Multifamily O Indiana

Indianapolis' apartment market? Don't look for a slowdown soon

Indy's apartment market? No slowdown soon,ph01
The Artistry is one of the modern apartment buildings attracting renters to downtown Indianapolis.

The multifamily sector has been booming throughout Indianapolis for several years now. And in the near future? It’s showing few signs of an impending slowdown.

That’s the message from two top real estate executives with the Indianapolis office of Cushman & Wakefield, executive managing directors George Tikijian and Hannah Ott. Both said that the Indianapolis multifamily market continues to attract renters and investors in high numbers.

Both said, too, that the sector’s hot streak isn’t ending anytime soon.

One of the clues? The average asking rents for apartments in the Indianapolis market continue to rise, even as developers bring new product to the market.

“We have raised our eyebrows at how high the prices have been throughout Indianapolis,” Ott said.

Tikijian said that the rental side of the multifamily market has been especially strong in the Indianapolis area, with Class-B and Class-C apartment projects filling at a blistering pace.

One of the reasons? Fewer people are buying houses today, he said. With that has come an increase in the demand for apartment units.

At the same time, unemployment has been low throughout the Indianapolis area, giving people more spending power. Tikijian said that Indianapolis residents can afford higher rental prices.

“Rent growth has been continuous,” Tikijian said. “That’s especially true in the B and C sector.”

According to Cushman & Wakefield research, the average occupancy rate for multifamily buildings in the Indianapolis area stood at an impressive 93.7 percent in 2018. At the same time, the average monthly rent for an apartment unit in the market hit $858 in 2018. That’s up 4.5 percent from 2017.

Rents, of course, varied by submarket. In downtown Indianapolis, the average apartment rent was a far higher $1,198, while in the east submarket it was a more affordable $677 a month.

Developers have been adding new apartment units to the Indianapolis market, with 2,500 to 3,000 new units entering this space in an average year. But Tikijian said that this new supply is relatively minor when compared to Indianapolis’ existing base of about 160,000 apartment units.

Because of this, all that new construction isn’t slowing occupancy or rent growth, Tikijian said.

“We are simply not adding enough units to have a negative impact on the market as a whole,” Tikijian said.

The newest apartment units are springing up in Indianapolis’ downtown market today. The city’s North Side submarket, too, is seeing steady construction activity. Ott said that Indianapolis’ suburban west submarket had long been quiet when it came to new apartment construction. That, though, is changing, Ott said, with new apartment projects rising in this area today.

What about affordable apartment construction? Are developers able to bring new affordable units to the mix in Indianapolis?

Not without government help, Tikijian said. The city of Indianapolis has provided incentives to help make affordable apartments feasible for developers. But the number of affordable units being built is low when compared to the total number of new multifamily units entering the market.

“The costs of building apartments have gone up so much. There is no such thing as building affordable properties without specific programs to help,” Tikijian said. “We do see a small number of units go up. The city has incentivized developers to add some affordable units with tax abatements and TIF funding. But those are small-scale numbers compared to the market. We will continue to have affordability concerns.”

The multifamily sales market remains strong in Indianapolis, too. Ott said that a growing number of buyers have entered this market in recent years. Indianapolis tends to attract mostly private equity groups and institutional groups. Some international buyers have entered the market, too, Ott said.

In an interesting development, Ott said that about 75 percent of the sales activity in the multifamily market today is coming from buyers who are outside of Indiana.

“There has been a tremendous amount of new capital,” Ott said. “We are seeing the arrival of people who have never owned in Indiana. Some have never owned in the Midwest. They are coming here because the pricing is more attractive than in the coastal markets.”

Ott said that Indianapolis’ economy is not only strong, it is diverse, which makes this an attractive market to investors. Indianapolis also benefits from favorable real estate taxes.

“There is no shortage of buyers for any asset class,” Ott said.

The highest demand among investors, though, is for Class-B value-add deals built after 1980, Ott said. Properties in this category built after 1990 are especially attractive to investors. Ott pointed to a portfolio of 2002-built apartment properties. One of the properties closed in 13 days, Ott said.

A challenge today? There aren’t many properties on the market. Ott said there simply isn’t much inventory for buyers to purchase throughout the Indianapolis market.

Part of the reason for this is that multifamily owners aren’t eager to sell.

“Owners are in love with their real estate,” Ott said. “They have the ability to refinance if they want to pull out capital. Maybe you can sell your property for $30 million. Because it is such a tight market for inventory, these owners want to keep their money invested and working for them. They don’t want to get that $30 million and then sit on the cash. Buyers have concerns about finding replacement properties. All those things are keeping inventory low today.”

Both Tikijian and Ott said that they expect the multifamily market to remain strong in Indianapolis throughout the rest of 2019 and into 2020.

“There is no reason to assume any weakening,” Tikijian said. “There would have to be a pretty significant recession with a lot of job losses to have a negative impact on the rental market.”