By John Robinson
Jones Lang LaSalle Indianapolis
Supply is DOWN
Historically, the Indianapolis suburban office market has added an average of 600,000 SF of new construction every year. Prior to 2013, the last spec building, Lake Pointe Five, was delivered in August, 2008. Indianapolis used to have 4-5 local, very capable and willing developers (Duke, Lauth, Browning Investments, etc.) competing for sites and deals. Like all developers in 2008, they delivered office buildings thinking the economic growth would continue.
Then came the liquidity crisis in September 2008 leading to The Great Recession. Because office building development relies heavily on the liquidity markets, which essentially shut down in 2009, office development ceased from 2009-2013. Also, Indianapolis has more than 10 office buildings representing nearly 2.5 million square feet that are in receivership. Once a building is in receivership, it is essentially “off the market” because of all the hurdles that must be cleared to get a new lease completed.
Lastly, but most importantly, you can still purchase existing, Class A product at a 30% discount to replacement cost, so why build?
Demand is UP
Though the financial service firms were largely responsible for the Great Recession, they were the first job sector to recover and expand. These firms have been expanding since 2010. Law Firms, who tried to shrink immediately in 2008/09, are finally stabilized and are, for the most part, no longer shrinking en masse.
2011, 2012 and 2013 saw an abundance of new big deals in Indianapolis, taking lots of space off the market. For example:
- Rolls Royce – 400,000 SF
- State Farm – 100,000 SF
- Comcast – 100,000 SF
- Geico – 100,000 SF
- Stonegate Mortgage – 60,000 SF
- ASH – 57,000 SF
The basic fundamentals of any commodity market are supply vs. demand. We have clearly seen new and existing supply shrink and new demand increase. With fewer developers and gun-shy banks, demand will have to far exceed supply before we start building in earnest again.
We expect this to new construction slowdown to continue for the next several years which will lead to fewer concessions, firming and growing rental rates and only strategic new construction of approximately 150,000 SF per year.