Industrial Market Soars with Record Absorption


Market Overview

The U.S. economy created 180,000 jobs per month on average in 2016. The steady hiring, though down from 2015, helped to lower the unemployment rate to 4.7% by year’s end. State and local unemployment continues to outpace the national rate. In the Indianapolis MSA, 5,500 jobs were added in industrial-using industries. The direct vacancy rate for local industrial product declined to 5.1% amidst record net absorption and limited new speculative construction. The 73% increase in leasing activity and spike in absorption are indicators of a healthy market, and will lead to a new wave of development.

Healthy Balance of New Construction

New construction completions, especially in the modern bulk sector, slowed in the last 12 months. After 4.8 MSF of speculative construction caused the vacancy rate to climb at the end of 2015, developers were wary to build until demand was able to catch up with supply. As a result, new construction completions were limited to four buildings totaling 1.8 MSF, while the number of build-to-suit (BTS) construction projects were on par with 2015 levels.

By the end of 2016, more than half of the speculative space built during the year had been leased or purchased. The record levels of net absorption and lease-up of the majority of this new speculative product is causing new development to spike again. Moving into 2017, there are ten speculative projects (5.2 MSF) and 13 BTS projects (1.2 MSF) under construction. With another 2.6 MSF in the pipeline, expect substantial inventory growth in 2017.

Modern Bulk & Record Absorption

While making up only one-third of total inventory, the modern bulk market accounted for 62% of new leasing activity and 76% of overall net absorption in 2016. Indianapolis ranked 6th in the U.S. for overall net absorption (up from 25th in 2015). New-to-market and expanding operations accounted for the vast majority of new transactions in the Indianapolis market. The Kohl’s purchase of a 936,510-sf speculative facility is the largest example of the rise of e-commerce, while 3PL operations continue to thrive in this centrally located logistics market. Asking rents have been reluctant to, but they have the potential for minor growth in months to come, especially with 1-3% average rises in construction costs. With approximately 10.5 MSF of tenants seeking space, the local modern bulk market should keep its momentum through 2017.

Developers Vying for Land Positions

The number of developers seeking to capitalize on the health of the industrial market is growing. Some institutional developers, who may not have considered the area in the past, are vying for land positions for potential development. The resulting demand is causing land prices to rise in dense areas and heightening labor competition, especially in the city of Plainfield in the Southwest submarket. Other developers are weighing options to extend development further outside the metropolitan area. With no natural boundaries such as oceans, mountains or lakes, the ability of the Indianapolis market to expand geographically to Monrovia and Mount Comfort could benefit growth. One area to watch is whether benefits of lower land pricing will outweigh the cons of a thinner amenity base.

Traditional & Medium Distribution

Traditional distribution facilities’ ability to draw tenants in search of competitive rental rates combined with a proximity to more densely populated areas has kept activity high. Non-modern-bulk distribution spaces boast an average direct vacancy rate of 3.6%, which is 110 basis points lower than Q4 2015. A lack of medium distribution options in the 50,000 to 100,000-sf range has triggered new construction with suitable blocks of space to meet this steady demand.

Flex Vacancy Outpaces Market

Light industrial, or flex product, was unaffected by new speculative construction and continued its vacancy decline through 2016. The total market flex vacancy rate fell to 9.8% by year’s end – the first time in single digits in more than a decade. Asking rents, up 6.7% year-over-year, are another sign of the steady health of the flex market. In the Southwest submarket, new owners are taking advantage of these strong market fundamentals. More than a third of flex product in southwest Indianapolis has changed hands since 2014, and these new owners have been able to capitalize on their investments by drawing new tenants and growing occupancy. The flex vacancy rate in the Southwest submarket fell by 5.5pp to 13.3% during the last 12 months.

Investment Activity Rebounds

The industrial investment market rebounded from a sluggish 2015 with 14.7 MSF trading across 40 separate transactions in 2016. Sales volume nearly reached $600 million – a 22% year-over-year increase. Modern bulk sales volume grew by a larger margin than other product types. Transpacific Development’s sale of their 8-building portfolio to a joint venture between Olympus Venture and Biynah Industrial Partners was the largest transaction completed in the last 36 months. Gramercy Property Trust became the second largest owner of local modern bulk product (Duke is first) after an active 2016. The purchase of a 700,981-sf flex portfolio by Shear Property Group and an 823,088-sf traditional distribution portfolio by Real Capital Solutions helped buoy sales closer to the record level reached in 2014. On the aggregate, price psf for modern bulk sales transaction rose above $50 and exceeded $40 for light industrial product. Average weighted cap rates across all product types lowered as a result of a low-interest atmosphere combined with an increased investment demand in emerging secondary markets like Indianapolis.

Market Outlook

The growth of the industrial market is having a clear impact on Indiana’s employment market. If the Indianapolis region is able to continue this momentum in bringing new companies and operations to the market, the ability to hire employees able to fulfill those job requirements is crucial. In order for the industrial market to continue to succeed, the labor force will need to keep up. Indiana’s newly elected governor spoke to this issue of increasing the skills of Indiana’s workforce in his first State of the State address. Expect a focus on state and local initiatives to build upon and strengthen the labor pool in 2017.