INDIANAPOLIS—The Indianapolis region has been one of the top-performing industrial markets in the nation for several years, and according to a recent report by JLL, in the fourth quarter it continued to see both strong leasing and construction activity. However, the total vacancy rate at the end of the year was 6.3%, up from 5.2% at the end of 2013. And experts attribute much of that increase to a flurry of speculative construction.
“There were a lot of spec buildings built in response to really hot years like 2011 and 2012,” Steve Schwegman, a lead broker for industrial real estate at JLL's Indianapolis office, tells GlobeSt.com. In those years the market sometimes saw several million-square-feet absorbed during a single quarter and “there was a lot of aggressive money willing to build spec.”
But even though leasing was quite robust throughout the year, “unfortunately most of the large leases have taken place in build-to-suits,” Schwegman says. For example, in one of the largest deals of the year Ulta Beauty took 670,680-square-feet in a build-to-suit development. Overall, the industrial market saw 995,302-square-feet of net absorption for the quarter, bringing the 2014 total to 4.08-million-square-feet.
In general, the developers of large spec buildings have experienced “very mild success so far.” For example, the market currently has eight buildings that can accommodate users who need about 500,000-square-feet and five of the spaces are first-generation specs.
“We've got more supply than there is demand; I think that's a fair thing to say,” according to Schwegman. Other Midwest cities such as Cincinnati and Louisville have the same problem, although in Columbus demand in the industrial market still outstrips supply.
“Sometimes the spec buildings just don't hit the sweet spot,” he explains. Companies frequently have very specific requirements that spec buildings designed to appeal to a wide cross-section of users can't meet. Some companies have decided they need 40' clear heights, for example, but Indianapolis specs top out at 36' clear height. And with their lower risk, build-to-suits are less expensive.
Still, “I am not really worried,” he says. “History has shown, especially in Indianapolis, that demand is cyclical. It's really hard to balance supply and demand in this business. Very rarely have we had equilibrium in this market.” In 2011 and 2012, the region had the opposite difficulty when user demand far outstripped supply. Therefore, Schwegman expects that users will eventually absorb the vacant space.
In fact, JLL is currently tracking about 10-million-square-feet of active deals in the market, and although some of these deals probably won't reach completion, “the activity is probably twice what it was last year.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
