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Experts see improving market: Higher occupancy rates, more construction projects mean good news for landlords, developers

April 25, 2005

IBJ: Is your sector of the construction or real estate industry better or worse off than a year ago and why?

BURK: Overall, I think the Indianapolis office market is better off than it was a year ago. The occupancy rate for the 29-million-plus square feet of multitenant office properties in the market increased by about 2 percent last year, to 82.5 percent. There was positive net absorption of about 600,000 square feet, most of which occurred in the suburbs.

For us at Duke [Realty Corp.], 2004 turned out to be a good year in terms of occupancy as well. We started the year at about 86-percent occu pancy on our 2.8 million square feet of office properties and finished at about 92 percent. We're definitely better off than we were a year ago, but not without significant challenges facing us for 2005.

We completed our Hamilton Crossing Six building in March 2004. That's a 180,000-squarefoot building, 125,000 square feet of which is leased to Adesa [Corp.]. The 55,000 square feet of speculative space is now leased at 98-percent occupancy.

We also made the decision at the end of last year to start another building with a substantial amount of spec space, Nine Parkwood, a 204,000-square-foot building with a lease of about 53,000 square feet to American Family Insurance. That still leaves us a substantial portion of space to lease and takes our current occupancy on finished and under-development properties back down to 88 percent, so that gives us plenty to do.

SMITH: Well, it depends on whose perspective you are looking from. If you are a tenant, things are getting worse. I agree with Jennifer that the market has come back, largely due to a recovering economy. How do you measure that? Well, there is more activity. Brokers and landlords are busier, and that is a good thing. Vacancy rates are falling. Downtown, we show vacancies have fallen about 3 percent in the last year. In the suburbs, the vacancy rate in the Carmel-Meridian corridor fell nearly 4 percent. The 1980s aren't quite back yet, but it is much better. Speculative development is back with Nine Parkwood. We haven't seen that in the last few years. There is positive net space absorption and demand that exceeds construction. Rental rates will increase and concessions will fall, so if you are a tenant, you might want to look at locking in now because your landlord is probably going to be in a better position 12 to 24 months from now.

BOOK: In the industrial sector, we are better. We've seen an increase in demand across the board in all property types of industrial. During 2003 and 2004, we have had a healing of our market in all sectors, especially in the bread-and-butter of our business, the 10,000- to 50,000-square-foot users. That area had pretty high vacancy rates for a while, which actually pushed rental rates down. I look back at last year as a real recovery, when most of the industrial parks in our market have gotten occupancy above 94 percent.

For the first time in a number of years, some spec midsize distribution space is being built. There continues to be demand for free-standing buildings despite increases in the construction cost. Especially since November's election, we have seen an enormous amount of activity. People finally felt comfortable making real estate decisions and pulling the trigger on some new buildings, not just the bulk warehouses but other types of industrial properties as well.

CARLINO From a general perspective, I think the market is the same or a little bit better. Looking beyond the central Indiana market, it seems like the trend of capital flowing away from Wall Street and into real estate markets is continuing.

McGOWAN: The big story from a retail perspective is really the compression of development returns being forced by higher land prices. I think everybody in this room is feeling that. And, of course, construction costs have been a huge driver pushing development yields down.

Ultimately, it is forcing all of us to work a little bit harder to find better pieces of property. That way you can command the rents necessary to get that yield back to where you want it to be. But retail-wise, it's clear Wall Street is continuing to push the major retailers to get their store counts up and to look into our emerging markets.

IBJ: What effect would a new sports stadium and expanded convention center have on downtown real estate?

McGOWAN: I think everybody understands from [an Indianapolis] Colts perspective how important that is. Let's talk about the [Indiana] Convention Center for a minute. Right now, the convention center creates direct spending of about $225 million. With the potential expansion, that could increase to $325 million-a $100 million increase in direct spending. We have the ability to increase the convention center's size by 375,000 square feet at a mere-in my opinion-cost of $275 million. Without question, this is a huge driver for our central business district and for central Indiana.

We are in somewhat of a crisis due to the fact that we have already lost two of our largest conventions, CEDIA, which is an electronics convention, and Performance Racing. If you put those two groups together, you are talking about close to $54 million in direct spending. In 2006, we could lose the Fire Department Instructor's Conference-which is 26,000 people-GenCon and others. Clearly, we have to address this issue for Marion County, central Indiana and beyond.

Direct spending really ties back to the real estate issue as a whole. Success builds upon success. If we have convention attendees, we have restaurants, additional retail and a tremendous infusion of direct spending into our community. I can assure you my partners and I would not have made a $100 million investment in the Conrad Hotel without having the trust of the city and the state that the convention center will be expanded and that the Colts are going to stay in town. These are huge issues for downtown Indianapolis and for our community.

IBJ: What about the recent Brookings Institution report that found, in part, that convention space is over-supplied? Won't we lose conventions in a bidding war even if we expand the Convention Center?

McGOWAN: First, I think that's incorrect for our market. When you look at it overall throughout the country, there are parts of the report that are correct. The bottom line is, our convention center is overheating because we don't have enough space to serve our current clients or our future clients. I have been to the CEDIA and Performance Racing conventions and, last year, they had people in the hallways. The fire marshal was trying to make sure there were clear passageways. That's why Performance Racing went to Orlando and CEDIA's going to Denver. With those two, we have lost $54 million in direct spending. If you own a restaurant downtown, think about the impact of losing that $54 million.

You have to look at our convention center, not at the rest of the country. The bottom line is, we don't have enough space and we have to get these people back. The beautiful part about this problem is people want to be here. We have a very tight package to offer. We have more hotels-not rooms, but hotels-connected to the convention center than just about any other city in the country.

IBJ: Let's go to Hendricks County. What effect will the opening of the Six Points Road and Interstate 70 interchange, the planned extension of the Ronald Reagan Parkway to Interstate 74, and the expansion of Indianapolis International Airport have on development in Hendricks County and western Marion County?

BOOK: People were trying to realize the effect as long as five or six years ago. A lot of folks have been getting into position for the opening of that intersection by owning land.

From the airport perspective, I think it takes our airport to the level of a much bigger city. It puts us in greater competition with larger markets and I think it is going to make an enormous difference.

But from a development standpoint, when you think of Hendricks County, most people tend to think of bulk distribution and buildings as large as 1 million square feet. With the opening of the Six Points Road interchange, there are already buildings being constructed that are catering to other uses besides just industrial.

It opens up Ameriplex like never before. There was only one means of access, off of State Road 267, and now you can get there right off of I-70. Ameriplex's intersection becomes much more valuable from a retail perspective. They have made some relatively significant announcements in the last 30 days about some retail users that are going in there.

As you go north, where Six Points Road, which is going to be called Ronald Reagan Parkway, will be extended all the way up to I-74, it is going to have an unbelievable impact on Brownsburg. When you think about how quickly you will be able to go from Brownsburg to the airport once that road is extended all the way, it will be a significant difference. Again, I think the biggest change will be the mix of uses. It won't be just industrial anymore-it will be retail, some office and some multifamily all the way up to Brownsburg. Some developers have already acquired land to the north of the interchange in anticipation of that. I think it is going to be significant for the next five to 10 years.

IBJ: Elsewhere in the suburbs, what can we expect in and around Duke's planned Anson project in Boone County and Republic's Saxony Development in Hamilton County? Are there other hot spots in the area that are going to take off?

BOOK: I think Republic's development probably has greater momentum just because of the amenities and other retail and residential development that's already there. The growth at Anson will probably be more conservative in nature, just because there isn't a Geist Reservoir on the northwest side. There might be more initial industrial development as the amenities and the rooftops start increasing on the northwest side. That will extend all the way into Lebanon eventually. Republic's location is nothing more than an extension of what is already taking place along I-69.

BURK: Right now, residential and retail demand is leading the development of the southern portion of Anson near State Road 334. Infrastructure work, including roads, lakes, parks, sidewalks, etc., will start there this quarter. A grocery-anchored retail center is planned to start construction in the third quarter, which will be an attractive amenity for residential. The single-family model homes are due to start in the fourth quarter and we are working on a medical-office deal that we would expect to be completed about the time the first homes are being moved into.

We also think as some of these earlier areas begin to develop-as the residential, retail and medical portions, and the streets, parks and green spaces become reality-we'll attract office users. It will probably start with small businesses and then, five to 10 years out, larger office users. We really think the Anson project is really a good mixed-use master plan development.

McGOWAN: I feel strongly about Anson as a project and a location. We studied the northwest side as we started Trader's Point and from a rooftop standpoint, clearly it was not initially there. If you look at the strength of Fishers to the northeast and the strength of Carmel, there is a gap [in residential and retail development] on the northwest side from 38th Street to Meridian Street. There's a large piece of the pie in Indianapolis that has not been tapped to its full potential, and that is really why we built Trader's Point in that area. Anson will further capitalize on the fact that northwest growth really hasn't reached its full potential.

SMITH: One area I think is hot right now is Carmel, with the City Center development and the new Central Park. Kite and Lauth [Property Group Inc.] are doing a lot of new retail along 146th Street. Really, on both sides of the county you have a lot of residential, retail and office development. In the Meridian corridor, there's medical development.

CARLINO: Indianapolis is a community that in some respects is going through some growing pains. One of them has to do with transportation. We have all heard about the Regional Transportation Authority and how they are trying to figure out how to get people moving around Indianapolis better and quicker. One of the first places that will come together in the next several years is along the I-69 and Fall Creek corridor into downtown.

The results of that will be focused on Fishers. Fishers has been booming for a long time, but the Fishers Airport is going to [move] and there is going to be a lot of land there for development. The town of Fishers has a lot of ideas about what they want to see there, but one of the things they expect to see is a transportation hub. So, that's going to become a hot spot.

IBJ: It's generally accepted that a good transportation system is a driver of economic growth and commercial development. Any thoughts on what impact our falling state highway budget will have?

CARLINO: I am certainly not an expert on this subject, but from my perspective, it seems like we have to continue to find what we are good at. We need to make sure one of the things that attracts people to Indianapolis and to central Indiana is quality of life. We don't have some of the natural resources that might sell that, so we need to eliminate impediments to a high quality of life. One of those is people getting where they need to be without sitting in traffic for long periods of time. It's not just a function of the Indiana Department of Transportation's highway budget; it's also a function of what else is being done in terms of light rail and other kinds of public transportation systems. It's important not only from Noblesville and Fishers into downtown, but also from Greenwood into downtown. Getting from downtown to the airport is equally important. From a regional perspective, any decrease in the state highway budget is not going to be as big an issue as getting a light rail or other system set up.

IBJ: In your sector, how does the Indianapolis market stack up against markets nationwide?

BURK: We know Indianapolis hasn't been one of the top performers nationally, not like Los Angeles or Washington, D.C., and suburbs of Maryland. But we certainly haven't been one of the worst, either. We have seen improvement in the last year, with occupancy rates increasing and rental rates and concessions flattening out. We haven't seen the job growth we would like to see here yet, but we certainly all hope that's coming with the intense focus it is now receiving.

From Duke's standpoint, Indianapolis has consistently been one of our strongest markets. Out of our 13 office markets across the Midwest and Southeast, only three of those ended the year 2004 with occupancy rates above 90 percent. Indianapolis was one of those, along with Atlanta and Nashville.

We are also seeing increased demand on the construction side. Certainly we are excited about our Simon [Property Group Inc. headquarters] project. We have several other third-party construction projects in the works right now. We just talked about the opportunities the Anson project presents. Indianapolis is definitely a market we're committed to and feel very good about overall.

SMITH: If you look at downtown, we have a 12.5-percent vacancy rate. Nationally, the Society of Industrial and Office Realtors tracks that at 14.5 percent. We are a little below the national average, so that's good news. In the suburbs, we are at 18.5 percent, which is about two points higher than the national average. Overall, we are just slightly above the national average, so that's a good thing. In other markets nationally, Washington, D.C., has a 6.2-percent overall vacancy rate and Dallas is at 19 percent. More in our neighborhood, Cincinnati has a 21.5-percent vacancy rate and St. Louis is at 22 percent. So we are actually doing better than or as well as the cities in our region.

Marcus & Millichap, an investment firm, looks at the office market investment potential in various cities. Fort Lauderdale, Fla., was No. 1; Washington, D.C., was No. 2; and Orange County, Calif., was No. 3. There were a couple of exceptions-Manhattan was No. 5-but generally the top 10 are warm weather cities. The Midwest brought up the rear. Indianapolis was No. 39 out of 42. Cincinnati was 35th, Detroit was 37th, Cleveland was 38th, and Columbus, Ohio, was 40th. So that's not necessarily good news because we can't change that. We don't have an ocean, we don't have mountains, we're in the Rust Belt. But we are holding our own nationally and in the region, and I think we are heading in the right direction.

If you look at rents, Indianapolis averaged $19.25 per square foot in the central business district. The average nationally for downtown rent is $29 per square foot, so we are a lot less expensive compared nationally. According to CB Richard Ellis, Manhattan is at the high end for the United States at $52 per square foot and Washington, D.C., is at $43 per square foot. We are actually less expensive than a lot of cities, relatively speaking.

BOOK: Contrary to the office market, we are one of the most desirable areas for industrial space, more specifically, for distribution space. Institutionally, for a market our size, we probably have a higher percentage of institutional owners and developers of large incremental industrial space than anywhere else in the country.

Typically, when distributors are looking to consolidate or open major distribution hubs, Indianapolis is always one of the front-runners. In recent years, we are being chosen the majority of the time when companies look at us. All you have to do is look in the suburbs at the amount of speculative space that has been con- structed and subsequently absorbed over the last eight or nine years. There are a lot of pending deals right now out there, a lot of it for spec space. We could have almost 2-1/2 million square feet in deals in the second and third quarters of this year. The majority of the spec bulk space out there will be absorbed, which will create the need for more.

From an investment standpoint, institutional investors covet the opportunity to buy the buildings with these kinds of leases. With the airport expansion and development in the surrounding counties, I don't see any change in that in the foreseeable future.

McGOWAN: From a retail standpoint, Indianapolis isn't typically going to be on the high end of the institutional investor's radar screen. However, we look at it from an emerging-market perspective, and Indianapolis offers that if you look at Carmel, Westfield and other places where there is tremendous growth. So I don't think it's fair to say Indianapolis is a weak retail market. You have to find retail with strong demographics. As a company, one of the key things we look at, of course, is average income. On average, our portfolio has more than $80,000 in average household income, which is very high in our sector. You also have to make sure you are looking at the actual growth in a three-mile radius. There are pockets in this community, but you have to continually look for the growth, look for the proper demographics and find the emerging markets. Then the retailers will come to you. In a market like Indianapolis, which isn't viewed as extremely attractive, you have to be creative and find your spots and hit those primary targets that you have established as a company.

CARLINO: Indianapolis and central Indiana have done a really good job of identifying what they are good at. Sam is right, we don't have oceans or mountains for people to look at. What we do have is a great location, from a distribution point of view, for getting around not only the Midwest but also all over the country.

We also have over the last couple of years identified this life sciences initiative. We have Eli Lilly and Co., Roche Diagnostics, Cook Group, Purdue and Indiana universities and all these other great resources, so let's figure out a way to bring them together and put them to work. We need to continue to identify those things that we're really good at-maybe it is the convention center business-and expand those.

IBJ: What should city and state officials be doing to attract more companies to central Indiana, not just necessarily life sciences and distribution centers, but companies like the office headquarters and the regional operations that have been leaving in recent years?

CARLINO: There are some really great things going on right now. It would be great if people in our community could figure out a way to get behind them. On a city level, Mayor Bart Peterson's administration for the first time has a package you can pick up that tells you how to get through the economic incentive process for the city of Indianapolis. It's not that you couldn't figure out that before, but now you have it all in one place.

The city is also trying to figure out ways to streamline the tax process and it has put together the Indy Works proposal. You may have your own political opinion on whether that is a good or bad idea [overall], but it seems to me there are a lot of great ideas there that deserve a lot of discussion and attention. I think this city would be well-suited if that got done. It would make the city a lot more attractive for companies if they saw it as a place where it's easy to do business because you know how things are done and things are a little more centralized. At the same time, hopefully, Indy Works can continue to deliver great services at a competitive rate.

The other thing happening is that Indianapolis and surrounding counties have been working together on Indy Partnership, an organization that tries to collectively market central Indiana as a whole. You don't have Carmel, Greenwood, Fishers and Brownsburg all competing with one another. They're all working together through Indy Partnership. We need to continue to support that.

At the state level, some interesting things are happening. The Department of Commerce has been replaced with the Indiana Economic Development Commission. It's a smaller group of people focused on economic development. They will have the authority to get things done, which will consolidate economic development functions.

There is one particular piece of legislation that involves a tax credit for any company that wants to move their headquarters here to Indiana. The tax credit would cover 50 percent of the cost of relocating here. That's one great thing in the works right now.

McGOWAN: I feel we have to stay on the course we are on right now. The mayor, [Deputy Mayor] Melina Kennedy and [City Controller] Bob Clifford have the mentality that we have to provide incentives and we have to make things happen in central Indiana and Indianapolis. Incentives caused the downtown Marriott and the Conrad hotels to be built. Simon is still downtown because of incentives. We have to maintain that approach. For Indiana to attract great companies we have to provide incentives. Although it's a somewhat controversial concept, that's the way we must compete. To stay on the cutting edge, in order to have four tower cranes in downtown Indianapolis like we do right now, which we haven't seen for a long time, we have to push and we have to provide incentives.

BURK: I strongly agree with everything Jim and Tom have said. We are on the right track in a lot of ways, but I think it's critical that we continue to do more to market Indianapolis as a city where people really want to live and work and to attract a talented, educated work force. We are doing a fair job, but we could do better. I read recently that the number of Indiana residents with college degrees is slipping compared with the rest of the country. We went from 43rd place in 2000 to 46th place in 2004 in terms of residents with college degrees, and something like 10,000 college graduates leave for other states each year. We need to do more to stop that brain drain and to market Indianapolis as a real cultural mecca.

IBJ: What effect is the cost of materials having on the construction and development sectors?

McGOWAN: Without question, construction material costs have gone up. I think everybody understands that. Increases in crude oil prices increase the costs of petroleum products, asphalt, roofing materials, etc. We are seeing 6- to 7-percent increases there. Gypsum and drywall are up as much as 20 percent. That's really being pushed by the strong residential demand. Kite Inc., which was formerly attached to us, last year was operating warehouses trying to get as much drywall as possible in stock. To an extent, that demand has tapered off, but it's still a tremendous problem industry-wide.

As for steel, the raw-material cost of steel went up about $200 a ton in the last year. That is a huge number. Steel is probably where we have seen the most impact because steel prices are affecting prices of metal studs, sprinkler pipe, structural steel. I could go on and on. We have all had to fight through that issue. Some will tell you we are going to start seeing that level out. A lot of demand came from Asia and is hopefully starting to taper off a bit.

Without question, it has caused some compression in the development return side of the business. The key for all of us is we have to be a little bit smarter. We have to value-engineer; we have to work with our design team on the blueprints to make sure they are as efficient as possible. It has made our jobs tougher. Retailers don't care about the cost of steel; they care about their sales projections and what they can pay for rent. We have to find better real estate and build better buildings more efficiently.

BOOK: The increasing cost of materials absolutely has to increase rents eventually, especially in industrial. It erodes the margins that developers get from investors when they lease these buildings. Any new industrial properties that come on line are going to have to have increased rents to maintain the margins that the developers have been accustomed to getting. Otherwise, they can't justify new buildings. So I think the net effect is increased rates. I don't see any other choice, especially with the increases being as much as they have been in the last 12 months.

SMITH: I'm taking a different position. Construction costs have caused projects to be less successful financially for owners. On the other hand, interest rates are still at historical lows and there is a lot of money chasing real estate. Maybe not for Kite or Duke, but for others there's a lot of money that will take lower returns. On the coasts, they have 6-percent and sub-6-percent cap rates. You have foreign money chasing deals, which means you can still have competitive rents despite the increase in construction costs.

IBJ: With construction and land costs increasing, when will rental rates have solid growth? Why haven't they yet?

McGOWAN: In retail, ultimately rents are tied to sales projections. In Indianapolis, based upon the demographics and the location, there are going to be certain limits on sales projections based upon what that area can command. On the reverse side, we are heavily invested in south Florida. In south Naples, when you do a sales projection for a Kohl's, a Home Depot, a Lowe's or a SuperTarget, they are obviously much higher. You could tie increased rental rates to the ridiculous land cost, but ultimately it is going to tie back to how much revenue retailers can generate. If they can generate high sales, then we are going to get the higher rental income. In other markets, you're going to be stuck at a certain level.

SMITH: What a development costs and what you can charge in rent have nothing to do with each other. Markets drive rents, and demand and supply drive markets. In a lot of cases, supply has been in check with demand, and what really drives demand is job growth. In Indianapolis, when we can create and retain jobs, then we'll have rent growth and occupancy growth. Until we do that, we have a huge problem. You really have to grow jobs in order to grow the rent. It has very little to do with the costs.

BOOK: In industrial, we have filled up much of our space or are in the process of doing that. I think rent increases will happen a little bit quicker on the industrial side. We are already seeing it in some product types, depending on what part of town we are talking about.

SMITH: But you have the demand.

BOOK: I don't think it's tied to job growth like the office market. It certainly is supply and demand, pure and simple. Supply has been filled and now the demand is increasing, so it will undoubtedly increase our rates.

McGOWAN: The bottom line is, each sector is a little bit different.

IBJ: With little positive absorption in the central business district, is there enough demand to keep Class A and B office buildings at high occupancy levels? Could downtown support another multitenant office tower?

SMITH: Downtown could, but you can get a long list of office towers that have 60,000 to 80,000 square feet vacant, so until that gets absorbed, there's really not a need for a new tower. When you look at the economics of a new tower, you need to be able to charge rents of $22 to $24 per square foot, and you have to solve a parking issue. The economics don't really work without public financial help. Until that other space gets absorbed, there's really not a need for that. Simon is building a tower, but they are going to vacate [170,000 square feet] and we have to fill that up, too.

We are heading in the right direction and if we can keep downtown thriving with all the public and private investment that's happening, then the space will get absorbed. It's possible we could dip under 10 percent vacancy in the next two or three years, and that would make a lot of owners pretty happy.

IBJ: What factors did Duke consider in deciding to start Nine Parkwood? What is the status of leasing at the building?

BURK: The primary factors we considered were the increase we had in occupancy levels in the past year across our portfolio and the fact that there are not large, contiguous blocks of space available for some of the larger users we saw. Those were the main factors in deciding to build a 200,000-plus-square-foot building with large floorplates to accommodate larger users. American Family has about 53,000 square feet. We have a number of prospects for the rest, but there's nothing else completed at this point.

IBJ: What impact are national alliances and increased competition for tenants having on the brokerage community?

SMITH: Meridian has been in and out of a national alliance. Our business was good before that and it is pretty good right now. We are busy. Truthfully, I'm not sure it makes a significant impact. I think we'll see consolidation in our industry, both at the upper end and locally. There will be a lot of people moving around and a lot of companies merging. It will be fun and interesting.

BOOK: I agree we are going to continue to see consolidations in our industry in the next five to 10 years. Sometimes the smaller brokerages might have more difficulty representing, for instance, Fortune 250 companies, just because of relationships some big corporations have with the larger national brokerage alliances.

IBJ: How are brokers advising tenants to react to the market?

SMITH: Lock deals in now. Go as long as you can with as much flexibility as you can, and do it now because tomorrow it's going to cost you more money.

BOOK: The market is changing. I think with the cost of construction and materials rising, rental rates are going to increase. If tenants are looking down the road to make better deals, that's going to be more difficult, so make your deal now.

IBJ: Everyone has been talking about Carmel, the northeast side and the northwest side-what about the south side?

BOOK: Looking five years down the road, I think we're going to see a significant amount of development-not only industrial, but also retail and more office along Interstate 65 down to Greenwood. Some developers have some fairly significant positions. Lauth has a large land tract down there, and other developers have staked out ground as well. We're going to see an increase in retail development near the County Line Road intersection.

CARLINO: The south side has really grown dramatically over the last 10 or 15 years and it will continue to grow. Duke has development down there, Precedent Cos. does, Greg Allen Builders-there are a lot of developers doing a lot of interesting things. I think there will continue to be opportunities for commercial development to match the residential growth we have had on the south side.

IBJ: Where are we regarding investment values of real estate and cap rates? Are we at the top or do you see trends changing?

McGOWAN: From a retail perspective, if you look at cap rates, obviously there is great compression and the cap rates continue to fall. Everyone is making the argument that the yield on 10-year Treasury notes is starting to rise; why aren't the cap rates rising as well? The answer is, as Sam said before, that there's a tremendous amount of capital chasing a limited supply of real estate. My perspective is that if you have a good-quality product, cap rates in Indianapolis can be very competitive. Will it be the lowest in the country? No. The Pacific Northwest, California and South Florida are all areas that will beat us. But the bottom line is that if you have a great project, credit, location and tenant mix, you can command very respectable cap rates compared with the rest of the country.

SMITH: What Tom just said is he can get a better return in Indianapolis as a real estate investor for that kind of credit and that kind of term, and that might be a good thing. Our stability-the fact that we don't have big changes in values-is actually a benefit for an investor.

CARLINO: Capital has flown into real estate and flown away from the stock market. People have talked about that capital maybe flowing back to the stock market when it starts recovering, but the problem is-maybe it is a good problem for all of us-that it is not as easy to get out of real estate and back into the stock market because you have a lot of different tax issues

IBJ: Are there any speculative office buildings with access to the airport that can accommodate a large office user?

BURK: We have great access to the airport from Nine Parkwood opening in January. We also have 22 or 23 acres at our Woodland Corporate Park complex on the northwest side available for build-to-suit development in a variety of different sizes, with interstate visibility and close proximity to the airport.

SMITH: You don't have to build a building-there's the former Galyan's Trading Co. Inc. headquarters building in Plainfield. It is vacant and available.

That's one of the challenges that Indianapolis has. A company gets bought and jobs go away. The question becomes, how do we backfill that space and replace those jobs? It's not going to be another Galyan's, it's going to be smaller companies growing.

There's also vacant office space at Park Fletcher.

IBJ: Let's talk about the Metropolis lifestyle center in Plainfield. At what point is the market reaching over-saturation in retail?

McGOWAN: I have spent a little bit of time with the guys at Premier Properties trying to understand that property. It has taken a little bit of time to get it to a point of maturity, but at this point I think everyone is fairly confident that it has the legs now to push forward.

It has reached that maturity because it has the necessary demographic profile, it has the rooftops, it has the growth-it has all the key components retailers are looking for in that area. Did it take some time? Yes, because it had to allow the demographics to catch up with it. Now that the demographics are there, the retailers are able to get the sales projections they need to move forward.

As for oversaturation, I think there is going to continually be a recirculation of retail. We have seen it in some locations around Indianapolis that used to be very strong from a retail perspective and now demographics have changed and the retail has scattered in different areas. Retail almost has a constant regeneration of demands as it follows demographic profiles to different areas.
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