The U.S. and the world at large are facing a tremendous challenge, the scale of which is unprecedented in recent history. The spread of the novel coronavirus CCOVID-19) is significantly altering day-to-day life, impacting society, the economy and, by extension, commercial real estate.
This report will focus primarily on the strength of the Indianapolis industrial market in Q1 20, which had not yet seen the inevitable effects of the shutdown orders and impending economic downturn. In fact, the Indianapolis industrial market achieved another strong quarter across all key metrics. Most notably, net absorption and new leasing activity posted 12.1% and 16.7% year-over-year increases from Q1 19, a year when both market indicators reached record high levels by year end.
E-commerce and third-party logistics C3PU companies dominated modern bulk tenant activity to start the year, accounting for 49.5% and 30.1% respectively of the 4.9 million square feet CMSF) in new leasing volume. Four tenants signed transactions larger than 500,000 sf, pushing the average deal size for the quarter up to 325,334 sf. Additionally, nearly 90%of new leases signed in the first three months of 2020 were new-to-market operations or expansions of existing footprints.
Strong activity will need to be sustained to absorb the 6.7 MSF of speculative modern bulk construction on track to be completed in 02 2020. Developers are still keen on breaking ground on several additional projects this summer, showing increased optimism in tenant demand and the Indianapolis industrial market's ability to bounce back from any future setbacks caused by the emerging global pandemic.
Vacancy for traditional warehouse and mid-sized distribution product remains especially tight. Outside of the manufacturing sector, which is primarily owner/occupant, vacancy for nonÂmodern bulk warehouse maintains the markets lowest at 3.1%.
The volume of investment sales activity in Q1 20 was concentrated in single-tenant net lease investments and midÂsized distribution buildings. Plymouth Industrial REIT added another asset to its growing class B local portfolio with the acquisition of a 276.420-sf property on Franklin Road. The REIT is hoping to capitalize on continued rent growth in the East submarket, where year-over-year rents are up 8.6%.
Flex product reached yet another historical milestone at the end of Q1 20 when the vacancy rate reached a record low 5.4%, a 30 bps decrease from Q1 19. The market average rental rate also grew by 5.4% in the past 12 months. While COVID-19 and its effects on the economy could hurt small business operations and their ability to pay rent, the flex market and the overall Indianapolis industrial market appears to be in a better position than it was prior to the last recession in terms of overall occupancy, long-term rent growth and user demand.
The extent, length and severity of this pandemic is unknown and continues to evolve at a rapid pace. The scale of the impact and its timing varies between locations. To better understand trends and emerging adjustments, please subscribe to Colliers' COVID-19 Knowledge Leader page for resources and updates.