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Indianapolis Caps Off Record-Setting 2019 in Industrial Market

Energizer leased 933,000 square feet within Sunbeam Development’s Franklin Tech Park.

The Indianapolis industrial market somehow heated up even more throughout 2019, setting several all-time records along the way and setting the table for another strong year in 2020. Landlords and tenants showed just how strong the market remained throughout 2019, with absorption across all industrial property types besting its previous record by nearly a third. A total of 11.4 million square feet was absorbed throughout the market in 2019. That blew away what was a record at the time — 8.9 million square feet absorbed in 2018.

Tenants were active all throughout the market, with 17.3 million square feet of space leased over the course of the year. That’s up from just under 14 million square feet that had been leased in 2018. While all sectors of the market attracted plenty of attention, the southwest and northwest Indianapolis markets saw the most action, with 5.3 million square feet leased in the southwest, and another 5 million square feet leased in the northwest.

Matt Niehoff, Cushman & Wakefield

The activity applied to both small and large tenants, with new projects all over the metro leasing up quickly. The city’s largest deal was a 933,000-square-foot lease to Energizer at Franklin Tech Park within a year of Sunbeam Development having finished the building. Another strong example is Strategic Capital Partners’ 65 Commerce Park project, which saw two full-building users swoop in for leases prior to construction ending.

Rental rates soar

While the leasing activity itself was encouraging, the growth in net rental rates throughout the year were even more encouraging for developers and landlords. Rates grew throughout the year, topping out at $4.36 per square foot for all industrial buildings and $4.03 per square foot for distribution facilities. In each area, the growth represented over a 9 percent jump, a sign of the strength of the market and tenants’ desire to locate in the best facilities available in Indianapolis.

Construction has continued to bull ahead in Indianapolis. Developers delivered 10.9 million square feet of new product to the market in 2019, another significant jump from the market’s prior record of 8.1 million square feet in 2017. Similar to leasing activity, the western markets remained most popular, with 3.8 million square feet in the northwest and 2.8 million square feet in the southwest.

With all that activity, developers might be expected to take a bit of a break, but so far demand for new product remains raucous. In fact, just under 13 million square feet of space is under construction as of today, 9 million square feet of which is either in the northwest or southwest. Much of that could come online in 2020, putting the market near another record.

Looking ahead

Here’s one thing to keep an eye on as the year goes on — about 10 percent of all new construction is under lease right now, a low mark compared to previous quarters. The market has been exceptionally strong from a pre-leasing standpoint the past several years, so leasing is certainly expected to pick up, but it remains something to watch.

As of writing, the market’s overall vacancy sits at 4.3 percent, a sign of a very tight market. All the new product in the pipeline could help raise that number and create a little more of a cushion between supply and demand, but we have seen strong pre-leasing activity on new product and strong backfilling of existing product consistently over the past few years.

Looking ahead to 2020, signs are indicating another solid year of leasing activity. Despite the high number of new projects coming to the market, vacancy isn’t expected to tick upward more than about one percentage point. Net absorption should still push ahead of the 8 million-square-foot mark, putting 2020 on pace with the busiest years in the market’s history.

We’re also projecting industrial rents to continue to grow, thanks in large part to the mass of brand-new construction soon to open. Net rates could near $4.50 per square foot, which would put them at the highest level the market has seen.

2019 was truly a high-water year for Indianapolis, and so far 2020 is off to a strong start. While it certainly would be difficult for the market to replicate its pace over another full year, it will be interesting to see just how close we get.

— By Matt Niehoff, Senior Research Analyst, Cushman & Wakefield. This article originally appeared in the February 2020 issue of Heartland Real Estate Business magazine. 

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