Activity is picking up in the Indianapolis retail market, buoyed by a strengthening economy that has intensified retail expansion. Positive job growth, escalating new home construction and rising retail sales are attracting new stores and have instigated other retailers to consider additional locations in selective pockets around the metro area.
The northern submarkets within Hamilton County are particularly active, especially around Exit 10 of I-69 in Noblesville, where new housing construction has fostered retail growth. In Carmel, the renovation and re-tenanting of The Centre and The Corner are moving forward.
The 82nd Street corridor is also lively as the nearly completed expansion of The Fashion Mall has attracted new retailers to the state such as West Elm and Free People.
Nearby, last year’s repositioning of Rivers Edge is initiating smaller new developments with Dairy Queen, Wendy’s and Famous Dave’s among the recent openings. The 127,000-square foot project will include an Earth Fare grocery, Walgreens and Panera Bread.
Large spaces are being filled across the metro area. Jo-Ann Fabrics is taking 28,000 square feet along Highway 36 and Brickhouse Fitness has penned a lease for 15,000 square feet along Lafayette Road. Although retail construction is at near historic lows, smaller buildings are under way and larger projects are moving through the planning process.
Short-Term Setback
During the first half of the year, vacancy rose 20 basis points to 12.2 percent. Net absorption in the first two quarters was a negative 145,000 square feet, down from nearly 206,000 square feet in the prior six-month period.
The combination of a spike in supply just as the recession began and the slow pace of the economic recovery has hindered improvement in the metro area’s retail sector. Vacancy has fallen just 60 basis points from the height reached in the final quarter of 2009, remaining stubbornly above 12 percent, even though inventory additions have plummeted.
Increased demand in community centers over the past 12 months pushed vacancy down 70 basis points to 13.5 percent in the second quarter. Neighborhood centers are still struggling however, as vacancy ticked up 20 basis points from a year ago to average 16.3 percent, including a spike of 50 basis points in the first half of 2012.
Incremental Rent Growth
With positive net absorption over the last four quarters, owners have raised rents. The average asking rent rose 0.7 percent year over year to $14.30 per square foot, including a 0.2 percent bump in the first half of 2012. Asking rents are still 3.9 percent below the recent height of the market in 2007.
Operators left concessions at 15.8 percent of asking rents, and recorded a 0.7 percent decline in effective rents to $12.04 per square foot during the past 12 months. Effective rents remain 9.9 percent below the market high reached in the final quarter of 2007.
On a year-over-year basis, the Northeast submarket recorded the largest gain in asking rents at 1.3 percent to an average of $11.25 per square foot. Effective rents meanwhile, bumped up 1 percent to $9.67 per square foot. This led to an increase of 2.2 percent in average revenues.
Who’s Buying?
Investors are attracted to the stability and relatively higher initial yields available in the Indianapolis retail market. As a result, out-of-state investment activity has heated up for single-tenant assets with corporate-backed, net-leased properties targeted at cap rates starting in the 6 percent range.
Strong competition for these properties has caused prices to spike, moving more buyers to consider assets with shorter-term leases that trade above an 8 percent cap rate.
Other investors meanwhile, are moving into the less competitive multi-tenant arena for quality properties with rents underwritten to current market values. However, with improving retail operations leading to stronger cash flows, few of these assets are listed.
Owners who purchased retail properties during the downturn and have completed repositioning efforts will find willing buyers at cap rates averaging above 9 percent.
— Joshua Caruana is the regional manager of the Indianapolis office of Marcus & Millichap Real Estate
Investment Services.