Record Low Vacancy Despite Construction Spree
The U.S. economy grew by 1.9% in Q3 19, extending the longest economic expansion on record and pushing the rate of unemployment down to 3.5% - its lowest level in 50 years. While still positive overall, slow business investment amid uncertainty surrounding the trade war and a weakening global economy are hampering growth. Unemployment is also at its lowest rate since 2000 on both a statewide and local level: 3.2% and 2.6% respectively. As Indianapolis nears full employment, growth among industrial jobs is contracting down more than 40% year-over-year.
The Indianapolis industrial market vacancy rate fell to 4.0% in Q3 19, marking another historical low. Asking rental rates are also up 6.1%, the largest year-over-year increase in five years. New construction continues to dominate the landscape. Nearly 6.5 MSF of new year-to-date construction was completed, and users have already signed on for 85.6% of that space.Modern Bulk
Despite a slowing overall economy, consumer spending still grew at 2.9%. E-commerce continues to dominate the local industrial market, where three of the largest new transactions were for e-commerce operations. Modern bulk buildings have absorbed 7.0 MSF so far in 2019, lowering the product's vacancy rate to 6.4%. Developers are racing to keep up with demand by bringing new buildings to market. Moving into Q4, 27 projects totaling 11.5 MSF are under construction, one-third of which have speculative vacancies. Most of the investment activity this quarter was focused on modern bulk product, and competing investors are compressing yields. All bulk properties this quarter traded below a 6% cap rate and Black Creek's acquisition of World Connect 3 achieved a record low cap rate.Traditional Distribution
Traditional warehouse buildings have seen vacancy fall to 2.6% - down from 4.7% five years ago. The limited options and rising pricing of new product have allowed owners of older buildings to push rents, which are up nearly 6% in the last year. The higher rents are also allowing new construction of small and medium-sized speculative buildings to break ground.Office Service/Flex
Slowing business confidence has yet to hamper flex product, which achieved yet another record low 5.6% vacancy in Q3 19. The growth of smaller operations and expanding local companies has caused the amount of vacant space in flex buildings to be cut by more than half in the last five years. In the Northwest submarket, home to Park 100, a hub for flex users. rental rates have grown by 11.3% in just 12 months and vacancy fell 11.7 percentage points in the last three years.Market Outlook
All sectors of the Indianapolis industrial market are booming, reaching the lowest vacancy and highest rental rates on record. The result has been an influx of new construction of all varieties. Developers are targeting the varying demands of users and differentiating their product from the growing number of options available in the market. For only the second time ever, there are two speculative projects larger than 1 MSF under construction. one of which is the first in the market to have a 40' tall clear height. Whether users have the appetite for the premium rent associated with the added cubic feet has yet to be seen. and how developers differentiate between their respective buildings and the 9.4 MSF speculative space under construction is worth keeping an eye on in the coming months.