Jon R. Owens, Cassidy Turley
With $1 billion in new projects on the horizon, it’s no surprise that downtown Indianapolis is making headlines. Indygo’s $37 million Downtown Transit Center, in close proximity to the Cultural Trail and Bike Hub, will serve pedestrians, cyclists and bus riders. A $26 million investment in a new Science and Engineering Lab at Indiana University-Purdue University Indianapolis will continue to encourage life sciences and technology careers.
Plans also are in the works to revamp downtown’s iconic Monument Circle with space for events, an ice skating rink, sidewalk cafes and more. On the residential front, investments in excess of $400 million over the past five years have resulted in new housing for 4,000 additional residents.
Downtown Residential Boom
According to public/private partnership Downtown Indy, “an increasing number of empty-nester Baby Boomers (born between 1946 and 1964), and young Millennials (born between 1977 and 2003) are choosing to live in the downtown area rather than in the Indianapolis suburbs.”
This influx has created additional demand for residential space. One of the largest apartment projects is Flaherty & Collins’ 28-story Market Square Tower, which will be located on the site of the former Market Square Arena. The $100 million project will feature 300 new luxury apartments and a Whole Foods Market.
TWG Development LLC and Ambrose Property Group also have two redevelopment projects valued at $16 million each: 800 North Capitol with 111 units and Penn Street Tower (the former Consolidated Building) with 98 units. Milhaus Development is completing a $32 million expansion of the Artistry building, bringing the total number of apartment units to 500.
The first phase of the residential/retail Pulliam Square project by TWG Development LLC, a $102 million redevelopment of the former headquarters of The Indianapolis Star, also is under construction. And Flaherty & Collins’ new Axis @ Block 400 development, featuring a Marsh Supermarket and 350 units, is expected to add an additional 200 units in Phase II.
Changing Office Landscape
Businesses are taking note of the tremendous changes occurring downtown. A big trend among employers is movement from the office towers of old to non-traditional buildings and modern-designed space. Employers are taking to heart the needs of the Millennial workforce. They are looking at what attracts and retains young talent: a less traditional work environment with open, collaborative spaces, natural lighting and a “cool factor.”
Aging office tower space in downtown Indianapolis has fallen out of favor. The Class A vacancy rate for office space in the third quarter of 2014 stood at 23 percent, according to Cassidy Turley. Industry sources project Class A vacancy could climb as high as 25 percent by early 2016.
Employers and owners are examining how to make these towers appealing again. Employers’ needs are evolving — they want large break rooms, open floor plans with fewer private offices and new amenities that allow employees to feel comfortable and motivated to do their work.
Converting traditional office space to accommodate these evolving needs is expensive, as much as $40 to $45 per square foot. And making that investment doesn’t address what seems to be a reluctance by today’s users to be in an office tower.
Still, OneAmerica is an example of a downtown tower owner bringing its office space into the 21st century. The mutual insurance firm recently modernized the seventh floor of its office tower. The hip, more efficient design includes collaborative workspaces, better use of windows with few offices on the perimeter and walk stations.
Built in 1970, the 36-story Regions Tower — recently acquired by The Nightingale Group LLC — is expected to undergo a major renovation of its lobbies and common areas. Recently, Zeller Realty acquired the 28-story Market Tower, which was built in 1988. Zeller is planning design changes that will meet the expectations of today’s office tenants. Renovation of the lobby and common areas is expected along with the addition of new food services.
Parking is at a Premium
With all of these changes comes parking challenges. When the towers were built, one parking space was allocated for every 1,000 square feet. Now, employers are putting more people in less square footage, creating upward pressure on the ability to park downtown and driving up rates.
User demand is particularly high at parking structures. Development of a parking structure is costly at $15,000 to $20,000 per space. If the structure includes underground spaces, the cost goes up even more. As vacant space in downtown’s Class A towers gets filled, parking will become even more challenging.
The good news is that as Millennials continue to move downtown, more employers will follow them, making for a bright future for all real estate sectors.
With all of the growth and development, combined with a host of sporting, cultural and entertainment activities, there’s no longer time for naps in Indianapolis.
By Jon R. Owens, SIOR, managing director and principal of Cassidy Turley. This article originally appeared in the December 2014 issue of Heartland Real Estate Business magazine.