Not much optimism in commercial real estate outlook

Another challenging year is in store for commercial real estate in Indianapolis thanks to high unemployment, a still-struggling housing market, an unforgiving credit environment and budget challenges for all levels of government, Cassidy Turley plans to report Thursday at its annual State of Real Estate event.

The firm, the city's largest commercial real estate brokerage and property manager, predicts rents across all categories of commercial real estate will remain flat for the next two years because of persistently high vacancy rates. But, in an upbeat note, demand actually grew in 2010 for office, industrial and apartment units.

Property investors, meantime, will be looking mostly at the very best Class A properties or the most bargain-basement challenged ones, and not much in between.

"Although 2011 will be somewhat better than the past year, we will experience much of the same in 2011 with economic growth being tepid and the job market remaining a major impediment to realizing significant increases in commercial real estate demand," the report notes.

Cassidy Turley plans to present its outlook for the year at an event Thursday afternoon at Old National Centre.

A few highlights:

Office

The office market showed signs of progress in 2010 as new lease deals added up to 80,000 square feet of positive absorption, compared to a loss of 418,000 square feet in 2009.

Another factor in the gain: The market did not add any multi-tenant buildings over 20,000 square feet, part of a two-year slide in office construction. Cassidy Turley expects the pace of new office development to remain slow, as unemployment remains high and more companies encourage employees to work remotely.

Top office-lease deals included the U.S. General Services Administration taking 75,000 square feet in M&I Plaza, Harrison College inking a deal for 34,000 square feet at 500 N. Meridian St., and PricewaterhouseCoopers taking 22,000 square feet in PNC Center.

The city's overall office vacancy rate stood at 20.6 percent. The Central Busines District continued to outperform the suburbs, registering a vacancy rate of 16.9 percent vs. 22.9 percent in the suburbs.

"A clear indicator that the office market seemed to turn a corner at the midpoint of 2010 is that seven of the 10 submarkets displayed positive absorption from the third quarter to the fourth quarter, and in some instances the gains were substantial," the report notes.

Retail

The year in retail was "slow and choppy" but ended on a strong note as sales jumped and fewer retail bankruptcies materialized than some had predicted. The strongest retail categories were gas stations, which saw a sales rise of 16 percent, and auto parts stores, which jumped about 10 percent.

Significant new local restaurant tenants include Cooper's Hawk Winery & Restaurant, which opened along 96th Street; Seasons 52, which is under construction in front of Fashion Mall at Keystone; and Mesh, which opened in the former Scholar's Inn along Mass Ave. New-to-market retailers included The North Face and OshKosh B'gosh.

Cassidy Turley expects a "modest increase" in retail and restaurant sales in 2011, along with a wave of additional store closures and consolidations. A dry development pipeline could start to come back to life as retailers who have weathered the storm start looking to grow again.

Industrial

The city's industrial market continued to show strength in 2010, notching net absorption of more than 3 million square feet, up from a gain of 2.2 million square feet in 2009.

Most of the 2010 gains came in the final three quarters, which helped push the industrial vacancy rate down to 6.7 percent, from the 2009 figure of 7.4 percent. Cassidy Turley said rents in 2010 remained flat to slightly down.

Among the year's largest industrial deals: Nice-Pak Products Inc. took 813,000 square feet; Caterpillar Inc. took 456,000 square feet; and Sara Lee took 280,000 square feet.

Looking forward to 2011, growth in the manufacturing and logistics sectors along with rising consumer spending and exports should bode well for the Indianapolis industrial market, Cassidy reports.

Potential challenges include the introduction to the market of space formerly occupied by manufacturing plants including the GM metal-stamping facility, and the potential for property tax caps to shift part of the tax burden from residential to commercial properties.

Investment

The number of investment sales of real estate remained steady in 2010 but the average price fell slightly, as difficult credit remained a "major hindrance to transaction volume and pricing stability" for most of the year.

While private buyers ruled in 2009, institutions and publicly traded real estate investment trusts stepped back into action in 2010. Most buyers were interested in either the best Class A properties or distressed properties offered at deep discounts.

A few of the most notable investment sales in each category include: an 809,000-square-foot industrial building used by Cooper Tire; the 213,000-square-foot headquarters of WellPoint on Monument Circle; the 507,000-square-foot Metropolis mall in Plainfield; and the 256-unit Eagle Pointe apartments.

Cassidy Turley expects the Midwest to become a more appealing target for investors, as "there is a considerable amount of pent-up equity and a need to obtain yield."

Click here to read the full report.