The city’s largest real estate brokerage predicts that 2014 will mark the first year the economy feels like it’s actually recovering from the Great Recession, as all sectors of the commercial real estate market continue to improve.
The local office of Cassidy Turley described its outlook in its annual State of Real Estate report, which the firm is slated to present at a Thursday event.
Locally, demand for multifamily housing is robust, the industrial sector remains one of the hottest in the nation, the office market finally is starting to show noticeable gains, and the retail segment is much stronger than it was a year ago, the report says.
On a national scope, the report finds plenty of reason for optimism. The U.S. economy created an average of 192,000 jobs per month in the three-month period from September to November, and consumers seem to be more confident. Also, the fear that the Affordable Care Act might prevent companies from hiring has not shown up in data, or “at least not yet,” the report notes.
But concerns still exist, mainly over whether lawmakers can put their differences aside and avoid another government shutdown. The national deficit also remains a major issue that requires a fiscally responsible plan.
“So what could dampen the outlook for 2014? The same thing that hampered 2013: Dysfunction from Washington that rattles the markets and undermines confidence,” the report says.
The vacancy rate for industrial space rose to 4.9 percent at the end of 2013 from 3.3 percent the previous year. But the report points out that the rate still is very strong, considering that the local market added more than 3 million square feet of speculative and build-to-suit industrial development.
Net absorption for the year ended above 1.9 million square feet. By the end of next year, Cassidy Turley forecasts occupancy gains in the local industrial market will surpass the five-year average of 2.7 million square feet.
Cassidy Turley is tracking more than 5 million square feet in new industrial projects that are scheduled to be completed in the next 24 months.
Among the projects under construction: a 328,000-square-foot project in AmeriPlex from Kansas City, Mo.-based Jones Development Co. for Federal Express, and 315,000-square-foot distribution center on near West 106th Street in Zionsville from Indianapolis-based Scannell Properties, also for FedEx. In addition, Sunbeam Development Corp. purchased a 685-acre site in Monrovia in which it plans to break ground this year on a 525,000-square-foot speculative project.
The biggest employment gains in eight years, a housing rebound and strong online and auto sales are contributing to the demand for more industrial space.
Perhaps the most striking statistic relating to the Indianapolis office market is that the downtown submarket’s vacancy rate last year crept up to 20.3 percent, as an additional 82,000 square feet became vacant.
The fall in occupancy can be attributed to traditional office users in the financial, legal and professional business sectors either delaying growth plans or embracing new workplace strategies that call for less space, the report said.
“The bad news for Indianapolis is that the majority of its tenant base, particularly in the Central Business District, falls into this category,” Cassidy Turley said.
On a brighter note, the area’s second-largest office submarket, the North Meridian corridor, saw its vacancy rate fall to 16.1 percent while adding more than 215,000 square feet of space.
Office vacancy rates overall fell slightly, to 19.2 percent, while adding about 280,000 square feet of users. Asking rents rose just 1.2 percent, to $16.97 per square foot across all office types.
On the development side, Indianapolis-based Edgeworth Laskey Properties LLC broke ground on the second of five buildings slated for the Concourse at Crosspoint office park near Interstate 69 between 96th and 106th streets in Fishers. The 132,993-square-foot building is expected to open in the summer.
And Pedcor Cos. announced its plans to invest between $80 million and $100 million in Carmel City Center with the addition of four mixed-use buildings, a parking garage with ground-floor commercial space and an expansion of the Pedcor office complex.
The Indianapolis retail market continued to strengthen in 2013, adding about 250,000 square feet of users and helping the sector post five consecutive quarters of occupancy gains.
Overall vacancies remained virtually unchanged from 2012, at 7.2 percent, as more retail space was added. Downtown posted negative absorption of about 14,500 square feet due to the large amount of mixed-use projects featuring first-floor retail space.
The Carmel/Westfield market posted the largest user gains, 130,851 square feet, while the Washington Square and Pendleton Pike markets had tenant losses totaling more than 100,000 square feet each.
Retail sales generally trended positive in 2013, but most of the gains continued to go to the upscale and deep-discount chains, while mid-range names such as Target and Kohl’s experienced challenges.
Increased competition in the grocery segment will continue in 2014, as traditional grocers continue to grapple with an influx of smaller, specialty players looking to seize a slice of the pie.
The Fresh Market opened a 20,000-square-foot store on East 116th Street in Fishers while Earth Fare opened two north-side stores in Carmel and Noblesville. Fresh Thyme Farmers Market announced plans for a store in Greenwood, and a 35,000-square-foot Whole Foods is planned as part of Browning Investments’ mixed-use project in Broad Ripple.
The apartment sector last year continued to lead the overall commercial real estate recovery, the report said, as the Indianapolis market has enjoyed more than three years of occupancy growth with vacancy falling to its lowest level in decades.
An optimistic outlook for jobs and population growth has led developers to build new apartments at their fastest clip in five years.
“Developers have sharpened their focus on the amenity-rich downtown submarket, which has erupted with trendy mixed-use concepts,” the report said.
More than 6,000 apartment units in Indianapolis traded in 2013, about on track with 2012’s total of 6,500.
Of the 1,133 new apartments delivered in 2013, 43 percent were geared toward retirees. As the central Indiana population continues to age, demand for retirement communities will remain strong, the report said.
Sales of office and industrial properties, as well as multifamily and retail properties, were strong in 2013.
Across the sectors, 98 properties sold for a total of $1.2 billion, with the industrial sector leading the way with 30 transactions totaling $471.5 million.
Several office complexes traded hands as well. Among them: the 649,200-square foot Capital Center and the 405,000-square-foot Rolls-Royce Meridian Center, both downtown, in addition to the 382,000-square-foot Woodfield Crossing II and III at Keystone Crossing.
Cassidy Turley expects more distressed office properties in receivership to come onto the market as they make their way through foreclosure.
In the retail sector, distressed properties accounted for 30 percent of the activity. Given the low prices paid, buyers can afford to improve the properties and transform them into viable and competitive assets, the report said.
Looking forward, headwinds to be encountered include uncertainty surrounding interest rates and inflation. But improving market fundamentals should be sufficient to counter any volatility in interest rates, the report said.