There have been few signs of a slowdown in the Indianapolis commercial real estate market. In fact, sales, leases and new construction in this key Midwest city all remain strong. Why? To find out, Mdwest Real Estate News spoke to David Funke, managing director with the Indianapolis office of CBRE. Here’s what he had to say.
I know it’s a broad question, but how busy is the commercial real estate market in Indianapolis today?
David Funke: I’d say the market has been quite steady. There has been a lot of talk across the country about a slowdown in activity. But we have not seen that here. We were just having a meeting with some of the leaders of our office about this. In many of the larger primary markets, there does seem to have been a more dramatic slowdown. But here, if it wasn’t for the fact that there is this national conversation in the media about an economic slowdown, I don’t think we’d be noticing any change in activity in the Indianapolis market.
That’s certainly good news.
Funke: There is one exception. There has been a slight slowing down in some of the investment sales activity. That is primarily because many of the value-add investors had purchased so much property as we were coming out of the recession. They were buying these properties and adding value. Today, there is not as much opportunity to create value when buying low and selling high as there once was.
What are some of the reasons for Indianapolis’ continued CRE strength?
Funke: Like most of the Midwest secondary markets, we are well-diversified. Just 20 years ago, we were so heavily manufacturing-oriented. That is not so much the case today. Every market wants to say it is strong in tech, but there aren’t too many markets our size that have a 1-million-square-foot office building downtown with the name “Salesforce” on it. The presence of Salesforce is significant. There are many companies that want to be here because they serve Salesforce. There is a very strong technology community here that keeps the market going.
How important is Indianapolis’ location in the center of the country?
Funke: We are known as the Crossroads of America. It is so true. I was recently at a ground-breaking for a developer that was celebrating 2 million square feet of new modern bulk distribution space. We happened to be marketing that park. I can tell you, there is no sign of a slowdown in the number of half-million to million-square-foot distribution facilities being built in Indianapolis. You want to be in Indianapolis. We can reach so many people within five or six hours of Indianapolis.
There are plenty of spec industrial buildings going up, too. I rarely hear of a new building coming out of the ground where there is distress from the developer that they won’t be filled.
The ground-breaking I just referred to was not in the city of Indianapolis itself. It was in a city to the east of us, Greenfield. That is what is happening now. We are moving out along the major interstates of 65, 70 and 74. All those interstates flow into Indianapolis. Go to the next exit north, south, east or west, that is where you are seeing a lot of new distribution space being built.
How strong is the multifamily market in Indianapolis?
Funke: There is no sign of multifamily slowing down. The market for class-A trophy properties is so strong, particularly for properties located downtown. The capitalization rates are dipping into the 3s. I have never seen that in my career. That is the sign of a really strong market. The investors in Indianapolis are chasing return. The properties in the coastal markets have already seen their prices bid up. Now they are chasing returns in smaller markets. But they also want the best location and highest quality real estate. That is why trophy properties here are selling as well as they are.
Apartments are still being built. There is no sign of these new buildings having trouble leasing-up. Prices have remained very strong. That is primarily because Indianapolis now has a downtown lifestyle that is very attractive to not only people in their 20s but to older people, too. Now people can find everything they want to live and work and play downtown. Many people can just walk to work. Another thing we continue to hear is that many people are willing to go the rest of their lives without ever owning a house again, after what happened to them after the housing crash of 2008. They are in apartments for the rest of their lives.
What about the office market? How is that sector performing?
Funke: The office market has been strong. Occupancy rates are high. What is different, though, is that as the economy and employment are growing, companies have learned how to run much leaner than they used to with their office space. They are using less space. We are sitting now in a new office with CBRE in Indianapolis. This space is 21,000 square feet. If it was 10 years ago, before we got good at the open-office concept, we would have been in 30,000 to 35,000 square feet. We have companies in Indianapolis that have found ways to lease less office space. This is a market, then, where we have gentle net absorption, but not the kind of growth prompting developers to build big office buildings like they used to. Developers are more cautious. If they build a building, it is to accommodate a major anchor tenant. We are not seeing much office spec space. So it’s a healthy, but relatively stable, market for office here.
And what about retail?
Funke: Retail is wildly dependent on the location of real estate and what kind of retail it is. We still have poorly conceived neighborhood shopping centers that probably shouldn’t have been built that are still struggling. We have our share of big boxes trying to find out what they need to be today. But we also have a very large retail team here that is active and is making very good money. So there is retail that is performing well today. If you want to make money in the retail real estate business, you need to gravitate toward the highest-quality tenants and real estate, then you can make a good living in this market. We are not seeing a lot of new retail space being built now.
Any other reasons for Indianapolis’ strong CRE market?
Funke: I was at an all-day meeting of the Indianapolis Chamber of Commerce last week. The governor of the state spoke. He said that when the state of Indiana does well, Indianapolis does well, too. That is true. The state of Indiana has been run in such a fiscally responsible way, we don’t have the budget pressures here that you see in other markets.