Commercial Real Estate and Office Complexes and Commercial Leases and Vacancy rates and Real Estate & Retail

Lilly vacating 99,000 square feet in 30 S. Meridian building

March 5, 2007

Eli Lilly and Co. has decided to vacate 99,000 square feet of office space at 30 S. Meridian St. in yet another blow to the struggling downtown market.

Roughly 1.8 million square feet of space already is sitting idle downtown, putting downward pressure on rents. And another big chunk could take the market a long while to absorb, said Jeff Harris, president of locally based Meridian Real Estate.

"The downtown multitenant office market is very weak," he said. "It's a great thing for tenants because rents are flat and landlords are willing to do deals they otherwise would not do. But if you're an owner, it's a bad thing because you've got to give more to get revenue on the space you've got."

The 11-story 30 S. Meridian building, which has 300,000 square feet of rentable space, is a former headquarters of USA Group and the former site of the flagship L.S. Ayres department store. It sits a few steps from where a two-story brick building stood that served as Lilly's first offices.

The 325 Lilly employees and contractors housed in the building will move to buildings the company owns, company spokesman Ed Sagebiel said. Lilly employs 13,200 workers in the Indianapolis area.

"It's a cost-saving measure," Sagebiel said. "If you have space available, it just makes more sense to do that."

Building owner Kite Realty Group is confident another tenant will sign on, said Tom McGowan, the company's chief operating officer.

The building has a wealth of amenities, he said, including a connection to Circle Centre mall, a workout facility, a conference facility and underground parking. In addition, Kite owns an 850-space garage by nearby Union Station it acquired when it bought the building from Virginia-based Sallie Mae five years ago.

Before Lilly's exit, 30 South Meridian was about 98 percent occupied. Lilly rented space on the fourth, fifth and ninth floors.

The pharmaceutical giant has terminated a lease for 29,000 square feet in the building and plans to vacate another 70,000 square feet in October. A recent quarterly report from Kite ranks Lilly 10th on a list of top tenants by annualized base rent. Lilly was paying about $1.16 million for its remaining 70,000 square feet.

Lilly will pay lease-termination fees totaling $975,000 to Kite, which has its headquarters in the building and eventually plans to expand into space now occupied by tenants. Lilly had an opt-out option for 2008, but worked out a deal to leave early so Kite could begin marketing the space.

"The key to this building is the fact we have a tremendous location, tremendous amenity package to sell from," McGowan told analysts during a February conference call. "We are confident we are going to get this result. It's going to take a lot of work and we are going to have to be aggressive in the marketplace."

Lilly isn't the only locally based company to deal a setback to the multitenant office market in recent months. Last year, Simon Property Group Inc. moved out of National City Center, dumping more than 170,000 square feet of office space onto the market. Simon moved to a newly built headquarters south of the Statehouse.

The vacancy rate for prime, or Class A, office space downtown was 15.8 percent at the end of 2006, up more than a percentage point from 2005, according to a market report from the local office of St. Louis-based Colliers Turley Martin Tucker.

Lilly's exit could push the vacancy rate another point higher, said Tom Hadley, a principal with locally based Summit Realty Group.

The move gives companies a chance to grab a large block of contiguous space downtown, while weakening the bargaining clout of building owners, Hadley said. The bottom line: Landlords hoping to push rental rates up may be out of luck.

Rents have been slipping, the Colliers report says. From 2005 to 2006, average annual rent rates downtown declined from $19.58 per square foot to $19.41. Meridian Real Estate's figures show the rate holding steady, at $19.25 per square foot, over that span. The Meridian report, which lists the 2006 downtown vacancy rate of 12.77 percent, says at least five Class A buildings have vacancies of 40,000 square feet or more.

Despite its struggles, downtown is not the worst-performing office market in central Indiana. The south side had an 18.8-percent vacancy rate at the end of 2006, the Colliers report says. By comparison, Carmel's vacancy rate was 13 percent, although it also rose in 2006.

The chief competitor for downtown landlords has been office space in the northern suburbs, where rents are cheaper and parking is free. Downtown has about 11.4 million square feet of multitenant office space and hasn't added much in more than five years. In 2003, vacancy hit a high of 18.5 percent.

The loss of Lilly pales in comparison to the most devastating office retreat in recent memory--a result of the 1998 merger of Bank One Corp. and First Chicago NBD Corp. As the combined bank consolidated operations in what is now Chase Tower, it abandoned 270,000 square feet in One Indiana Square.

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