Commercial Real Estate and Office Complexes and Rolls-Royce and Real estate deals and Vacancy rates and Real Estate & Retail

Rolls-Royce gives downtown office market a bounce

March 22, 2011

The decision by Rolls-Royce Corp. to occupy Eli Lilly and Co.’s Faris office campus downtown headed off what could have been a big spike in the central business district Class A office vacancy rate.

Rolls-Royce announced March 15 it would lease 404,000 square feet in two Faris-campus buildings on South Meridian Street that Lilly vacated in 2010. The aircraft-engine maker will begin moving 2,500 office employees to the site from other Indianapolis locations later this year.

Lilly had been a tenant in Faris since developing it in partnership with Kite Realty Group Trust in 2001. Because Faris was a single-tenant building, it hadn’t shown up yet in the office-vacancy statistics generated by most local commercial real estate brokerages.

The downtown vacancy rate for Class A space of 18.4 percent at the end of 2010 would have jumped to 23.4 percent if the Faris space was included, according to Summit Realty Group statistics.

“If you’re an out-of-town company looking at Indianapolis, you’re going to look at those numbers and wonder if downtown was dying,” said Tim Norton, Summit’s executive vice president. Tenants all over downtown would use those numbers to their advantage in negotiating leases, said Norton.

He said leasing the Faris space to multiple tenants would have been a big challenge because it isn’t in the heart of downtown. “Those numbers would have been with us for a long time.”   

CB Richard Ellis is thought to be the only firm that was including the vacated Faris space in its numbers. CBRE, which was hired by Lilly in 2009 to market the Faris space, started including the Faris campus in its vacancy statistics in last year’s third quarter when Lilly finished moving the 1,000 employees who had worked there.

Its preliminary data shows a Class A vacancy rate of 20.8 percent at the end of this year’s first quarter. Factoring in the Rolls-Royce lease, that number falls to 16.2 percent.  

CBRE’s Jeffrey Luebker, who represented Lilly, said the decision by Rolls-Royce to occupy the space gives downtown another “global brand,” which elevates its profile and can be helpful in the marketing of all downtown space. He listed Lilly, Simon Property Group and WellPoint as other big brands downtown.

One building on the Faris campus that Rolls-Royce isn’t leasing is the 120,000-square-foot Brougher Building, which was a high school until the late 1970s. Luebker said interest in that building has picked up in the short time since the Rolls-Royce announcement.

Luebker said that an office tenant or tenants is still the most likely use for the building, but he’s taken calls from people who’ve mentioned a variety of uses. Because it’s close to both Lilly and Rolls-Royce, an academic use playing off life sciences and technology would be a good fit, he said.

The Brougher Building is one of several large downtown spaces still available. Others include the former Safeco Corp. insurance offices at 500 N. Meridian St., where 320,000 square feet is still available. M&I Plaza, the former First Indiana Plaza at Ohio and Pennsylvania streets, has 210,000 contiguous square feet available. And PNC Bank is trying to sublease almost 100,000 square feet at PNC Plaza at Illinois and Washington streets.

Jon Owens, a senior vice president at Cassidy Turley, said the odds of filling those spaces are improving. He said tenant interest in the downtown office market began picking up in the middle of last year’s fourth quarter.

The Rolls-Royce deal will only help matters, he said, noting that there will be some vendors and service providers who want to be nearby. And the bounce should be felt by more than just office space owners and brokers, said Owens, noting the benefit of having 2,500 Rolls-Royce employees patronizing Circle Centre mall and other downtown businesses.

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