Indianapolis Office Rents Rising at a Record Pace
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 office market vacancy rate ticked up 0.6pp to 16.0% by the end of 2017, with stark contrasts in activity between the CBD and suburban markets. Overall trends denoted steady new leasing and investment sales activity, while asking rents rose 4.4%, the largest annual increase on record.
The CBD now has a lower vacancy rate than the suburban markets for the first time since 2012. Resurgent class A product downtown absorbed 265,090 sf of vacancy in 2017, due in large part to activity in top-tier office towers. After years of declining occupancy, downtown top-tier office towers shed 2.9 pp of vacancy in 2017 and ended the year with a 15.8% vacancy rate. Growth in the tech sector, highlighted by Salesforce’s Q2 17 move into the newly branded Salesforce Tower and InfoSys’s absorption of two floors in OneAmerica Tower, has been the catalyst for this change. Class A asking rental rates, following the decline of downtown vacancy, rose to $23.80 by Q4 17 – up 5.2% year-over-year.
Major 2017 absorption events occurred in the north suburbs as tenants shifted from Castleton, Meridian Corridor, and Keystone Crossing to new construction in fast-growing Carmel and Fishers. The Northwest submarket was unaffected by construction but saw the phasing out of Interactive Intelligence, which contributed to year-end negative net absorption. Still, the lion’s share of new leasing activity occurred in class A buildings in the north suburban submarkets, and newly available large blocks of space will create opportunities for tenants looking for quality space in established suburban office settings. Despite the increase in suburban vacancy, asking rates are up 5.9% year-over-year as owners continue to invest in their properties and compete for tenants.
Investment sales activity was strong for the second consecutive year. Inventory totaling 5.4 MSF traded for more than $600 million. The majority of investment activity was aimed at north suburban office parks. The year began as Duke Realty executed its national strategy to shift away from office product by selling Hamilton Crossing, and ended with Strategic Capital Group’s purchase of Precedent Office Park.
Moving into 2018, new construction will continue to play a role in the north suburban markets, while new-to-market tech and strong fundamentals will boost CBD occupancy and asking rents. With Indianapolis landing on Amazon’s top 20 list of cities for its potential new headquarters, the area is gaining attention as a go-to market for growing companies.