The COVID-19 pandemic might not be over. But that isn’t stopping Indianapolis’ commercial real estate market from thriving.
And two sectors in particular – industrial and retail – provide an example of just how resilient this market has been since the pandemic first started making headlines in early 2020.
Indianapolis’ industrial market is thriving. This isn’t a surprise: Industrial real estate has been booming across the country, and Indianapolis has long had a strong industrial sector.
But the retail sector? Its performance in the Indianapolis market is more unexpected. Yes, retailers have faced challenges since the pandemic began. But many retailers have evolved, focusing on in-store pickup and curbside delivery and boosting their online presence. Retailers here are doing what it takes to survive in these still-challenging times.
No slowdown for industrial
Andrea Hopper, senior vice president and industrial specialist with the Indianapolis office of Colliers, said that her market, like most others across the country, is in the middle of a industrial market boom.
According to Colliers’ research, the Indianapolis market saw more than 16 million square feet of industrial absorption last year. That was a record-setting year for this market, one that Hopper said usually sees 9 million or 10 million square feet of industrial absorption.
As of the end of April of this year, Colliers reported that the Indianapolis-area industrial market recorded more than 4 million square feet of absorption, with most of this absorption being in the big-box modern bulk building arena.
“There is so much activity in that really big range, tenants looking for 600,000 square feet to more than 1 million square feet of industrial space,” Hopper said. “More tenants are coming to our market and looking for space. We believe we are going to see another solid year for us here.”
The other numbers in the industrial sector are strong, too. The overall industrial vacancy rate in the Indianapolis market fell to 4.3% earlier this year, according to Colliers.
And Hopper said she doesn’t expect vacancies to rise anytime soon. Colliers tracks pending industrial deals, and Hopper said that as of late April there were 6.5 million square feet of pending industrial deals in the pipeline in the Indianapolis market in just the bulk sector of this asset class.
“With so many of the buildings going up, there are deals in place for new tenants before these buildings are even built,” Hopper said. “Activity is through the roof. There is very little space available. When you do have a space that comes on the market, it is scooped up very quickly.”
Why is this sector so hot? Hopper said that many of the trends that favor the industrial sector started prior to the COVID-19 pandemic. But once the pandemic hit, even more customers turned to ordering products online. That led to the demand for new distribution centers across the country, including in the Indianapolis market.
This includes a recent increase in the number of distribution centers that Amazon has opened in the local market, too.
At the same time, companies need more distribution centers for food. Customers have grown more comfortable with ordering food online during the pandemic. This has led to an influx of companies that need more cold storage space, Hopper said.
Indianapolis’ location in the center of the country helps, too. Companies are striving to get their products to their customers in as few days as possible. Indianapolis provides quick access to much of the rest of the country.
Hopper pointed, too, to Indianapolis’ strong interstate system. The city benefits from a network of highways that interconnects through the Indianapolis area and spreads out to other major markets across the country.
All this positive news doesn’t mean that the Indianapolis market doesn’t face challenges. Like in all markets, developers continue to struggle with a shortage of supplies and building materials. They are also struggling to find enough labor to build their facilities.
“We have seen a few hiccups with some buildings because of supply chain issues,” Hopper said. “Labor was also a big story before COVID. It still is. These new distribution centers might have to become more automated if they can’t find the bodies to staff them.”
But even with these challenges, Hopper said she sees the boom times for industrial continuing throughout 2022 and into next year.
“Activity has remained very solid,” Hopper said. “The activity from users looking for 50,000-square-foot to 150,000-square-foot spaces is not slowing. The demand from those looking for big-box spaces of 600,000 square feet to more than 1 million square feet is not slowing, either. Those two tranches of users will remain active. As long as we have the product, we are going to see demand.”
The retail evolution
Ashlee Boyd, managing partner for commercial with Indianapolis-based Thompson Thrift, said that the Indianapolis commercial real estate market is strong today. He said that mixed-use spaces, multifamily and much of the retail sector are all performing well.
Multifamily is firmly in recovery mode in downtown Indianapolis, Boyd said, while retail is performing better in suburban areas.
And retail in the urban centers of Indianapolis? That, unfortunately, still faces challenges, Boyd said.
“Downtown continues to lag,” Boyd said. “Retail there has not recovered in the same way it has in the suburbs.”
Overall, though? Retail has seen a strong resurgence since the earliest days of the COVID-19 pandemic, Boyd said. And while it’s true that consumers embraced online retail during the pandemic, the majority of all retail purchases are still made in brick-and-mortar stores, Boyd said. That isn’t changing.
What is changing is that the savviest and most successful of retailers are embracing the omnichannel approach, building a strong online network and operating brick-and-mortar locations. Retailers also adapted during the pandemic, giving their consumers a greater number of ways to purchase their products.
“We’ve seen retailers offer in-store pick-up and curbside pick-up,” Boyd said. “Many have beefed up their online presence. Restaurants focused more on delivery. What COVID did in the short-term with the shutdowns forced retailers to improve the way they operate. Just look at food retailers and the many different ways in which they can deliver products to consumers: in-app purchases, in-store pick-up, Door Dash, delivery and dine-in.”
Those retailers that have struggled during COVID were also faring poorly before the pandemic hit. COVID hastened the demise of many of these retailers.
But those that have adapted? They are enjoying a boost in business as consumers return to shopping and socializing.
“The retailers who have adapted to the online space and have strong brick-and-mortar locations are the ones that will continue to thrive going forward,” Boyd said. “COVID thinned the retail herd. Those that are left are the most vibrant and strongest retailers. In most cases, they have only gotten stronger and better since the pandemic.”
Those retailers looking for new space – and many retailers are growing – are looking at locations in mixed-use developments, Boyd said. The mixed-use arena was strong before the pandemic and is even more popular today.
As Boyd said, consumers want to be wowed today. Those who live in high-growth suburbs still want an urban experience. They just don’t want to live in downtown Indianapolis to get it.
Mixed-use developments that combine retail, office and multifamily housing are one way to bring the feel of urban living to suburban areas, Boyd said.
“A mixed-use environment is like breaking off a chunk of that urban experience and dropping it into the suburbs,” Boyd said. “You feel you are in a village, an urban community. When you add height and density to a development, it gives the feel of that urban experience.”
Boyd said that Thompson Thrift mixed-use developments are more successful the more the developer adds density such as residential, hotel and office uses.
“The challenges there lie in making it function well for retailers,” Boyd said. “They need amenities such as convenient and adequate parking. But when you can create the dense feel of an urban environment, when you do that correctly, the development usually performs very well.”
As with many markets in the Midwest, Indianapolis’ downtown area is seeing a slower recovery than are its suburban locations. Boyd said that some people who lived in the downtown and its surrounding neighborhoods moved during the earlier days of the pandemic. They discovered that being locked down in the suburbs, where there is more space, was more comfortable than going through lockdowns in downtown.
But downtown Indianapolis – again, like in other major cities – also was the site of protests following the murder of George Floyd by a police officer in Minneapolis. Some of those protests turned violent, resulting in fires, broken windows and violence. That created a perception among many that downtown Indianapolis was no longer as safe as it once was.
Today, with fewer office workers downtown, the center of Indianapolis is quieter and feels less safe. That is keeping residents from the suburbs and tourists from visiting its restaurants and shops.
“We need to get the workers back downtown again,” Boyd said. “Major employers have either not brought their workers back or are considering a hybrid work arrangement. That is a real phenomenon that has, along with the safety issues, slowed the recovery in the downtown areas. If there are not people working downtown, it’s hard for restaurants and retailers to survive in those urban areas.”
Despite downtown’s slower recovery, Boyd said, the Indianapolis CRE market as a whole has proven resilient throughout the pandemic. Boyd said that no one could have predicted in those earliest days of the pandemic how quickly Indianapolis’ commercial real estate activity would recover. “One of the most significant things COVID did for retail was remind people of how much they appreciated going to restaurants or shopping in stores,” Boyd said. “When people couldn’t do that, they realized how much a part of their everyday lives those experiences are. People enjoy getting out. They want to go to restaurants and be entertained.”
