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Spec Building Meets Market Saturation at America’s Crossroads

Posted 5:00 AM by

Real Estate Insights

In her recently revealed emails, Hillary Clinton referred to Indianapolis by its decades-old derisive nickname, “Indianoplace.” She and everyone else still using this nickname should have come to the State of Real Estate panel presentation in Indianapolis hosted by the Commercial Real Estate Women (CREW), Indy Chapter. The discussion revealed the delicate balancing act that continues to feed Indy’s growth – the one between spec building and market saturation.

Janice Payne, a principal at Touchstone CRE Advisors, moderated the panel, which consisted of Leslie Teskey Bonacker, VP at Cresa; Angie Wethington, VP of Development and Asset Management for Browning Investments; Kathryn Sobotowski, manager of Corporate Real Estate and Development at Indiana University Health; Amy Winchell, leasing and sales associate at Veritas Realty; and Amy Burmeister, senior VP at Colliers International.

Industrial and E-Commerce

Wethington kicked off the panel with insights into the market sector that’s had the most speculative success in Indianapolis: industrial assets. Over the last decade, the Plainfield submarket alone has blossomed into a 69-million-square-foot market boasting tenants like Amazon, Walmart and Fed Ex. Last year, 7 million square feet of additional spec space was produced, with 2 million more slated for 2016.

Wethington is confident the space will be absorbed, either by one or multiple users. “The spec space is what sets us apart as a market,” she said. “One specific competing market which demonstrates that is Kansas City. They have a lot of similarities to us in terms of central location and the labor demographic, but they miss out on some opportunities because they aren’t a spec market.” When national or international interests have the option to take a pre-built space or wait months for a build-to-suit, it’s no mystery which is more convenient.

While e-commerce and distributors form the foundation of Indy’s industrial sector, Winchell pointed out that online sales still only account for about 10% of total retail sales in the U.S. “You can’t have online sales without a brick and mortar store,” she said, “and today you can’t have a store with no online presence either.”

Office Optimism

Bonacker observed that the office market in Indy is due for some speculation of its own. Especially on Indy’s booming north side near edge cities like Fishers and Carmel, office leasing is a landlord’s market. “It was a tenant market until very recently, but now, the space just isn’t there,” she said. This has spurred redevelopment of some older buildings into the kind of cool, collaborative spaces Bonacker says today’s tenants are looking for. “Companies are willing to spend more now to have a better, more open office,” she said, “especially when that helps them attract and retain top talent.” That trend offers owners or managers of amenities in non-ideal locations the opportunity to compete with class-A space – at least for the time being.

Sobotowski agreed, but added that when it comes to medical office space, the market is more equitable. “There are only so many tenants for landlords to seek out, especially as private practices become rarer,” she said. However, as healthcare evolves to look more like retail, that could shift. IU Health built four urgent-care clinics in 2015, each of which is open seven days a week and is intended to take the place of an emergency room for minor injuries and illnesses. Today’s market for health systems is all about streamlining care and taking services to the consumer. “We hope to build 17 or 18 more clinics in the next years,” Sobotowski shared.

The Hunger Games

Today’s Hoosier consumer has no shortage of options when it comes to retail and restaurants, and with IKEA coming soon, that trend is still on the upswing.  Winchell commented on grocery stores and craft burger/beer joints as two of the most competitive verticals in the retail sector. The key to success in both seems to be targeted advertising to a specific demographic. “Whole Foods and Fresh Thyme both target health conscious consumers, but one is affluent consumers and one is frugal consumers; that’s why they can both survive,” she said. The number of locations it takes to make a profit in the Circle City can vary based on oil prices. “When oil prices are more expensive, tenants need four or five stores in a market to make their strategy work, but when prices are low, two or three can work,” Winchell shared.

Multifamily Multitudes

Burmeister said that while investors have become more discerning about the multifamily projects they choose to back, the availability of cheap debt is still driving a lot of new multifamily construction. “As long as we stay around or above a 90% occupancy rate, things are healthy,” she said. With companies like Appiro and Cummins making major investments in Indy-area headquarters, its expected demand for housing will grow, though some may choose to buy, not rent. For renters, amenities like pet grooming stations, WiFi, and secure bike storage are becoming industry standards. Older buildings struggle to catch up when it comes to handling all the packages their tenants receive. “Today’s building manager might spend more time delivering Amazon packages than they do leasing units,” Burmeister joked.

Hot Spots

Many sites in the Indy market are cause for excitement and anticipation. “Every single drive-thru restaurant wants to get in near IKEA,” Winchell said. IKEA is a certainty, but at sites like the old airport terminal, the future is unclear. “There have been proposals as extreme as a hotel and casino and as predictable as more industrial space,” Wethington said. “Just about every developer has a hat in the ring.”

Indy’s downtown is home to two more old industrial sites both ripe for redevelopment, one an old GM holding, the other an old Citizens Energy Coke plant in the process of environmental remediation. “To me, [both sites] have something in common in that they seem to be multi-use sites,” Burmeister said. Citing developments Keystone at the Crossing and Anson, she added, “[Large developments] can take 10 years. To shortchange that process without a vision would be a mistake regardless of what the use is.”

The same could be said of all development in Indy this year, when so much potential is on the horizon, with so many variables yet undecided. As Indy grows from no place to some place, careful planning about what kind of place it wants to be is required. In all sectors of commercial real estate, the roads forward are full of opportunity and risk. Only honesty about what our market can support – while at the same time pushing its boundaries – will cause our growth to continue for years to come.

About the Author
Andie Friedman is a partner in Katz, Sapper & Miller's High Net Worth & Family Office Group. Specializing in tax and financial issues relevant to high-net-worth individuals and their families, Andie helps her clients realize their individual and family financial goals. Connect with her on LinkedIn.

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