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Less empty office space downtown? Don't count on it: Local market experts cast doubt on national report

November 7, 2005

A recent report lauding the health of Indianapolis' downtown office market over the next two years may have caused a few bursts of excitement, but they were likely short-lived.

New York-based Cushman & Wakefield cited Indianapolis' downtown as a leading office market nationwide in a recent report, citing the possibility of vacancy around 7 percent in 2007, down from 13.5 percent now. If that happened, it would signal the healthiest downtown office market since the late 1990s.

Few local observers see that happening, however.

In the report, Indianapolis ranked alongside markets like Phoenix, Boston, Baltimore and Louisville as having an above-average outlook and positive momentum over the next two years.

While it's true that more office users are expanding, rather than scaling back on space, the report ignores some key weaknesses, local office experts said.

"Where we're still seeing voids is the big corporate users," said Tom Hadley, principal of locally based Summit Realty Group, which is a member of the Cushman & Wakefield alliance of independent brokerages.

Cushman & Wakefield uses Summit's research on current office market conditions, but Summit isn't involved in the forecasts, Hadley said.

"Downtown is showing [office space] absorption," he said. "If it continues on that same pace, one would suspect [a lower vacancy rate] is going to happen."

The downtown office market only recently recovered from the hundreds of thousands of square feet vacated when First Chicago NBD Corp. merged with Bank One Corp. (now Chase) in 1998, Hadley and others noted. Smaller consolidations and mergers also have stripped downtown of office users, while no new corporate headquarters have stepped in to take massive chunks of office space.

The occupancy rates in downtown's high-rise towers range from 64 percent at First Indiana Plaza to 98 percent at OneAmerica Tower. Some large users, including KeyBank and Chase, are looking to sublease some space to other tenants.

Other tenants are considering relocations. Notably, the Bose McKinney & Evans law firm is scouting the market for new space, which could leave an additional 80,000 square feet empty in First Indiana tower.

"I would be amazed if the overall downtown Indianapolis market got under 10 percent [vacancy] anytime soon," said Nick Arterburn, first vice president of the local office of Los Angeles-based CB Richard Ellis. "It would be a shocker. It would be great, but it would take two or three headquarters companies moving to downtown Indianapolis."

The report also doesn't take into account an upcoming wallop for office market statistics, Hadley and others said-Simon Property Group Inc.'s plan to leave National City Center for new headquarters now under construction at Capitol Avenue and Washington Street.

When the locally based mall owner makes the move in fall 2006, it will leave behind more than 170,000 square feet in National City Center.

Even if new tenants commit to some or all of Simon's space at National City, it's unlikely the space would be ready for occupancy by the end of the year, said Jeff Henry, managing principal at the local office of St. Louis-based Colliers Turley Martin Tucker.

"Because of the Simon situation, we're going to be hard-pressed to have positive [office space] absorption through 2006," Henry said.

The National City Center space could take several years to fill, barring a single tenant or two taking the entire space, Arterburn said.
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