To say that the greater Indianapolis industrial market experienced a historical year in 2016 almost seems trite. By every measure, the city’s industrial records were shattered. Net absorption in 2016—8.3 million square feet—crushed that of previous years. Additionally, 11.2 million square feet of new leases were signed, which is more than the 2014 and 2015 totals combined. And, the market saw its lowest vacancy rate in 36 years at 3 percent – down from 5.8 percent at the end of 2015. Now that’s historic!
The industrial market is on fire, and Indianapolis is among the brightest embers. While the city has always competed well with its peers, Indianapolis outpaced the competition in 2016. The city was ranked in the top 10 for industrial space absorbed last year, and it has a history of being “recession-resilient,” in that it is one of the few industrial markets that actually grew during the last recessionary period.
Bryan Poynter, Cushman & Wakefield
The industrial market was tight heading into 2016 and tightened even further throughout the year as historic leasing demand dramatically outpaced new supply. After no new buildings were delivered in the third quarter of 2016, the fourth quarter produced four newly constructed industrial warehouses totaling 635,000 square feet.
Build-to-suit projects were completed for Telamon Corp. (101,000 square feet), Brybelly Holdings (165,000 square feet) and Foamcraft Inc. (60,000 square feet). The lone speculative project was a 132,000-square-foot medium distribution facility in Greenwood.
Twelve speculative projects totaling 6.3 million square feet are expected to deliver in 2017. Considering that vacancy is lower than its lowest point in the last cycle and tighter than any time since the early 1980s, the market desperately needs space to bring supply/demand fundamentals more in balance. It is highly likely that more construction will be announced or started later this year.
Will the expected 6.3 million square feet be enough to balance the market? As a percentage of inventory, the market is not being overbuilt and, in fact, could support even more new construction. While buildings are being constructed in every size category, most demand has been for medium-size and smaller buildings, and the market is responding. These buildings are being constructed in geographically diverse submarkets. Construction timelines are extending, and land prices and building costs are rising. These factors all have led to an increase in rental rates, something the market hasn’t seen in a long time. However, that escalation should slow a bit this year.
With investors aggressively seeking strong secondary markets, new players are continuing to enter the Indianapolis market and acknowledge its high performance. Molto Properties recently closed on 43 acres in the AmeriPlex logistics campus near the Indianapolis International Airport. A 620,000-square-foot spec building will be constructed on the acreage. Pure Development has unveiled plans for a 100,000-square-foot building; Scannell Properties, a 230,000-square-foot building in Greenwood; and Welsh Development Co., a 171,600-square-foot building.
Spec construction clearly indicates that Indianapolis is a safe industrial market with strong fundamentals and existing opportunities. E-commerce and third-party logistics are key drivers of those opportunities. Labor supply continues to be challenging. However, this is not unique to Indianapolis or even the Midwest. It will be important to pay attention to the transportation initiatives being implemented, involving both the public and private sector, that will assist people in commuting to work.
Looking forward, vacancy may increase as some of these buildings are delivered and will require time to become fully leased. However, market fundamentals indicate that there will be sustained demand for newly delivered speculative warehouse space. The new supply will allow for continued positive net absorption.
—By Bryan Poynter, SIOR, CCIM, Senior Director, Cushman & Wakefield.