Growth in the Indianapolis downtown multifamily market is as dynamic as the city itself. Since 2013, 3,000 units have been delivered and leased up rapidly. The vacancy rate registers 4.5 percent in a submarket that historically has seen vacancy rates of around 8 percent. Demand is healthy and growth continues, with another 283 units scheduled for delivery by the end of this year.
A unique contributor to this multifamily construction boom is the downtown campus of Indiana University-Purdue University Indianapolis (IUPUI), the IU Law School and the IU Medical School.
A sudden building spree of more than $100 million of student-focused projects is occurring downtown near IUPUI. With more than 1,000 units currently under construction or in the works, these new deliveries signal a real change for IUPUI from a commuter orientation to that of a residential campus.
These off-campus locations will likely appeal to young professionals as well, and savvy developers are making certain to provide conventional units as part of their mix.
The largest such development currently under construction is Trinitas Ventures’ 193-unit, 669-bed project at the northeast corner of Michigan Street and Capitol Avenue. Known as Lux On Capitol, the student housing development is due to open in the fall of 2017.
IUPUI also is in the mix with its construction of a $45 million project that will house 700 students and is expected to open this fall.
These and other projects will double the residential options for students. Look for downtown’s demographics to shift as more and more college students choose to live on or near campus.
Tech jobs drive demand
Scott Pollom, Cushman & Wakefield
A major announcement made by Salesforce.com also will have a far-reaching impact on the submarket. As one of the largest technology companies in the world, Salesforce.com has leased nearly 400,000 square feet in the 48-story, 905,000-square-foot Chase Tower in order to expand its workforce with another 800 employees. The company will have naming rights, so it will become Salesforce Tower Indianapolis next year.
Tech talent was a major draw for the company. Indianapolis has
strategically positioned itself and has grown into one of the fastest-growing technology hubs in the country. Fifty-nine tech companies have announced the addition of 4,600 jobs coming to Indiana in the near future.
The combination of more tech employers locating and expanding downtown and tech jobs paying higher salaries has created a high degree of marketability in the multifamily sector. Plus, the urban lifestyle appeals to both professionals and retirees.
Supply pipeline grows
The greater Indianapolis construction pipeline remains highly active, with a total of 4,367 units currently under construction. Over half of those units are scheduled for delivery in the next two quarters.
Given the number of units scheduled to come on line, accompanied by the current historically low market vacancy, the Indianapolis multifamily market may see a slight uptick in vacancy. Rental rates will continue to grow, albeit at a much slower rate than in 2015.
Notably, rental rates in the Indianapolis market have significantly increased by 3.1 percent. In the first quarter of 2016, Class A properties experienced the smallest amount of year-over-year rental growth (1.6 percent), while Class B and C properties experienced 2.6 percent and 3.3 percent growth, respectively.
Investment sales volume was robust in the first quarter, with over 2,800 units trading hands across 23 properties. Investors continue to seek investments in historically strong secondary markets such as Indianapolis as higher yields have proved to be attainable.
Investment sales data for the first quarter provides merit to the higher-yield potential of secondary markets. The mean cap rate in the Indianapolis market was 8.3 percent during the first quarter, with a high of 11.1 percent and a low of 5.8 percent.
The ultimate seller’s market
Investment sales activity has not been this strong in the Indianapolis market since 2005. With Class A cap rates flirting with the sub-5 percent level, some developers are willing to consider selling as quickly as the units fill up, and at premium pricing.
As a result of the hot market and historically attractive interest rates, investors from both coasts as well as outside the United States are expressing interest. With cap rates falling around the country, buyers are finding sanity and solid returns on their investments in Indianapolis, especially with properties constructed in the 1980s and 1990s.
The downtown apartment market will continue its red-hot streak as long as rental demand continues, which we believe will be for the foreseeable future.
— By Scott Pollom, CCIM, senior vice president, Cushman & Wakefield. This article originally appeared in the July 2016 issue of Heartland Real Estate Business.