Office, industrial markets heated up in 2014

The Indianapolis office and industrial markets posted strong results in 2014 as demand for space in both sectors continued to improve following the recession.

Year-end reports from a handful of local real estate firms show the local office market absorbing anywhere from roughly 300,000 square feet to 400,000 square feet.

That translates to a year-end vacancy rate of about 18 percent, according to reports from CBRE and DTZ (formerly Cassidy Turley). NAI Meridian statistics peg the number higher, at 20.6 percent.

In any event, the numbers are encouraging, said Jason Tolliver, regional vice president of research at DTZ.

“The first quarter of 2014 was a disaster, with the polar vortex,” he said, “so each quarter got progressively stronger and hit a high note in the fourth quarter.”

Year over year, the office vacancy rate in the Indianapolis area dipped in 2014 by one percentage point, from 19.2 percent to 18.2 percent, DTZ statistics show.

CBRE reported a nearly identical rate, 18.3 percent, and estimated that local office users absorbed a healthy 397,000 square feet of space last year.

The North Meridian corridor, which has an inventory of about 6.5 million square feet, showed the most improvement. It absorbed about 172,000 square feet in 2014 to push vacancy below 13 percent.

Another large office submarket, Keystone at the Crossing, dumped more space back onto the market than what it could absorb, however. The area on the northeast side ended the year with net absorption of negative 37,000 square feet but still posted a respectable 13.9 percent vacancy rate, according to DTZ.

Despite healthy gains, the local office market still shows signs of weakness. The most glaring example is downtown, where vacancy hovers around 22 percent. The central business district ended 2014 with a negative absorption rate of nearly 170,000 square feet.

Part of the reason for the glut in inventory is purely cyclical, Tolliver at DTZ said. The financial services sector is finally starting to dig out of the downturn and beginning to hire. But trendier tech startups are shunning the large office towers and instead opting for smaller, older space with more character.

“What you’re going to see is a lot of the towers trying to reinvent themselves,” Tolliver predicted.

Office observers are particularly interested in what new building owners have in store for their properties. New York City-based The Nightingale Group LLC bought the 36-story Regions Tower in September from a local ownership group that included Michael Maurer and Robert Schloss, both shareholders of IBJ Media.

And in October Chicago-based Zeller Realty Group bought the 30-story Market Tower out of foreclosure from local developer HDG Mansur.

Overall, the local office market might be getting stronger but not enough to warrant new speculative construction, NAI Meridian President Jeff Harris said in the firm’s year-end office report.

“The fundamentals of the market are improving,” he told IBJ. “But I still think there’s a lot of space that’s not being leased.”

Meanwhile, the local industrial market ended the year on an even stronger note, posting a vacancy rate of just 5.8 percent. That’s up from 4.9 percent in 2013, according to DTZ statistics.

But what’s more telling is that vacancy remained low amid a glut of new industrial space coming online. The industrial sector absorbed a whopping 5.5 million square feet in 2014. Another 6.5 million more square feet is in the pipeline this year.

Much of the new construction involves build-to-suit warehouses. Because developers already have signed tenants before completing construction, such projects don't add vacancy to the market.

The lone spec building finished last year: Atlanta-based Industrial Developments International Inc.’s 464,000-square-foot warehouse at AmeriPlex-Indianapolis, south of Interstate 70 on the west side.

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