Destination Indianapolis: the Midwest Market Attracting National Interest
By Chris Bruzas, Berkadia
Like all markets, Indianapolis is hoping for a return to more normal investment activity for commercial real estate in 2021. So far, the signs are positive, especially for the multifamily sector. The end of 2020 saw a pickup in multifamily sales activity nationally, a result of strong appetite from sidelined capital, continued positive collections trends and occupancy trends, and positive signals from the vaccine rollout.
Indianapolis has steadily been gaining favor with investors, given its economic stability, steady population growth and growing renter interest in secondary and tertiary markets. According to Berkadia’s 2021 forecast, Indianapolis continues to set the standard for urban renewal and economic development. Regional job creation, including at Bottleworks District, Indiana University Health and Amazon, continue to attract new residents.
More than 13,000 apartment units were delivered in the past five years with demand continuing to rise. At the end of 2020, occupancy in the metro area was at 95.1 percent, reaching a 20-year peak. Underpinning healthy apartment occupancy is housing demand created by a consistent net migration of about 12,000 people annually and rising household formation.
Like the rest of the country, Indianapolis continues to feel the impact of the coronavirus, though the effects have been mitigated, as the metro area has not faced some of the stricter regulation on evictions and restrictions, like Chicago or New York. In fact, Berkadia research found that the city’s construction industry was able to maintain momentum even while many other businesses were closed, because developers were continuously requesting permits. More than 2,500 market-rate units came online in 2020.
Many of these deliveries, and the more than 13,200 deliveries over the past five years, were placed in the area’s growing corporate corridors in the Carmel/Hamilton County submarket. Builders will continue to focus on additions in the area during 2021, with 17 projects already underway.
We continue to see enormous demand for well-located assets as vehicles to place capital. We’ve seen record-breaking private equity fundraising in the past few years — $83 billion in 2019. Up until the second quarter of 2020, $23 billion was raised and was on pace to match 2019, but it slowed down with the pandemic. Still, there’s a lot of capital looking for a good home and everyone from local mom-and-pops up to large institutional players are considering Indianapolis.
For example, in November we sold a 240-unit Class C multifamily property for a record-high price per unit in the submarket to a new investor in the region. We’re seeing more and more interest from outside investors in the market, attracted by the growth and stability of the city as they look for new opportunities to lock in while interest rates remain at record lows.
As investors are not aggressively underwriting year-one rent growth, Indiana continues to have stable opportunities to place money, with proven return on investment due to expansive square footage widely available at a lower price compared with primary markets.
Class B and C apartments are still at over 95 percent occupancy with abnormally high rent growth over the past year. In fact, demand is so high that most ownership can’t turn units over quickly enough and waitlists remain. New urban construction continues to see slower lease-up and higher concessions, but garden-style, suburban new construction remains very strong.
So far, 2021 is off to a slower start for inventory to hit the market but we expect that this will start to pick up at the end of the first quarter and into early second-quarter 2021. In the meantime, we continue to see extremely high demand for properties with stable occupancy and upside opportunities. We’ve even seen more than 100 signed confidentiality agreements for tertiary deals with affordable components. Interest rates have ticked slightly higher over the last six months, but pricing remains very high and cap rates in Indianapolis remain below pre-COVID levels.
Secondary markets remain strong as the gateways to steady job growth, rent growth and an exceptional cost of living. With the downtown and urban office markets in flux, we’re optimistic about the opportunities that well-run cities like Indianapolis can offer in 2021.
Chris Bruzas serves as senior director with Berkadia. This article originally appeared in the February 2021 issue of Heartland Real Estate Business magazine.