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Indianapolis-area office market showing signs of a rebound

July 21, 2015

Stronger absorption in the metro area is pushing vacancy down and rental rates up, mid-year office reports show.

Office tenants absorbed more than 62,000 square feet of space in the second quarter, lifting absorption for the first half of the year to 143,256 square feet, according to the DTZ real estate firm.

The robust activity helped drive overall vacancy down, from 18.6 percent through the first half of 2014 to 17.6 percent through June of this year. DTZ, however, expects vacancy will fall even further, to below 17.5 percent by the end of the year.

“I’m really bullish on the office market compared to where we’ve been,” said Jason Tolliver, DTZ’s regional vice president of research. “There’s nothing on the radar screen that shows this will be derailed or short-lived.”

Much of the improvement in occupancy can be attributed to better job prospects. In Indianapolis, the unemployment rate dipped to 4.5 percent in May.

The North Meridian corridor continues to attract tenants and saw 65,885 square feet of occupancy growth last quarter. Absorption downtown, where some tower owners have struggled to lease space, also grew, climbing 50,602 square feet. That easily outpaced the Keystone at the Crossing submarket, which saw a net occupancy decline of 54,363 square feet.

“When you look at the employment numbers, there’s probably no indicator that’s more important than jobs,” Tolliver said. “And it’s permanent hiring that’s really going to move the needle on demand [for space].”

Vacancy is lowest in the North Meridian submarket (11.9 percent), followed by Keystone at the Crossing (15.3 percent). Despite signs of improvement downtown, vacancy there remains high, hovering above 20 percent.

Vacancy is 15.5 percent in the northeast submarket, and 17.4 percent in the northwest.

The improving occupancy is reflected in the overall rental rate, which increased slightly in the second quarter, to $18.08 per square foot, according to DTZ.

Rents for Class A space increased even more, climbing 2.3 percent year over year, to $20.06, according to Marcus & Millichap’s quarterly report.

The office market also has benefited from the paucity of construction of speculative space, beyond PK Partners’ River Crossing North development, as well as a dwindling inventory of distressed properties, NAI Meridian said in its mid-year synopsis.

Investors are taking note. Properties changing hands through the first six months included the 305,000-square-foot Landmark Center and the 151,000-square-foot Century Building, both downtown, in addition to the 181,000-square-foot College Park Plaza on the northwest side.

Sales of office building in the metro area through June totaled $256.5 million, for an average sale price of $91 per square foot, according to DTZ.   

Nationally, investment sales between January and May totaled $54.7 billion, up $15 billion from the year-ago period, DTZ said. Global uncertainty has resulted in capital pouring into the United States at a record pace, pushing offices prices to new heights, particularly for buildings in central business districts.
 

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