Government and Real Estate & Retail

Office market vacancy rates showing positive signs: Government leasing boosts downtown performance; suburbs see fast absorption despite flurry of construction

August 13, 2007

Downtown and suburban vacancy rates are declining slightly or at least holding steady-a positive sign for an Indianapolis office market absorbing a plethora of new space on the city's north side.

The second-quarter vacancy rate for the central business district dropped to 15.9 percent, from 16.7 percent the previous quarter, according to data from the local office of St. Louis-based commercial real estate firm Colliers Turley Martin Tucker.

A similar report from the local office of Los Angeles-based CB Richard Ellis showed the rate dipping from 14.3 percent to 14 percent during the same period. The results vary because real estate firms use different building inventories to compile their statistics.

But while the downtown market seems to be improving, it's not as healthy as the 14.9 percent registered by CTMT during the same time last year. Even so, office brokers are not about to panic.

"It's not fantastic, but it's not real bad either," said Jeff Henry, managing principal of CTMT's Indianapolis office. "It's steady."

The same goes for the suburban market, where the second-quarter vacancy rate of 17.3 percent declined slightly from 17.5 percent during the first quarter of 2007, according to CB Richard Ellis.

CTMT's figures showed the suburban vacancy rate for the second quarter remaining nearly unchanged, increasing to 17.1 percent from 17 percent the first quarter.

Both figures are encouraging signs, given the enormous amount of office space being built around Indianapolis, particularly along the North Meridian Street corridor in Carmel.

"It's very rare when you've got new construction going on that you will see vacancy rates flat-line, because it takes the market a little while to absorb those buildings," said Dan Richardson, first vice president of CB Richard Ellis. "Speculative construction is a sign of a healthy market."

To be sure, the suburban office market absorbed 181,461 square feet in the second quarter, a vast rise from the previous quarter's mark of negative-89,580 square feet.

American Funds contributed to more than half the total absorption amount, 105,000 square feet, by expanding its Keystone at the Crossing operations to the new Opus Landmark at Meridian. Minneapolis-based Opus North Corp., known for developing industrial space, made its first foray into the local office scene with the 126th Street park.

Money manager American Funds bought the building and will occupy all of it, as well as maintaining its Keystone location, which helped to bolster absorption rates because the company increased its overall presence rather than simply swapping space, Richardson said.

All told, about 600,000 square feet of office space has opened recently or will soon along North Meridian. That includes 186,000 square feet at Indianapolis-based Duke Realty Group's Parkwood West complex at the northwest corner of Meridian and 96th streets, and 180,000 square feet from Sacramento, Calif.-based Panattoni Development Co. at 111th and Pennsylvania streets.

Priced at $23.50 a square foot, Duke's Parkwood building is the most expensive of the new offerings.

John Robinson, executive vice president of Meridian Real Estate, predicts new construction to the north will continue, taking more tenants from Class B buildings. The vacancy rate for that space in the suburbs is roughly 20 percent.

"We're still showing positive absorption, despite a million-and-a-half square feet of new construction being added in the last year," Robinson said. "You have lots of local developers lining up land positions for land development, so you're going to continue to see new construction in the North Meridian corridor."

Meanwhile, the government-not the corporate sector-can take credit for a declining downtown vacancy rate.

State and local agencies absorbed roughly 175,000 square feet of office space during the second quarter of 2007, pushing the rate roughly a point lower than in the first quarter, according to CTMT's figures.

The deals include 50,000 square feet for the public defender's office in the Gold Building; 55,000 square feet for three state agencies, including the Indiana Utility Regulatory Commission, in National City Center; and 71,000 square feet for the Indiana Supreme Court in 30 S. Meridian.

The state agencies' occupancy in National City Center helps ease the pain of Simon Property Group Inc.'s departure from the tower to its new headquarters a block away on West Washington Street. The Supreme Court takes space on South Meridian Street previously occupied by Eli Lilly and Co.

The government's share of downtown office space is on track to exceed 7 percent this year, approaching the 10-percent average of the mid-1980s, before a new state government center opened.
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