Indianapolis Office Market Recovery

CoStar Group, the commercial real estate industry’s largest information resource, reported this week in its 2010 Third Quarter Office Review and Outlook that the U.S. office market has begun a recovery, posting positive net absorption for the second consecutive quarter. CoStar cited three major indicators of the recovery process:

1. Positive office employment growth for a second consecutive quarter. Office employment growth indicates that recovery is beginning to take hold despite high unemployment levels and continued layoffs. In the past two quarters, approximately 24,000 and 8,000 office-using jobs respectively have been created, according to U.S. labor statistics.

2. The strength of leasing activity. CoStar Group CEO, Andrew Florance was quoted in the article saying, "Leasing activity in the quarter was healthy and robust," adding, "We’re now seeing the strongest leasing activity numbers we have seen since the peak of the market [in 2005 and 2006]." "Tenants are no longer staying on the sidelines to wait for a better deal. They are trying to move in to capture better deals," Florance said.

3. The historically low level of new office supply. "Office deliveries in the United States remain stunningly low, historical all-time lows," Florance said. "We're down 85% right now in deliveries [from historical averages]. When you look at new construction starts, we're running at about 3 million to 4 million square feet of new construction starts for office space in each quarter in the United States. That is well below what is required to replace depreciating inventory."

CoStar indicated that the U.S. office vacancy rate is clearly moving down and declined slightly in the third quarter to 13.62%. "This means we are no longer in a deteriorating market," Florance said, "and the balance is shifting ever so slightly but consistently from being a tenant market to being an owner market."

Okay, so what does that mean to Indianapolis office tenants? It means that office tenants in general can anticipate rental rates increasing as the recovery progresses. Fortunately for Indianapolis area businesses, there appears to be a bit of a lag before the national trend toward recovery takes place here. In Q3 2010, slight increases in Indianapolis office vacancy occurred, raising the CBD and Suburban markets to 20.3% and 22.4% respectively.

I believe that now is the time to get in the market before further indications of a recovery cause building owners to make marked changes to their leasing plans by increasing effective rents and decreasing lease incentives.

It is worth noting that in the three recessions I’ve experienced personally while working for Duke Realty Corporation and since founding Carmen Commercial Real Estate, I’ve always been amazed by how quickly the market responds, usually with increasing rental rates and diminishing lease incentives, such as landlord buildout allowances and free rent.

If you are interested in exploring your current lease terms and how a renewal negotiation or relocation could potentially lower your facility costs, please contact me. My team and I would be happy to survey the current market and provide our best professional direction for you and your business.