Industrial Developers Look to Indianapolis


Market Overview

The year began with a leadership change in the White House and at the Indiana Statehouse and ended with the signing of the U.S. Tax Cuts and Jobs Act. While there will likely be lasting effects from both national and local legislation, 2017 was more or less a year of the same positive economic trajectory. After 87 months of job growth and the creation of 2.1 million jobs, the unemployment rate continued its decline to 4.1%, a 17-year low. The Indianapolis area, with an even lower 2.8% unemployment rate, is virtually at full employment.

The local industrial market vacancy rate held steady at 5.2% throughout most of 2017, despite a wave of new speculative construction deliveries. New development as a whole more than doubled the amount of square footage delivered in 2016, and absorption was down 14% year-over-year compared to the record-high level reached in 2016.

Modern Bulk

New development of modern bulk product soared. Developers sought to capitalize on high absorption momentum with an influx of speculative projects. Of the 7.8 MSF delivered in 2017, 6.9 MSF was developed on a speculative basis. Despite some added speculative vacancy in Q4 2017, strong YTD new leasing activity of 9.8 MSF and positive YTD direct net absorption of 7.0 MSF kept direct vacancy at a low 7.8%. New 3PL and e-commerce operations accounted for 59% of all modern bulk space leased in 2017. The logistical advantages of the Indianapolis market to draw these growing industries bodes well for the future of the local modern bulk real estate market. 

Medium Distribution

Buildings set up for medium distribution boasted the largest year-over-year rent growth. The 25.6% increase can be attributed to the high occupancy and limited new construction of this product. The only speculative building delivered in 2017 in the 50,000 to 75,000-sf size range is 100% leased. Although user sales volume was down as a whole across all other product types, sales of traditional warehouse and medium distribution facilities rose by 10.8%. The East submarket was the most active in owner/user sales, while the Northeast experienced the highest average sales price psf.

Light Industrial/Flex

No existing product type exhibits the strength of the local industrial market like the light/industrial flex product. Before the end of 2016, the flex vacancy rate had never reached single digits. At the end of 2017, the vacancy rate fell to 7.9% and asking rents rose 5.9% year-over-year. The Southwest led all submarkets with a 4.7pp 12-month occupancy increase. East, which saw occupancy tighten by 1.6 pp, experienced a 12.4% growth in asking rental rates. Investors took notice in several East submarket portfolios, including Lincoln Business Park, Shadeland Business Center, Post Park, and Shadeland Industrial Park, which all traded hands in 2017. 

Market Outlook

Moving into 2018, there is 5.5 MSF under construction, 60% of which is either pre-leased or BTS. Positive momentum combined with strong lease-up of existing space will help keep vacancy low. New-to-market and existing distribution operations will continue to boost the Indianapolis industrial market, bringing investment and more local jobs.