Strong job growth in the second half of 2016, robust tenant absorption of new apartment supply and falling vacancies throughout the Indianapolis metro area supported a markedly improved multifamily marketplace by the end of the year. This year, steady employment gains and rising home prices will continue to bolster apartment property performance metrowide.
In the first half of 2016, hiring was sluggish due to a lack of available workers, but ramped up at midyear. By year’s end, area employers increased employee headcounts by 25,300, a 2.5 percent increase overall. Although employment gains were widespread, the education and health services sector led job creation followed by construction.
Josh Caruana, Marcus & Millichap
With the opening of Cummins Inc.’s new distribution headquarters and tech sector growth most notably Salesforce’s significant expansion in the area hiring this year is expected to remain stable. The forecast calls for employers to add 20,000 new workers to payrolls this year, which will further elevate demand for multifamily rentals.
Construction ramps up
Developers delivered 2,500 rental units to the marketplace last year, the second largest annual supply increase in nine years, but tenants readily absorbed the new supply. Nearly half of the submarkets in the metro area received new supply in 2016, with the greatest share of completions concentrated in the downtown Indianapolis and Hamilton County submarkets.
One of the largest projects delivered last year was Lakeside Apartments of Carmel. The four-story development on Breaklines Street offers 283 market-rate rentals and a luxury amenity package in the Carmel/Hamilton County submarket.
Renter demand still strong
Although construction activity is expected to remain heightened through 2018, the pace of deliveries will ease slightly this year, with 2,200 apartments scheduled for delivery by the end of 2017. That said, demand for multifamily units will continue to outpace new supply and will contribute to dropping vacancy to the lowest point of this cycle.
Last year, tenant demand for Indianapolis rentals surpassed the rise in deliveries, resulting in apartment vacancy declining 130 basis points to 5.6 percent, the lowest annual level since 2000.
This year, slower inventory growth amid persisting demand will allow for a 60-basis-point contraction in the vacancy rate, to 5 percent. Given the limited supply of new inventory, high demand and declining vacancy, rents will continue to rise in 2017.
Rents rise modestly
Average effective rents in Indianapolis climbed 2.5 percent in 2016 to an average of $806 per month. It is worth noting that in some recently built apartment towers, downtown rents achieved double the average.
That said, the region’s rents remain among the lowest of major U.S. metros and are roughly $475 below the national average. The most affordable rents last year were found in the East Indianapolis submarket, where the average effective rent surged 5.3 percent to $657 per month.
This year, the average effective rent is projected to rise 3.2 percent to $832 per month, setting a new local high, yet Indianapolis will remain one of the most affordable places to rent among major U.S. metros.
Property sales spike
The higher cap rate in Indianapolis versus the coastal markets attracted many investors to the metro area in 2016. The wave of new inventory delivered over the last six years provided many acquisition opportunities at the top end of the market at cap rates that typically started in the 5 percent tranche.
As a result, sales activity doubled last year, as both local and out-of-state buyers contributed to higher transaction volume. Investors were most active in the downtown Indianapolis and southwest Marion County areas. Competition for older assets in desirable areas that can be quickly updated and have rents adjusted to market rate was also heightened last year.
What’s ahead?
Improving apartment operations in Indianapolis will continue to garner the attention of investors in 2017. Syndicates and high-net-worth individuals from the East and West coasts will focus their attention on newer buildings in walkable urban neighborhoods, especially in downtown Indianapolis or Carmel, where cap rates start in the 5 percent span.
Well-priced properties in desirable locations will receive multiple offers. Additionally, strong population growth in suburban cities such as Greenwood and Whitestown will attract renters as well as investors to apartment assets in nearby areas.
—By Josh Caruana, Vice President/Regional Manager, Marcus & Millichap. This article first appeared in the May 2017 issue of Heartland Real Estate Business magazine.