Cushman offers optimistic view of Indianapolis real estate market

One of the city’s largest commercial real estate brokerages said it expects the local real estate market to continue to strengthen, as several sectors show improvement in occupancy and other key indicators.

The local office of Cushman & Wakefield described its outlook in its annual State of Real Estate report, which the firm presented at a public event Thursday.

The report finds plenty of reason for optimism. The Indianapolis economy has experienced year-over-year job growth, with total non-farm employment rising by 1.6 percent since the fourth quarter of 2015. At the same time, the city’s unemployment rate has dipped to 4 percent, lower than the national average of 4.8 percent.

Office, industrial and multifamily real estate are particularly strong sectors, helping to drive the rosy outlook.

Office

The office vacancy rate for the entire Indianapolis area at year’s end stood at 14.8 percent, down from 15.6 percent at the end of 2015—then the lowest vacancy mark for the metro office market since the third quarter of 2007.

Downtown’s vacancy, which once stood at about 21 percent, continues to trickle down, from 17.5 percent in 2015 to 17.1 percent at the end of 2016.

“It’s been tough for a lot of years,” said David Moore, a Cushman & Wakefield office broker. “It’s been oversized for so long. It’s finally growing into itself right now.”

Much of the new occupancy can be attributed to what Moore refers to as “tower transformation,” in which tower owners are transforming their properties to make them more appealing to younger companies.

Others are moving downtown from the suburbs as the city’s core gains population from the multitude of new apartment projects. And there’s also the Salesforce effect. The San Francisco-based company is establishing a regional headquarters in the former Chase Tower, now renamed Salesforce Tower, and helping to make it more attractive for a tech firm to put down stakes in a traditional tower.

“It’s not renovations that are going on,” Moore said. “It’s bigger than that.”

Industrial

Though maybe not as sexy as the other real estate sectors, industrial is on a tear, with a measly vacancy rate of just 3 percent.

In the fourth quarter of last year alone, the industrial market absorbed more than 1.8 million square feet, bringing absorption for the entire year to nearly 8.3 million square feet, the highest total in the history of the market.

“I’m no historian, but I have been in the business for 20 years and haven’t seen anything like 2016,” said Bryan Poynter, a Cushman industrial broker. “Industrial records were shattered.”

Vacancy is expected to rise, however, in 2017. But only because a dozen speculative construction projects are in the pipeline totaling 6.3 million square feet, he said.

Several new players also are entering the local industrial market: including Chicago-based Molto Properties LLC. In January it bought 47 acres in the AmeriPlex business park and plans to build a 621,000-square-foot spec building there.

Multifamily

The rapid pace of local apartment construction, particularly in the downtown and north-side areas, shows no signs of slowing.

The local market delivered 3,000 new units in 2016, with another 3,700 in the pipeline this year, said Scott Pollom, a Cushman multifamily broker.

Overall occupancy at year’s end stood at 93.2 percent, extending the longest period of occupancy above 93 percent in the past decade, he said.

Occupancy at Class A apartment buildings is even higher downtown, at 96.9 percent. The high occupancy, in turn, is helping to drive rent growth. Average monthly rent increased by 2.2 percent in 2015 and by 4.8 percent last year. Downtown, it grew “an astonishing” 8.5 percent, Pollom said.

“With so many new, high-end properties in the downtown market, that’s one reason you see such high rent growth,” he said.

Pollom foresees demand keeping pace with new supply, due to rising interest rates that will keep would-be homeowners in the rental market.

Retail

The retail sector presents more of a mixed bag, with additional store closures expected as retailers grapple with right-sizing stores and e-commerce operations while confronting heightened acquisition activity.

Overall, retail vacancy in the Indianapolis market is a healthy 5 percent. Much of the retail growth continues to be driven by restaurants and grocery stores, which accounted for between 60 percent and 70 percent of deal activity in the United States.

Fast-casual chains have driven most of the restaurant growth, while small-format and niche grocers continue to proliferate.

In Indianapolis, a few of the retail hotspots are Massachusetts and Virginia avenues, trendy areas that made Cushman & Wakefield’s national “Cool Streets” list.

“Cool Streets” mostly are occupied by local retailers that can react quicker to trends than their corporate competitors can, said Jacque Haynes, a Cushman retail broker.

Streets such as Massachusetts and Virginia avenues will continue to drive the retail market, she said.

“There are certainly challenges, but landlords are finding other concepts that fuel the millennial generation,” Haynes said.