The city's largest real estate brokerage expects the industrial and residential markets to boom in 2013, but offers a more cautious view of the office and retail sectors, predicting that political gridlock in Washington, D.C., could hamper an already sluggish recovery.
The local office of Cassidy Turley described its outlook in its annual State of Real Estate report, which the firm is scheduled to present at an event Thursday.
The report finds plenty of reason for optimism. It notes that demand for real estate loans and the economy's average monthly job creation—about 172,000 per month since January 2011—are on par with figures recorded during the real estate boom years of 2004 to 2006. Household balance sheets are in better shape, the housing market is bouncing back, and corporate profits are stronger than ever.
But concerns about whether lawmakers can start to address the nation's soaring debt without sinking the recovery adds up to a murky outlook.
"The odds are very much stacked against the economy posting anything other than subpar growth and disappointing job creation for the early part of 2013," the report predicts.
The vacancy rate for Indianapolis industrial space fell to 3.3 percent at the end of 2012, a level not seen in decades, and modern bulk facilities have even fewer vacancies, at 1.7 percent.
The low availability of space has driven a Midwest-leading development push: 3.2 millon additional square feet are under construction, putting Indianapolis well ahead in speculative development compared to nearby cities including Chicago (1.7 million square feet), Cincinnati (900,000 square feet) and Minneapolis (350,000 square feet).
Projects under construction include a 795,000-square foot project in AmeriPlex by Atlanta-based Industrial Developments International, a 771,000-square-foot warehouse in GreenParke in Plainfield by Chicago-based Verus Partners, and a 622,000-square-foot project on Ronald Reagan Parkway by ProLogis and locally based Browning Investments.
Helping drive the demand: Rebounding auto sales and a stronger housing market. Residential building materials account for 12 percent of Indiana warehouse space, Cassidy Turley notes.
The Indianapolis office market started 2012 strong but finished in "low gear" as "businesses became increasingly uneasy amid a climate rife with economic uncertainty and politican brinksmanship," the report says.
Office vacancy rates finished the year virtually unchanged, at 19.7 percent, and asking rents stagnated at an average of $16.03 per square foot across all office types. The market for the year absorbed about 200,000 square feet of space.
Another headwind for office was the reality that any budget deal in Washington could have an outsized impact on the office market nationally, and in Indianapolis in particular. Federal spending accounts for 16 percent of Indianapolis' gross metro product. Federal agencies lease 923,000 square feet in the city.
Even as employers add jobs, they aren't picking up new office space as quickly as they dropped it during the Great Recession. Companies have added 36.7 million square feet since expansion began anew in 2011, but that doesn't make a huge dent in the 141 million square feet they shed between 2008 and 2010.
The vacancy rate rose to 19.1 percent for the Central Business District, despite four years without any new supply. In the suburbs, vacancy rates fell slightly, to 20.1 percent. The Keystone and Fishers submarkets had the lowest vacancy rates, at about 16 percent apiece.
In an optimistic sign, available sublease space has declined for six consecutive quarters. And, on the development side, Sourwine broke ground on an 81,000-square-foot multi-tenant building at Keystone at the Crossing, the market's first speculative office development since 2008.
The Indianapolis retail market saved its best quarter of 2012 for last, adding about 340,000 square feet of users for a 2012 total of about 508,000 square feet, better than 2011 but short of the 2010 mark.
Overall vacancies fell to 7.1 percent, and asking rents rose to $11.80 per square foot from $11.64.
Cassidy Turley reports a handful of factors should support continued recovery: Household balance sheets are in the best shape since 1993, Consumer Confidence readings are strong, single-family home prices are finally rising, and lower gas prices are giving consumers a boost.
Retail sales largely trended positive in 2012, but most of the gains went to the upscale and deep-discount names, while mid-range names such as Target and Kohl's saw sales stagnate or fall.
Notable 2012 deals included the Earth Fare grocery at Hamilton Town Center and a handful of new retailers at The Fashion Mall at Keystone. Strong demand from yogurt shops, cell phone stores, restaurants and automotive parts shops have boosted several neighborhood and community centers.
The apartment sector in 2012 retained its position as "the perennial favorite for investors, whether selling, buying or developing," the report notes.
Supportive factors include steady demand for quality units, readily available financing and a vacancy rate tracking below 6 percent. Despite the delivery of about 2,500 new apartments in 2012, Cassidy Turley expects vacancy rates to continue falling for the next two years.
About 6,500 apartment units in Indianapolis traded in 2012, roughly on track with 2011's total of 6,900. Out-of-town investors have been seeking out secondary markets like Indianapolis in search of slightly higher yields.
They'll have more properties from which to choose: Developers are on track to deliver about 1,500 new units in the first few months of 2013.
Sales of office and industrial properties in the Indianapolis area rose in 2012, multifamily sales held steady and retail property sales fell.
Cassidy Turley reports 3.7 million square feet of office transactions for 2012, up from 900,000 square feet in 2011, though two sales in one year of the million-square-foot Chase Tower skews the figure.
Fewer distressed assets traded than Cassidy Turley had expected, as many owners capitalized on an increased availability of debt and improving financing terms.
Notable transactions include the 423,000-square-foot Axcess 70 Building, 456,000-square-foot Mount Comfort Distribution Center, and porfolio deals including a 2.2 million-square-foot KPJV/ProLogis portfolio and the 445,000-square-foot Hillsdale flex office portfolio. Another notable building transaction was Ambrose Property Group's purchase of downtown's Circle Tower.
In the office realm, a gap between Class A buildings and older ones continues to widen.
"The economic recovery has been merciless when choosing winners and losers," the report notes. "The winners are the well-located Class A assets; the losers are essentially everything else."
Another tough area: Commercial land sales. Though prices remain 40 percent to 60 percent off their highs, investors and developers remain bearish since financing is largely unavailable for any development without significant pre-leasing.