Industrial Market Boasts Historic Low Vacancy
The U.S. economy is boasting the lowest unemployment rate since 1969 (3.7%), the 2nd longest expansion since the 1960s, and the longest streak of monthly hiring on record (8.5 years). Nearly 200,000 jobs were added in Q3 2018, and wages are finally growing. Amazon, one of the nation’s largest employers, even raised the minimum wage for its employees to $15/hour. The Federal Reserve, praising the economy, raised the federal funds rate again in September to 2.25%. The Indiana job economy paints an even rosier picture. The state’s labor force grew by 2%, and unemployment is at 3.5%.
Vacancy for industrial product is at an all-time low both nationally and locally. At 4.2%, the direct vacancy rate for Indianapolis has fallen by 0.5pp since last quarter, and asking rents are up 4.5%, marking the largest year-over-year jump since 2014-2015. More than two-thirds of the construction completions in Q3 2018 were BTS or pre-leased speculative product, which contributed to the 7.6 MSF of year-to-date direct net absorption as new tenants entered the market.
E-commerce now accounts for 10% of all retail sales outside of the automotive industry and continues to be one of the biggest drivers in the modern bulk real estate market. The vacancy rate for this type of product ticked down to 6.7%, a 0.8pp drop from Q3 2017. Of the ten construction projects delivered in Q3 2018, only three were unleased by their completion. Strong activity drove additional developers to break ground on speculative product during the quarter. A total of 16 projects totaling 7.3 MSF, with 5.0 MSF unleased speculative space, were under construction moving into Q4 2018 as developers seek to capitalize on the booming industrial economy.
The East submarket, where more than half of the product is traditional or medium-distribution warehouse space, saw the strongest year-over-year occupancy gains: 94.5% to 97.0%. With large blocks of decent space in the submarket filling up, rates will start to tick up. Still, rents are comparatively below market. The tightening of the submarket is helping to boost new development east of I-465 in Mount Comfort.
Nowhere is business confidence more impactful than in small flex and light industrial buildings. Flex product, which is home to many new and expanding companies, reached another historic low vacancy rate in Q3 2018. The 5.8% flex vacancy rate is down from 7.6% in Q3 2017. The Southwest submarket, which fell from 8.7% to 4.4% vacancy in the last 12 months saw an average asking rent increase of 21.3% during that time. Flex continues to be the darling of investors locally as noted by the 401,223-sf sale of Northeast Business Center in Q3 2018.
Industrial real estate will remain the most dynamic commercial real estate market, with a high volume of new development and low vacancy. One key factor to a market’s success is its proximity to logistics hubs. More and more companies are looking at Indiana’s highway infrastructure, its business-friendly environments, its centrality in the nation, and its growing industry footprint and choosing to locate operations in the Indianapolis metro area. With e-commerce expected to grow by 55% over the next four years, the health of the central Indiana industrial market is not expected to fade.