No matter where you turn in the Indianapolis metro area, there is one common thread — change. From Mile Square to Downtown Fishers to Main Street in Speedway to Fletcher Place, all are nearly unrecognizable from a few years ago, and they are just a sampling of central Indiana commercial districts that are transforming at a rapid pace. Restaurants, retail and mixed-use developments are a big part of this rapid evolution, but the ripple effects on office real estate are taking hold.
Tech jobs are catalyst
James Winkler, Colliers International
Downtown Indy Inc. estimates the population in the central business district (CBD) will double from 2010 to 2020. According to the Indy Partnership, approximately 60 percent of the market’s 11,100 new jobs in 2016 came from the information technology and logistics fields. The downtown office market, where a majority of these jobs are landing, is evolving as a result of this technology job growth.
In the past few years, large blocks of vacancy have plagued the Indianapolis CBD, specifically in high-rise office towers. In mid-2016, the largest of those availabilities became an asset. San Francisco-based Salesforce.com signed a new lease to consolidate operations into nearly 250,000 square feet on 11 floors in the tallest tower in Indianapolis.
The deal includes naming rights, changing the name of the building from Chase Tower to Salesforce Tower. The company will soon take occupancy, further diminishing a downtown office vacancy rate that spiked during the Great Recession and has now fallen four straight years to 17 percent — its lowest since 2009.
The average asking rental rate of $22.31 per square foot for Class A CBD product, while up 3.5 percent year-over-year, remains very competitive with other tertiary markets. The Indianapolis CBD office market will continue to benefit from a growing number of companies that are drawn to the increasing pool of workers living downtown and the affordability of real estate in an urban core on the rise.
Shifting appeal of towers
Building owners and developers are gearing up to take advantage of the strengthening downtown office market by highlighting the appeal of their assets or repositioning them to become more attractive to prospective tenants. As companies grow and their real estate needs expand, office towers can offer large blocks of space and draw operations to efficient floor plates. Conversely, buildings we have dubbed the “creative/character class” have the type of space that is in demand by fledgling companies.
With this in mind, innovative owners are investing capital into stale assets in order to provide the appeal of both efficient floor plans and a culture-driven vibe needed to recruit and retain talent.
Market Tower, a property transformed in 2016 by Zeller Realty Group, and BMO Plaza, acquired last year by Hearn Co., are two prime examples of assets repositioned for that purpose. The investment in creating modern, usable common area amenity space and speculative suites as selling points sets them apart. The ability of these buildings to grow occupancy while raising rental rates could have a ripple effect.
Northern suburbs shine
Compared with the CBD, the north suburban submarkets are a larger and traditionally more reliable portion of the Indianapolis office market. While the CBD vacancy rate hovered around 20 percent in the years following the recession, the suburban vacancy rate steadily decreased year after year, ending the first quarter of 2017 at 15 percent.
In the first half of 2016, significant transactions in the suburban office market dominated leasing activity. While a few large tenants downsizing in the latter half of the year contributed to a stagnant vacancy rate, asking rental rates in Class A suburban space grew by nearly 7 percent from 2016 to 2017 and outpaced the market average growth of 3.9 percent. The slight dip in the high occupancy, as well as the higher average asking rental rates, are also a result of construction.
The new ground-up construction, which had been quite limited prior to 2016, is proving to have an impact on the suburban office market. River North, a 102,000-square-foot speculative building with asking rental rates of $25.50 per square foot, was nearly 100 percent preleased by the time it was completed in the third quarter of 2016. Two Concourse, constructed in 2014 and the first recent development to take a chance on speculative construction, also completed its lease-up.
The flight to quality space by suburban tenants is extending to smaller build-to-suit and mixed-use projects. With that in mind, and the additional vacancy created by unleased speculative projects like the one-story, 61,000-square-foot Lakeside Green development in Carmel, the north suburban vacancy rate ticked up slightly. Still, the high 85.8 percent occupancy rate and peaking rental rates could trigger further development.
Rise of coworking spaces
A developing trend to watch in both the downtown and suburban Indianapolis office market is the rising popularity of coworking space operations. Coworking facilities provide a shared working environment where solo practitioners, small business and entrepreneurs can post up in a place to work outside of home or a traditional leased office space. The concept is not a new one, but several developers and owners are hoping to capitalize on the blossoming position of Indianapolis as an entrepreneurial hub.
The ability to get these individuals into shared space and incubate new and smaller companies in open memberships or short-term leases could help the start-up community flourish. That growth will also likely feed traditional office assets. For a city that has thrived on public-private partnerships, the expansion of these collaborative and flexible operations is a great metaphor for how the Indianapolis office market is moving ahead.
—By James Winkler, Director, Market Research, Colliers International. This article first appeared in the May 2017 issue of Heartland Real Estate Business magazine.