Industrial Market Exhibits Balanced Strength
With no significant policy changes at the local or national level, the U.S. economy maintained slow-to-moderate growth through Q3 17. Surveys show an upbeat business sector and high consumer confidence, which both traditionally trigger boosts in capital investment and consumer spending. The U.S. job market ended the quarter with 4.2% unemployment, the lowest since 2001 whereas central Indiana has a 3.4% unemployment rate. As job markets near full employment, a slowdown in job growth is inevitably taking place.
The local industrial market vacancy rate stands at 5.2%, up 0.3pp from Q3 16 but steady with Q2 17. New construction, heavily weighted towards speculative projects, is growing the inventory base. Absorption is still down 51% from this time last year when absorption reached a record high by year-end.
Despite an additional 3.3 MSF of YTD speculative construction deliveries, the modern bulk direct vacancy rate is down 0.1pp to 7.5%. New leases totaled 7.5 MSF, with 3PL tenants and e-commerce operations accounting for more than half of new user activity. Notable transactions in Q3 17 included XPO Logistics’ lease of the 1.1 MSF distribution center in Lebanon that had been on the market for more than 36 months. In late September, UPS purchased the 892,540-sf nearly-completed Plainfield Logistics Center for $82 million. Both significant user transactions will contribute to net absorption in Q4 17, climbing towards the record absorption levels reached last year.
Asking rents for modern bulk product have been relatively stable, with the exception of spaces under 150,000 sf. These small- to mid-sized distribution spaces in modern bulk buildings are in highest demand, accounting for more than half of all new leases signed during the last 12 months. Triple net asking rents for these spaces have grown 15.8% year-over-year to $4.61, and more new product is under construction.
Light industrial/flex product continues to outperform the rest of the market in terms of occupancy growth. Vacancy rates fell in all submarkets, pushing the average flex vacancy rate to 7.6%, a 2.7pp year-over-year change. The Southwest and Northwest flex submarkets both experienced a 5.3pp bump in occupancy since Q3 16. These submarkets also saw the largest increases in weighted average asking rental rates.
Investment activity was balanced amongst all product types in Q3 17. Transwestern increased its local bulk ownership footprint with the acquisition of two modern bulk buildings in the Southwest submarket, while Brennan Investment Group grew and diversified its Indianapolis-area portfolio with two purchases. Year-to-date, investors have capitalized on 8.4 MSF of local product, on pace to match 2016 activity.
Another 3.4 MSF of new product will be delivered in Q4 17. While 41% is unleased as of this report, the level of tenant activity in the market should keep vacancy at a healthy level.