Office Market Picks Up Speed After Slow Start
The U.S. economy grew by 2.3% in 2019 and is in its longest expansion on record. After adding 2.1 million jobs, the nation's unemployment rate ended the year at 3.5%, the lowest level since 1969. Strong consumer confidence led to an increase in year-end retail sales, but business investment slipped amid slowdown concerns. Wage growth is sluggish, ongoing trade disputes with China are negatively impacting an already struggling manufacturing sector, and GDP growth, while still positive, grew at its weakest rate in the last three years.
The Indianapolis office market vacancy rate increased by 60 bps year-over-year, triggered by high-profile headquarters consolidating and tenants shifting to new construction. These moves caused negative year-end net absorption for the first time since 2010. Still, asking rents rose 3.0% while both new leasing and investment activity were virtually flat with 2018.
Tech-related and service-based companies continued to look to the downtown Indianapolis market to grow their operations. ANGI Homeservices expanded their footprint again, taking two more floors at 130 East, and Salesforce absorbed an additional floor in Salesforce Tower. Asking rents rose 5.7% year-over-year to $23.37 FSG. Despite increased activity and positive net absorption during the second half of 2019, Anthem's Q1 2019 move out of a 213,609 SF building on Monument Circle ended a six-year streak of declining vacancy, with the year-end CBD vacancy rate up 81 bps over 2018. Besides this major outlier event, overall momentum is still positive, and occupancy growth should pick back up where it left off. At the end of December, IU Health leased more than 140,000 SF at the Landmark Center and will take residence in 2020.
North Suburban Markets
New construction projects in the suburbs are driving up vacancy due to tenants relocating from nearby buildings. In mid-2019, KAR Auction Services moved from 180,000 sf at Hamilton Crossing to their newly constructed 253,500 SF BTS along the Meridian Corridor, contributing to positive absorption but increasing the suburban vacancy rate. More than 40% of the total market's new leasing activity took place in class A north suburban buildings, and this strong trend will be needed to absorb the growing number of large blocks of vacant space.
Investment sales showed varying performance by submarkets and asset type. In the CBD, owners opted to refinance during a period of minimal trading, while value-add suburban activity was solid during the year. In Fishers, buyers hope to capitalize on the market-high 9.7% rent growth for class A space with purchases of the primarily vacant former Marsh building and Crosspoint Plaza. In Midtown Carmel, another burgeoning submarket, the Allied Building traded at a record low cap rate. Sellers put a large amount of stabilized suburban product on the market in 2019 and hope to achieve strong pricing in 2020 as rental rates rise yet large vacancy concerns grow.
Overall, rents are at previously-unseen levels for existing product and are still rising, driving more developers and users to consider new construction. With the recent preleasing success of The Ellipse and The Agora, additional projects will break ground in 2020. Expect this to have a continued impact on rising rents and grow the vacancy in some older buildings.