Government buoys office market: Downtown vacancy rate drops as agencies expand

July 23, 2007

Downtown's anemic office market has shown signs of life over the last few months, but that doesn't mean companies are taking more space and pushing occupancy rates higher.

Credit goes to the government.

State and local agencies absorbed roughly 175,000 square feet of office space during the second quarter of 2007, pushing the vacancy rate down to 15.9 percent, roughly a point lower than in the first quarter.

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. A big chunk of the space was taken by agencies expanding outside their overcrowded government buildings.

In fact, 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, said Bill Ehret, president of locally based Summit Realty Group. The rate had been below 5 percent for years.

"Now, 25 years later, here we are," Ehret said. "They're coming back out and leasing the multitenant office space, which helps stabilize the market."

The office market has been in dire need of upbeat news. Even with the recent government leases, the vacancy rate for the central business district is up from 14.9 percent in the second quarter of 2006, according to data from the local office of St. Louis-based Colliers Turley Martin Tucker.

Most of the carnage has been borne by a few troubled buildings. The worst is First Indiana Plaza, which will be losing Bose McKinney & Evans in 2008 when the law firm takes 111,000 square feet in Chase Tower. The departure will leave the 31-story First Indiana Plaza near 50-percent occupancy, at a time when the owners are trying to sell it for $60 million.

Other struggling buildings include National City Center and Capital Center, which is losing Huntington Bank to the Sky Bank Building, 45 N. Pennsylvania St. Meanwhile, Chase Tower will be about 98-percent occupied, an impressive feat for the state's tallest building.

The Gold Building, at 151 N. Delaware St., isn't far behind. The Public Defender's lease puts the 400,000-square-foot building at 89-percent occupied.

That office has been cramped in its 34,000-square-foot space in the City-County Building. Lawyers have to double-up on desks, and paralegals are four to a desk in some cases, said Chief Public Defender David E. Cook.

"The space here was just wholly inadequate for us to even do our job, let alone have a professional atmosphere," Cook said.

The department is scheduled to move starting Aug. 1, into space mainly on the second and third floors of the Gold Building. Only the Juvenile Division will remain in the City-County Building.

Another recently signed government lease is for the city's Department of Metropolitan Development. Its Division of Compliance is taking 36,000 square feet at 1200 S. Madison Ave. And brokers say some state agencies are looking at space in the Disciples of Christ Building, at 32 E. Washington St.

"We're very fortunate right now that the public sector is needing additional square footage downtown," said Jeff Henry, managing partner of the local office of Colliers Turley Martin Tucker. "As long as they're expanding and moving out of government buildings, and not competing buildings."

But the market still isn't strong enough to justify construction of much new office space, Henry said.
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