms hire more people, they tend to lease and occupy more space. In Indianapolis, the area unemployment rate is 3.4%. The local market is pushing closer and closer to full employment. Expect absorption to continue on an upward trajectory in 2018 but slow in 2019. Rents will continue to rise as available space tightens. More new development and capital investment in office product is on its way through the end of 2018.