In comparison to many other U.S. markets, the Indianapolis bulk warehouse sector has weathered the financial crisis and the downturn fairly well, but in no way is the city immune to the recession. The market’s vacancy rate has crept up from 13.25 percent at the beginning of 2009 to 15.20 percent at the end of the third quarter. Some of this increase in the vacancy rate can be contributed to two new projects coming online — Browning Development’s Axcess70 Buildings 1 and 2, totaling 673,000 square feet, and Browning/Duke Realty’s 533,520-square-foot Allpoints Midwest.
In 2008, the modern bulk warehouse market experienced more than 5 million square feet of positive absorption while managing reasonable growth of 3.35 million square feet. The net result was a 7.5 percent increase to the entire Indianapolis modern bulk market. Through the close of third quarter 2009, the market has remained mostly idle, while only recording two new transactions — AEL Span 144,075-square-foot deal and Niagara Water’s 226,900-square-foot deal — and only growing the overall market inventory by 2.5 percent. Only a couple of new projects have come online, but these projects were financed and under way prior to the financial crisis really hitting in the later part of 2008.
From the tenant’s side, the troubled financial markets have created some new trends on how deals are being structured. Landlords are very wary and, in many instances, unable to financially fund heavy tenant-improvement packages. Tenants looking for heavy tenant-improvement space in today’s environment are being pressed for longer lease terms and stronger financial commitments. Landlords are willing to do short-term lease deals as long as they are only funding light or no tenant improvements.
Despite the slow leasing velocity and increased vacancy, asking rental rates on new speculative, tax-abated product have held firm between $2.95 to $3.25 per square foot NNN, with estimated operating expenses still running between $0.25 to $0.30 per square foot. Rental rates for existing product coming back to market reside between $2.44 and $2.77 per square foot NNN, with higher operating expenses running between $0.63 and $1.05 per square foot. The few large lease renewals signed in 2009 — including Emerson Electric, Electrolux, CAT Logistics and Nice-Pak — have shown a slight reduction in the lease rents, but the overall lack of new deal volume has made it difficult to determine if rental rates are holding firm or decreasing.
— Chip Barnes is a principal and Matt Dickerson is a vice president with Indianapolis-based NAI Olympia Partners.