Indianapolis office vacancy rates still rising

Rising vacancy rates continue to plague the downtown office market, according to a midyear report from Indianapolis-based Meridian Real Estate.

The amount of available downtown office space has grown in recent months, from 19.3 percent at the end of last year to 22.2 percent in June.

“I would say that’s a pretty significant change over the last six months,” said Jeff Harris, president of Meridian Real Estate.

Even so, the market is beginning to show signs of stabilizing, he said.

One of the most encouraging examples is a 70,000-square-foot lease the owners of M&I Plaza signed with a civilian division of the U.S. Marine Corps. As IBJ reported in March, the Marine Corps Technology Services Organization plans to move from Kansas City, Mo., in two phases starting this summer and finishing up in January 2011.

The 10-year, $20 million deal for four full floors of the 28-story building will push the city’s sixth-largest office tower from a woeful 30-percent occupancy rate to about 50 percent.

Conversely, the state of Indiana continues to downsize its downtown office footprint by consolidating agencies at its government center and reducing outside office space, the report said.

Roughly 2.8 million square feet of downtown office space is vacant, out of a total inventory of 12.7 million square feet. That's like having two-and-a-half empty buildings the size of Chase Tower, downtown's largest office complex.

Faring just as poorly is Keystone at the Crossing, near the Fashion Mall. The vacancy rate in that submarket increased by nearly 4 percentage points, to 27.3 percent. Landlords at Keystone are being extremely aggressive to maintain current tenants and attract new ones, the report said. Building owners are increasing concessions and lowering rents, and in some cases, even offering free rent for a period of time.

Keystone is among the worst of the 10 submarkets Meridian Real Estate tracks in central Indiana. Only three other areas are faring worse: the east/southeast submarket, which reaches from Beech Grove to north of 56th Street and has a 43.3 percent vacancy rate; the northeast region, which extends from 56th Street to Allisonville Road and vacancy rate of 28.5 percent, and Greenwood, with 28.3 percent of office space vacant.

Vacancy in the North Meridian Street corridor extending to Carmel, where several new office buildings have been constructed in recent years, also grew, from 19.5 percent at the end of last year to 21.1 percent in June.

“Typically, this submarket accounts for a fair volume of leasing activity; however, that has not been the case lately,” the Meridian Real Estate report said.

AT&T has indicated it will terminate its lease at the Parkwood Crossing office complex at Meridian and 96th streets and American Family Insurance, also located at Parkwood, is exploring other options, the report said.

Overall, vacancy rates grew in nine of the 10 submarkets tracked by Meridian Real Estate. The midtown submarket from 16th to 56th streets is the only one in which vacancy rates fell, from 15.1 percent at the end of last year to 9.7 percent in June. That is among the smallest areas, however, accounting for just 16 buildings and 990,000 square feet of office space.

Though Harris at Meridian Real Estate expects vacancy rates to stabilize, he’s not predicting significant growth in occupancy anytime soon.

“Companies are learning how to make money with fewer employees,” he said. “Typically, that translates into not needing as much office space.”