CRE O Indiana

Colliers' Cantu: Booming industrial, steady office keeping Indianapolis strong

Colliers' Cantu: Indianapolis CRE market remains strong,ph01
Alex Cantu
Colliers' Cantu: Indianapolis CRE market remains strong,ph02
Alex Cantu

As executive vice president for capital markets in the Indianapolis office of Colliers International, Alex Cantu understands just how strong the commercial real estate market is in Indianapolis. We spoke to Cantu about this, focusing especially on the strength of the region’s booming industrial market and its steady office sector. Here is some of what he had to say:

Industrial has been strong across the nation, but it’s performing especially well in Indianapolis. What are some of the reasons for this?

Alex Cantu: Absorption has been phenomenal in the industrial market here. The entire market has a vacancy rate near 4 percent. I think our connectivity to the rest of the country has been paramount. Companies can access the majority of the U.S. population in a single day’s drive. Indianapolis has also had sustained population growth. Our unemployment rate is very low, so people are moving here for the jobs. The population growth has allowed companies to hire the best workers. They need good, relatively inexpensive labor to man these distribution facilities.

Are there any other factors boosting the industrial market here?

Cantu: We have a set of highly sophisticated, quality developers in this city. They have done a great job meeting the demands of industrial users, distribution users. We have companies such as Duke, Browning and Prologis that have a large footprint here. They are all very sophisticated and skilled developers of industrial real estate.

And as a final component, we have seen consistent rental rate growth the last six or seven years. As we continue to bring on more supply, we have not yet outpaced demand. This will be the second year in a row in which we absorb more than we deliver as a market.

Is this an unusual time for the Indianapolis industrial market?

Cantu: I wouldn’t say that. Our market has been consistently strong for the last five years. And the last 36 months have been very consistent in the demand for industrial real estate.

How about spec construction? Have you been seeing much speculative industrial construction recently?

Cantu: We have seen a lot of spec development. And these developments do fill up. We will deliver between build-to-suit and spec, 9.1 million square feet of industrial space in 2019. We anticipate that with a couple of transactions, we will surpass 10 million square feet in net absorption this year, too.

We know industrial is strong, but how is the office sector performing in Indianapolis?

Cantu: The downtown and suburban office markets are a bit bifurcated. We have seen good absorption and strong fundamentals, though, on the whole in the office sector.

In the suburbs, vacancy rates are down among Class-A assets and we are seeing decent demand for office space across the board. Our key assets, our top-tier assets in the market, whenever they have had vacancies, they have been absorbed.

The suburbs of Carmel and Fishers have seen a lot of activity. As cities provide more amenities such as bike paths, walking paths and beautification efforts, that helps the office market. All these things matter to office users. These amenities have become important when companies are making the decision to move to a market. So markets like Carmel and Fishers have had a lot of success in attracting new companies, and we believe that success will continue.

How strong are the office numbers across Indianapolis?

Cantu: We have had more than 600,000 square feet of build-to-suit office projects in the last five years. We have not had much spec office construction. That has been very limited. Those build-to-suits are in a way acting as the new supply of office space to the market. Vacancies increase as tenants roll into those new products and then other companies fill up the space left behind.

We are seeing rental rates grow at a healthy pace. We would like to see it increase even more. That would help our investors and developers continue to build new product, which would attract today’s workforce. What people are looking for in an office space has changed. We have to continue to increase the qualify of office product in this market so that what we offer mimics what companies are looking for.

How strong is the downtown office market?

Cantu: Downtown has been very healthy. We have seen significant absorption. We have had several thousand housing units come online in the downtown area. This has brought in new residents, all the way from younger people just out of school to Boomers moving out of the suburbs and into the urban lifestyle. We have seen a lot of engineering firms expand their presence here. We believe tech and engineering are the backbone of where our office absorption comes from.

What amenities are companies looking for in their office space?

Cantu: They do want amenities like gyms, outdoor spaces and open, collaborative areas. Those are necessary and important. Our developers are, very similar to developers everywhere else, in this amenities race. What’s interesting, though, is the actual use of these amenities. Are they actually being used?

Developers are adding so much because tenants are telling them that this is what they need. We are seeing everything from coffee bars to high-tech conference centers and amenity centers. Developers are adding so much to attract tenants. The tenants say they need it, but it all comes at a heavy price. Then you fast-forward 24 months and these amenities aren’t getting used. That raises the question of how developers can deliver a product that is attractive to the tenant base but is also done thoughtfully.

We’ve found that the amenities that are used the most often are those that have programming around them. They have gyms that are staffed with trainers, for instance. They are more thoughtful about the amenity set they are offering instead of just throwing money around to make pretty spaces.