Rents Still Growing as Vacancy Ticks Up

 

Market Overview

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%.

The local office market vacancy rate ticked up from Q2 2018 to 16.0% while still recording positive year-to-date direct net absorption of 154,483 sf. Asking rents are up but slowed to a 3.1% year-over-year growth. With no sizable new lease transactions signed in Q3 2018, leasing activity is down 13.8%, while investment sales activity is on par with 2017 levels.

 

CBD

Downtown Indianapolis office vacancy ended the quarter at 15.7% – down from 16.4% in Q3 2017. Tech-related companies continue to dominate the headlines and affect real estate fundamentals in the CBD. The highly anticipated Bottleworks project broke ground at the end of Massachusetts Avenue and signed its first major office tenant in Q3 2018. High Alpha, a “venture studio” with success in creating and funding local tech companies, will operate out of 41,470 sf in the 1.2 MSF development. Large blocks of vacant space set to open up in the next six months, including Anthem’s Monument Circle location and Salesforce’s sublease in the Century Building, are likely to be filled quickly as new-to-market and growing companies continue to be drawn to downtown Indianapolis.


North Suburban Markets

Shifting tenants in the suburbs are affecting each submarket differently. In Q3 2018, Carmel benefited from the relocation of MJ Insurance, previously in the Keystone Crossing submarket, to its new development in Midtown Carmel. The space left behind by MJ Insurance was mostly backfilled by Healthx, who also shifted from a neighboring building. The space that Healthx left behind is now vacant. The musical chairs and downsizing of some large tenants earlier in 2018 caused rising vacancy in some class A- and B+ buildings, thus driving up concessions by some landlords. In highly coveted office parks, though, owners are pushing rents to figures that were until recently only quoted in new construction projects.

 

Investment Market

Year-to-date, more than $300 million of local office assets have sold. Growing rental rates have pushed pricing in investment sales activity by 30-40% in the past three years. Q3 2018 activity was dominated by investors doubling down on the Indianapolis market. Zeller Realty Group, following its successful repositioning and sale of Market Tower, acquired Capital Center, the fourth-largest downtown property. NAYA USA Investment & Management bought 500 North Meridian, thus expanding its class B/C portfolio, while DRA Advisors completed its purchase of Meridian Plaza.

 

Market Outlook

The biggest challenge facing ownership, especially in some assets in north suburban submarkets, is the vacancy on the horizon. The number of competitive large blocks of vacant space is about to grow, a positive sign for large tenants in the market weighing the benefits of relocating to a new home.