CBD Shows No Signs of Slowing Down
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 office market vacancy rate stands at 15.8%, up 1.0pp from Q3 16 but steady with Q2 17. New leasing activity and positive absorption events were spread evenly across downtown office property types, resulting in declining vacancy and higher average asking rental rates. In the north suburbs, a wave of new construction projects are shifting occupancy.
Downtown Indianapolis office product continues to outperform the rest of the market in terms of occupancy and rental rate growth. The resurgent class A market vacancy rate shed 4.2 pp in the last 12 months, ending Q3 17 at 14.8%. Meanwhile, the creative/character class of buildings still boasted the highest occupancy of 87.5% and asking rent growth of 16.4%, the strongest of all subsets in both categories. InfoSys’s entrance into the Indianapolis market with a 35,378-sf lease in OneAmerica Tower and HomeAdvisor’s 17,622-sf expansion at the Marott Center highlighted the new leasing activity in Q3 17.
New construction continues to impact the suburban office landscape, most notably in the two fastest growing markets: I-69/Shadeland and Carmel. Stanley Convergent Security Solutions and BlueSky both relocated and expanded into their respective BTS construction projects, resulting in 55,000 sf of positive net absorption for the I-69/Shadeland submarket. Additional new construction projects broke ground in Carmel that will shift significant occupiers MJ Insurance and Allied Solutions from the Meridian Corridor and Keystone Crossing submarkets in the coming months.
The Northwest submarket, with its lack of new construction and a healthy amount of new leasing activity in the first half of 2017, turned into a hotspot for investment activity in Q3. Duke Realty continued to execute its national strategy to shift away from office product by divesting its three remaining local traditional office properties: Woodland V, VI & VII. Meanwhile, Priam Capital expanded its Indianapolis footprint by acquiring a leased-up Intech Ten and Tempus Management entered the market by purchasing One College Park from Zeller Realty.
Vacancy in the CBD continues to tighten as tech and new-to-market companies occupy vacant space. The asking rate for downtown office buildings will rise through the end of 2017 as absorption grows. In the suburban office markets, the impact of new construction is just beginning. Even though vacancy will grow as tenants shift from older product, rental rates will also grow as both old and new product alike look to push up rates.