Annual Market Report (2012)

Annual Market ReportIndianapolis, Indiana 2012

www.cassidyturley.com | 3

Dear Colleagues,

This annual report marks the beginning of 2012, a year that will be significant not only politically but also economically, as we could see a continued recovery or a second global recession. Despite lingering uncertainties, natural disasters and political unrest overseas, 2011 was characterized by gradually improving business conditions, giving us rational confidence for the coming year. Although the challenges of the past year hampered growth, Indiana’s commercial property markets proved to be remarkably resilient as every segment of commercial real estate demonstrated strengthening fundamentals.

I am also happy to say that Cassidy Turley has had another successful year. Our office received accolades as the #1 commercial real estate brokerage and the #1 commercial property management firm as ranked by the Indianapolis Business Journal 2012 Book of Lists. The Indiana Chamber of Commerce named our office as one of the Best Places to Work in the state for the fifth consecutive year.

Cassidy Turley is also enjoying success across the country in our second year as a unified firm. We are attracting top talent and expanding into new markets. Our property management portfolio has grown to 455 million square feet, and our leasing portfolio stands at 400 million square feet. Our strategy has been one of smart growth, aiming to get better, not just bigger. In 2011 we added five markets—Atlanta, Boston, Dallas, Houston and Tampa—and now provide a full suite of services in 26 major markets and more than 60 offices across the country.

Our progress would not be possible without the support and loyalty of our clients. For this, I thank you, and I hope that our annual report—covering the regional and national economy and its impact on the Indianapolis commercial real estate market—will prove useful for your business. In these turbulent economic times, keen insight is even more critical to your success, and we stand ready to assist and guide you.

Sincerely,

Jeffrey L. Henry, SIORRegional Managing Principal

2012 Market ReportIndianapolis, Indiana

Economic Overview 4

Industrial Market 8

Office Market 14

Retail Market 20

Investment Market 23

Land Market 28

Associates 30

Industrial Appendix

Office Appendix

COntEnts

4 | We know the state of Real Estate®

2012 Market Report

ECOnOMyAt a glance

Economic Overview

U.s. Economy The U.S. has successfully avoided another recession, but economic conditions couldn’t feel more uncomfortable. Despite this feeling of unease, third-quarter gross domestic product numbers were actually quite solid. Real GDP grew at an annualized rate of 2.5 percent, more than double the average growth rate registered in the first half of 2011, and as the year drew to a close, positive economic data began appearing in numerous sectors. Retail sales were up 7 percent in October and “Black Friday” sales were up 16 percent compared to those a year ago. That means 70 percent of the U.S. economy is signaling healthy, possibly even robust fourth-quarter GDP growth.

Equity markets have rallied 7 percent since hitting their low point in July of 2011, and the CBOE VIX, a solid measure of investor fear, was down to 27 in December; it was at 45 just eight weeks prior. All of this sudden improvement in the data has spurred a solid rebound in the consumer confidence index (CCI), which rose to 56 in November after basically being in the gutter for several months. Most encouraging, the expectations component of the CCI moved from 50 in October to 67.8 in November, a massive improvement in the consumer psyche. There are now clear signs that improved growth is translating into new jobs.

ADP reported that private sector employment increased by 206,000 from October to November, the largest monthly gain this year. Small businesses (1-49 employees) added 110,000 jobs, medium-sized businesses (50-499) added 84,000, and large businesses (>499) added 12,000. The improvement in the labor market was confirmed in early December when the Bureau of Labor Statistics reported the U.S. economy added 120,000 jobs. Although the headline figure was modest relative to the ADP report, October data was revised somewhat higher, and September data

was revised upward by a hefty 52,000 to 210,000. Moreover, the unemployment rate dropped to a two-and-a-half-year low to 8.6 percent. The jobs data that drive demand for commercial real estate also registered solid gains. Professional and business services added 33,000 payrolls, retail trade added 49,800, and manufacturers added 2,000.

This isn’t to suggest that all is well with the economy or commercial property markets. Challenges for the U.S. recovery remain and Europe’s debt crisis remains chief among them. Between 15-20 percent of U.S. exports go to Europe. In addition, U.S. banks have strong financial links to the 17 countries that make up the euro zone. Some peg U.S. bank exposure to European debt (both direct and indirect) at nearly 55 percent of those banks’ total capital. The U.S. economy can withstand a mild euro zone recession, but a deeper recession would surely push the U.S. back into retrenchment.

Another key factor keeping the risk of recession elevated in the U.S. is the lack of agreement from U.S. policymakers on deficit reduction. The super-committee’s failure to agree on measures to reduce the deficit by $1.2 trillion over the next ten years has resulted in even less confidence that policymakers will come up with a sensible plan for long-term fiscal sustainability prior to 2013. Further, the recent economic improvement does not override the fact that the U.S. remains knee-deep in deleveraging recoveries, which are nearly always characterized by slow, choppy growth.

Nevertheless, the conversation has rapidly shifted away from “double-dip” rhetoric to a more common theme of slow growth with upside potential. Even if we end up with subpar economic growth for 2012, as we did in 2011, that scenario engenders continuously improving commercial real estate fundamentals in the form of stronger demand, falling

9092949698

100102104

1997

1998

1999

2000

2001

2002

2003

2005

2006

2007

2008

2009

2010

2011

Multifamily

Retail

Industrial

Office

Downturn Recovery Upturn Mature nDownturn

Weak DemandHigh Vacancy

Improving DemandFall ng Vacancy

Strong DemandTight Vacancy

Historic DemandVacancy Rents

Leading Index for Indiana (LII)

In CRE Fundamentals slowly Improving

U.S. Economy 2010 2011 (e) 2012 (f)

Real GDP 3.0 1.6 2.0

Unemployment Rate 9.6% 9.1% 9.0%

CCI 54 55 54

CPI 1.7 3.0 2.2

Manufacturing (ISM) 57.3 55.4 55.0

West Texas Intermediate

79 94 98

Source: Indiana Business Research Center

Source: Cassidy Turley Research

e: Estimate; f: Forecast

January 2012


Economic / MARkEt tRACkER

nationally, Hiring Is Picking Up

Source: BLS; Cassidy Turley Research

Source: Institute for Supply Management

Source: Federal Reserve Bank of St. Louis

Corporate Profits Continue to Impress

U.s. Manufacturing Remains in Expansion

0

50

100

150

200

250

300

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Thou

sand

s

Private Sector Total Nonfarm

S u ce Bu au bo Sta i s Cas dy Turl

Ma ufacturing Remains i xpansi n

3035404550556065

Nov- 9

0

Jan-

92

Mar-93

May

-94

Jul-9

5

Sep-9

6

Nov-9

7

Jan-

99

Mar

-00

May-0

1

Jul -0

2

Sep-

03

Nov-0

4

Jan-

06

Mar-07

May

-08

Jul-0

9

Sep-

10

Nov- 1

1

Ins tu e o S p y anagemen

0

400

800

1,200

1,600

2,000

1981

1985

1989

1993

1997

2001

2005

2009

r t Pro t i t p

e al Re e v Ba of St Lou s

Corporate Profits, Billions of Dollars, SA

30 Year Average

vacancy, and a commercial market inching closer towards sustained rent growth.

Commercial real estate has already demonstrated for a solid 20 months that it can perform reasonably well in the throes of a deleveraging recovery. In fact, from April 2010 through the third quarter, the U.S. office sector has absorbed 61.6 million square feet, the industrial sector has absorbed 91.5 million square feet, and the multifamily sector has absorbed 324,000 units. All indications are that finalized fourth-quarter numbers will further substantiate this growth trend. For the office and industrial sectors, the current pace of demand is not far off from pre-recession (2005 and 2006) levels, and the multifamily sector is registering the strongest levels of demand since the technology boom of the late 1990s. Retail is the one commercial sector that continues to lag behind. Demand for retail space did turn positive in the first quarter of 2011 (+704,000 MSF), but rising gas prices in the early summer took their toll on consumer spending. As a result, the retail sector shed more space than it absorbed in second and third quarters of this year. With retail sales having shown flashes of an uptrend since August, it is reasonable to expect that the retail sector will begin absorbing space again in early 2012.

Investment sales have clearly slowed recently. According to Real Capital Analytics, November marked the first year-over-year decline in any month since the bottom of 2009 as all property types except multifamily witnessed a slight decline in investment activity. Although a decline in CMBS conduit lending has been one factor, the broader economic malaise is weighing more heavily on investors. Even within the multifamily segment, where financing is cheaper and easier to obtain, investors have grown more cautious.

Given the numerous shocks that occurred

in 2011—the debt ceiling debate, the S&P downgrade of U.S. credit, the European crisis, battered consumer confidence—it is no surprise that investor demand eased. Assuming no additional shocks to the economy at this point, the CMBS market will reactivate in larger volume numbers, and spreads will begin to tighten. CMBS issuance will reach $30 billion in 2011 and will near $40 billion in 2012, fueled in part by refinancing needs. This will put the level of CMBS lending in 2012 on par with 2004 levels of investment sales. Moreover, assuming the recovery follows the script we have laid out, investor demand will continue to spread beyond the primary trophy markets, with secondary and tertiary markets seeing much stronger sales activity in 2012. If the U.S. economic recovery falters, then we will see a flight back to safety, which will disproportionately benefit primary markets such as New York, Boston, San Francisco, and Washington D.C.

Central Indiana Economy The Indiana economic outlook brightened somewhat during the fourth quarter as the Leading Index for Indiana (LII) regained almost all the ground it lost since last January, registering 96.9 in November, just shy of its post-financial crisis high of 97.1. While economists remain cautious, this upward trend is undoubtedly a positive sign, with four of the LII’s five components moving higher. The LII is an index developed by the Indiana Business Research Center designed to reflect the structure of the state economy and predict, in a general way, the direction of economic activity within the next several quarters. It is comprised of five national measures that become available more quickly than do state-level data, thereby offering a more timely view of future conditions. The five components of the index are the National Association of Home Builders Housing Market Index, the Census Bureau’s value of unfilled motor vehicle and parts orders, the interest


2012 Market ReportEconomic Overview

rate spread between the Federal Funds rate and the 10-year Treasury yield, the Purchasing Managers Index, and the Dow Jones Transportation Average.

The Ceridian-UCLA Pulse of Commerce Index (PCI) also showed some new life in October, rising 1.1 percent following three consecutive months of declines. The PCI, a real-time measure of the flow of goods to U.S. factories, retailers and consumers, had declined far more severely than the LII over the preceding months. Although its authors are cautiously optimistic of its newfound positive direction, it remains to be seen if the PCI reversed course for good or if it is in the midst of a swing that has characterized so many economic indicators amidst the deleveraging recovery.

Also supportive of consumer spending and economic growth are relatively healthy household finances. Though delinquency volumes are inching up again across the nation, consumer balance sheets remain in far better shape in most Midwestern states, including Indiana. Hoosiers’ real personal income (income after taking into consideration the effects of inflation on purchasing power) has kept pace with the nation since the beginning of the recession and has started to rise again.

Indiana’s real gross domestic product rose by 4.6 percent in 2010, the third-fastest increase in the nation, driven by growth in the manufacturing sector. However, in 2011 it slowed to 2.2 percent as construction and government employment shrunk. 2012 Indiana GDP growth estimates range from 2.5 percent to 3.1 percent and will likely track somewhere in between. Interestingly, the top ten metros for economic growth since the recession, as measured by their gross metro product, are concentrated on the East Coast and in Texas. One notable exception is Indianapolis, where the economic

growth rate for the period 2007–2010 ranked 10th in the nation. For real estate professionals this is good news as metro areas with stronger economies are much more likely to witness stronger demand and increasing interest in real estate.

It is estimated that around 40,000 jobs will be added to Indiana payrolls in 2012 as the overall economy strengthens. As a result, the state’s unemployment rate may well shift down to 8 percent by year-end. Exactly where these jobs will come from is the subject of debate. Predictions of economists vary greatly in terms of what segments of the Indiana economy will grow and by how much. The most optimistic forecasts predict stronger growth in financial, education and health, and professional and business sectors, with manufacturing and trade jobs seeing slightly slower growth. Other forecasts expect to see more sluggish overall growth and a bumpy ride for these key commercial real estate sectors. Regardless of which prediction plays out to be more accurate, continued growth for the state is projected by all, and this bodes well for the commercial property markets. Certainly, more robust growth would be preferred, but slow growth is better than no growth, and with strengthening fundamentals in all segments of the property markets, there is little reason to expect that we will not continue to experience year-over-year improvements in all commercial real estate segments.

Much discussion has been given to the potential negative impact the European sovereign debt crisis could have upon the national property markets if a prudent course forward isn’t agreed upon by European leaders. It is worth pointing out that Indiana is not insulated from the affair. Europe has long been a strong trading partner with Indiana. In 2010, the most recent year annual data is available, European Union countries imported more than a quarter of Indiana’s exports (27%) for a total of $7.7

million. The European Union began its dramatic increase in imports in 2002, hit a downdraft in 2009, and recovered in 2010. The majority of this growth came from the euro zone countries that have increased their imports by 22.4 percent (average annual rate) since 2002. Indiana exports to non-euro zone countries also grew since 2002, but since 2008 their imports have dropped off. More specifically, Germany, France and Spain have collectively commanded 70 percent of the Indiana export market within the euro zone by importing $4.2 billion worth of Hoosier goods. While France and Germany have been top 10 trading partners for the past 10 years, Spain just joined the leaders in 2010. Of all the euro zone countries, Spain has had the largest average annual rate of growth over the last decade, driven primarily by growing Spanish demand of Indiana pharmaceutical products. Overall, the euro zone has recorded double-digit average annual growth rates in the short, medium and long term—an important trend for the Indiana economy and one that could suffer as a result of the European sovereign debt crisis.

In Indianapolis faltering business and professional services are slowing the recovery, but hiring should accelerate in the second half of 2012. The business and professional services sector, a primary demand driver for office space, remains under pressure from declines in administrative and support jobs, and demand for these services will remain weak until the local recovery strengthens. On the bright side, according to Moody’s Analytics, the high-value-added components of business and professional services have surpassed their previous peak. Although these jobs comprise a smaller share of business and professional services employment, these jobs hold a larger share of the wages and have a greater impact on growth.


Economic / MARkEt tRACkER

U.s. Consumers Are still Deleveraging

Commercial & Industrial tenant Finances Better

Source: Federal Reserve

Source: U.S. Board of Governors of the Federal Reserve System

0%

20%

40%

60%

80%

100%

1954

1958

1963

1968

1973

1978

1982

1987

1992

1997

2001

2006

2011

C n ume s Are S l D leve agi g

Household Debt-to-GDP

F e al Rese

0

200

400

600

800

1,000

2000

2000

2001

2002

2003

2003

2004

2005

2006

2006

2007

2008

2009

2009

2010

2011

Bankruptcy: Business-Total, ( 12-Month Ending) for Indiana

Peak

0.00.30.60.91.21.51.82.12.42.73.03.3

2005

2005

2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

2011

2011

Commercial Real Estate Loans Commercial & Industrial Loans

m a & al e

Charge Off Rates, SAAR (%)

Indianapolis’ continuing recovery will remain muted until stronger national growth in 2013–2014 gives way to a broader services expansion. Economists expect payrolls to return to their pre-recession peak in 2015, about a year after the nation. The transportation and distribution sector will remain a key growth driver as it continues to benefit from improving demand for durable goods. Midwest demand for core capital goods was strong in the second and third quarters despite the debt-ceiling debacle and financial market turmoil. Also, inventory growth has slowed, which reduces the possibility of an inventory overhang that would force Midwestern manufacturers to sharply cut production. This foreruns continued growth in the Central Indiana industrial sector in 2012.

Unfortunately, local hiring in manufacturing will likely fall short of production gains occurring elsewhere. Instead, the pace of local economic recovery will be driven by large private services, where productivity gains are much harder to achieve. This isn’t to suggest the Indianapolis forecast is bleak. The Indianapolis moniker as the “Crossroads of America” is well deserved. As a result, the logistics and distribution sector in particular will continue to witness growth from increased output from across the Midwest. Longer term, the Indianapolis metro area will reap the benefits of a well-

diversified economy, a reasonable cost structure, and a steady pipeline of new residents and businesses. As a result, employment growth will track above the Midwest average, with growth occurring faster here than in other peer markets.

Additionally, Indianapolis’s mild housing correction is creating less of a drag on Central Indiana consumers; the peak-to-trough house price correction is estimated at 7 percent, using the FHFA index, far below the nation’s 18 percent mark. Expect prices to improve next year, with a larger gain in 2013 as the labor market strengthens. By then hiring will become more robust in Indianapolis because of the metropolitan area’s large share of employment in private services, which will be at the forefront of national growth.

In short, the long-term prospects for the Indianapolis market are bright. As many metropolitan areas struggle amid lackluster factory hiring, Indianapolis is positioned to compensate by attracting high-paying jobs in fields such as healthcare, life sciences and information technology. Growth within these sectors will keep job and income growth ahead of other Midwestern cities, while also boosting an already diverse industrial core. Further, Indianapolis stands to gain from positive net migration flows which will further reinforce an expanding healthcare and consumer-dependent service industry.

Indiana Business Bankruptcies Falling

Source: U.S. District Courts: Administrative Bankruptcies Office

January 2012


2012 Market ReportIndustrial Market

InDIAnAPOLIs InDUstRIAL MARkEtAt a glance

U.s. Industrial MarketDespite a challenging economy, the U.S. industrial market continues to grow. Reports show the industrial market in the midst of a sustained rebound from recessionary slump that finally hit in 2009 and lasted into 2010. Demand for industrial warehouse space registered 24.7 million square feet at the beginning of the fourth quarter, marking the third straight quarter in which demand eclipsed 20 million square feet, amid strength in autos, mining, electronics and other sectors. In fact, the overall industrial market has now grown for nearly nine consecutive quarters, providing a further sign of strengthening stability. For context, the current pace of net absorption exceeds the levels recorded over the same three-quarter period in 2006 and 2007—both very healthy years for the industrial sector. Further, most local markets are now exhibiting improving industrial fundamentals with warehouse space now back to pre-recession levels. Through the first three quarters of 2011, 55 out of 67 markets tracked have recorded positive demand for space with the greatest demand occurring in Dallas, Detroit, Chicago, Dayton, Milwaukee and Indianapolis. Overall, port cities, distribution center hubs and auto markets logged the best recent gains.

The U.S. industrial vacancy rate is currently more than 70 bps below the peak of 9.9 percent reached in the second quarter of 2010. Through October 2011, U.S. industrial vacancy had continued its descent and registered 9.2 percent. Average asking rents have increased for three straight quarters and are now tracking at around $5.13/nnn. As for the development pipeline, a lack of new product has provided the industrial market a brief respite to recover. The industrial sector delivered 317 million square feet in 2006, 284 million square feet in 2007 and nearly 284 million square feet in 2008. But development dropped considerably since that time, registering 126 million square feet in 2009, 41 million

square feet in 2010 and a projected 47 million square feet in 2011. In the near term muted development is likely to continue as the current rent dynamic is not supporting speculative construction in most markets. As a result, the lack of new industrial product will likely continue to drive down the vacancy rate nationally, a trend that will accelerate in 2012–2014 as demand grows at a faster pace than supply for the next several years.

Year-over-year investor demand is picking up for industrial properties. After several impressive quarters of absorption, investors are becoming increasingly comfortable with the industrial sector, particularly given higher yields vis-à-vis other product types. Further, the strength of the industrial market is also reflected in its comparative lack of distressed properties. Distressed asset sales, which barely rose above 20 percent of the total industrial transactions during the worst of the recessionary market, have fallen to around 15 percent. Despite unspectacular internal rates of return, returns on warehouse investments are relatively predictable and this predictability has become very attractive, particularly for life insurance companies and other institutional investors who are seeking certainty and a viable alternative to the rising prices for the core office and multifamily assets.

Indianapolis Industrial MarketThe pace of leasing slowed somewhat during the latter half of 2011 but despite the slower pace, year-over-year leasing velocity remains considerably better than 2010. Through the first half of 2011 we witnessed 3.8 million square feet of new leasing and 3.2 million square feet of renewals and expansions. During the final half of 2011, new leasing fell by 77 percent to 882 thousand square feet and the rate of renewals and expansions declined by 28 percent to 2.3 million square feet. Despite the general slowdown in the second half of the year, the pace of leasing both in terms of total square footage and number of deals inked rose from the third

0%

2%

4%

6%

8%

10%

2005 2006 2007 2008 2009 2010 2011

Historical Average

0

2,000,000

4,000,000

6,000,000

8,000,000

2006 2007 2008 2009 2010 2011

Net Absorption

4Q11 4Q10

Inventory SF 242,786,193 242,416,228

Vacant SF 10,339,804 15,166,669

Vacancy Rate 4.7% 6.3%

Occupied SF 232,266,970 227,249,559

Absorption (Qtr) 1,022,521 2,659,489

Absorption (YTD) 5,017,411 3,437,690

Vacancy Rate (Industrial)

net Absorption (Industrial)


80

60

40

20

0

20

40

60

2007

2008

2009

2010

2011Th

ousa

nds

Squ

are

Feet

0%

1%

2%

3%

4%

5%

6%

Absorption Vacancy

0

200

400

600

800

2007

2008

2009

2010

2011

Thho

usan

ds S

quar

e Fe

et

0%

2%

4%

6%

8%

10%

Absorption Vacancy

25

175

375

575

775

975

1,175

2007

2008

2009

2010

2011

Thou

sand

ds S

quar

e Fe

et

0%

2%

4%

6%

8%

Absorption Vacancy

Industrial / MARkEt tRACkERto the fourth quarters. By year-end the industrial market had posted 5.5 million square feet of new leasing, 5.6 million square feet of renewals and expansions and over 1.8 million square feet in user sales. Strikingly, over 2.6 millions square feet of leasing was driven by new tenants to the market.

Net absorption for 2011 registered 5.01 million square feet, with 1 million square feet of that growth occurring during the final three months of the year. This marks the fifth consecutive quarter of occupancy growth in the Central Indiana industrial sector with year-over-year gains in excess of 1.6 million square feet. In fact, the Central Indiana industrial market witnessed more growth through the first nine months of 2011 than during all of 2010 and nearly double that of 2009. By year end, every industrial submarket had witnessed varying shades of occupancy growth. Submarket variations in net absorption included the Southwest (+1.90 MSF), Northwest (+1.83 MSF), East (+354,000 SF), South (+345,000 SF), Southeast (229,000 SF), West (+158,000 SF), North (+87,000 SF), Downtown (+60,000 SF), and Northeast (+58,000 SF).

Overall market vacancy declined slightly for the fifth consecutive quarter, ending the year at 4.7 percent, down 160 bps from a year prior. At year end, vacancy rates had either decreased or remained flat in all nine of the Central Indiana industrial submarkets. Variations in submarket vacancy for all product types included the South (7.7%), Northeast (6%), East (5.3%), North (4.8%), West (4.5%), Downtown (3.9%), Northwest (3.7%), Southwest (3.6%) and Southeast (1.9%). Across the market, product-type variations in multi-tenant vacancy were comprised of flex (9%), office showroom (8.3%), medium distribution (5.7%), traditional bulk (4.6%), modern bulk (3.1%), manufacturing (2.6%), maintenance (1.8%) and transport (1%). At the close of the fourth quarter, there was a total of 25.9 million square feet of available space in the

market with a little more than 10 million square feet of that amount vacant. The amount of overall sublease space available on the market declined throughout the year, ending at 1.5 million square feet in December. The average quoted asking rental rate for available industrial space remained unchanged during the fourth quarter at $3.84 per square foot. This represented a 1.9 percent increase in quoted rental rates from midpoint of 2011 when rents were reported at $3.77 per square foot. The average quoted rental rate within the flex segments was $8.49 per square foot at the end of the fourth quarter, while warehouse rates tracked at $3.48 per square foot.

Growing momentum in the industrial market took place even while the overall economy seemed to be stuck in idle during the second quarter and while economic growth was somewhat lackluster during the third quarter. Over the final quarter industrial growth accelerated and multiple economic indicators provided good reason to be optimistic about the Indiana economy and industrial markets in 2012.

In November the Leading Index for Indiana (LII) increased to its highest level since September of 2008, and full percentage point above where it stood in August, by registering at 97.2. The LII is an index developed by the Indiana Business Research Center designed to reflect the structure of the state’s economy and predict the direction of economic activity in the next several quarters. It is comprised of five national measures that offer insight into future conditions of the Indiana economy. The five components of the index are the National Association of Home Builders Housing Market Index (HMI), the Census Bureau’s value of unfilled motor vehicle and parts orders, the interest rate spread between the Federal Funds rate and the 10-year Treasury yield, the Purchasing Managers Index (PMI) and the Dow Jones Transportation Average (DJTA). Strikingly,





400

300

200

100

0

100

200

2007

2008

2009

2010

2011

Thou

sand

s S

quar

e Fe

et

0%

2%

4%

6%

8%

10%

12%

14%

Absorption Vacancy

Indianapolis Downtown submarket: Absorption and Vacancy Change

Indianapolis East submarket: Absorption and Vacancy Change

Indianapolis northeast submarket: Absorption and Vacancy Change

Indianapolis north submarket: Absorption and Vacancy Change

January 2012



New Leases

Company Location Square Footage

Amazon Southwest 925,000

Amazon Southwest 900,000

RR Donnelly Southwest 799,000

OHL Southwest 406,000

Genco Southwest 309,000

Venture Warehouse and Distribution West 299,000

Genco Marketplace South 292,000

Gilchrist & Soames Southwest 251,000

Apotex Southwest 156,000

ERI Recycling Southwest 156,000

Cherryman Industries East 135,000

Global Stainless Supply East 128,000

Wepack Northwest 125,000

Hanzo Logistics Southwest 102,600

Undisclosed Southwest 105,800

Sataria Southwest 97,500

Sky Enterprises Northwest 90,000

International Paper Northwest 72,000

National Trade Supply South 68,000

Tridien Medical Northeast 60,100

Fastenal Northwest 51,000

Total Square Feet 5,528,000

Largest signed Industrial transactions—ytD 2011*All square footage rounded to the nearest thousand, all transactions greater than 50,000 SF


the November reading not only marked the index’s 2011 highpoint, it also marked the first time in a year that all five of these LII components improved in unison.

Breaking down the drivers behind the LII uptick offers even more promising news. The housing market improved for the third consecutive month with confidence reaching its highest level since the homebuyer tax credit ended in 2010. In December the HMI rose to 21 (below historical standards

but as context the highest the HMI has registered since the housing-crisis was a value of 22) offering further evidence that pockets of recovery are slowly beginning to emerge. The Institute for Supply Management’s PMI also rose to its highest level since June to 52.7. A reading above 50 is indicative of continued expansion in the manufacturing sector, a major demand driver for industrial warehouse space, and this most recent reading now marks the 28th consecutive month of an expanding

manufacturing segment. Signs of life may also be found in the automotive sector as unfilled orders for motor vehicles and parts continues to increase. Further, the DJTA added a small gain in November on top of a major 17 percent gain in October to end the year with a reading of 4946. Granted, it still has a long climb to regain its post-recession high of 5515 but we are absolutely trending in the right direction.

Another positive harbinger for the industrial market, particularly for the logistics and distribution segment, is that Indiana ports have experienced one of their busiest years since before the recession. This growth isn’t limited to Indiana, in fact overall U.S. port traffic is up to the tune of a 2 percent increase in tonnage shipped, but Indiana growth is impressive. Case in point, the Port-of-Indiana Burns Harbor announced in November that it had already handled more cargo in 2011 through 11 months than it had any other year since 2006. The Ceridian-UCLA Pulse of Commerce Index (PCI), a real-time measure of the flow of goods to U.S. factories, retailers and consumers, also makes the case for increased demand within the logistics and distribution segment. As with many other indices the PCI spent the final quarter of 2011 recovering ground lost earlier in the year but it continues to trek positively, having increased 1.2 percent over the final two months of 2011.

Pulling all of this together, it remains clear that despite an economy which is struggling to garner momentum, the Central Indiana industrial market is growing and commercial real estate fundamentals continue to improve. Indeed, there are many encouraging signs that suggest recovery for the economy and for the broader property markets will continue. Indices are trending positive, oil prices have fallen from the highs witnessed at midyear, banks are flush with cash and businesses remain extremely profitable. There is little doubt the economy will continue to move


Industrial / MARkEt tRACkER

20

480

980

1,480

1,980

2,480

2007

2008

2009

2010

2011

Thou

sand

s S

quar

e Fe

et

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Absorption Vacancy

75

25

25

75

125

175

2007

2008

2009

2010

2011

Thou

sand

s S

quar

e Fe

et0%

1%

2%

3%

4%

5%

Absorption Vacancy

forward in fits and starts, but assuming nothing else goes wrong, it should not retrench nor will it curtail continued growth in the Central Indiana industrial market.

Analysis by Product type and submarketTo provide a better understanding of the key commercial real estate metrics of absorption and vacancy occurring in a particular area of the market, we segment our data based on product type and by one of the nine geographical submarkets in

which the building is located. These are the Northwest, Southeast, Southwest, South, West, Downtown, Northeast, North and East. The primary property classifications include office showroom, medium distribution, traditional bulk, modern bulk, flex, manufacturing, maintenance and transport. Office showroom are facilities which are designed for a distributor or sales agent who does not require high ceilings or rail service. They are typically under 25,000 square feet with 12–16 foot ceilings and

Indianapolis northwest submarket: Absorption and Vacancy Change

Indianapolis southeast submarket: Absorption and Vacancy Change

Indianapolis south submarket: Absorption and Vacancy Change

Indianapolis southwest submarket: Absorption and Vacancy Change





0

150

300

450

600

750

900

2007

2008

2009

2010

2011

Thou

sand

s S

quar

e Fe

et

0%

4%

8%

12%

16%

20%

24%

Absorption Vacancy

0

1,000

2,000

3,000

4,000

2007

2008

2009

2010

2011

Thou

sand

s S

quar

e Fe

et

0%

2%

4%

6%

8%

10%

12%

Absorption Vacancy

Renewals and Expansions


Epson America Southwest 750,000

Adidas East 599,000

Baker & Taylor Northwest 504,000

Home Depot Northwest 497,000

OHL Southwest 401,000

Hachette Northwest 395,000

Brightpoint North America Southwest 322,000

Southwire Company Southwest 300,000

Arvin Meritor Southwest 275,000

Ceva Northwest 237,000

BD&A Southwest 151,000

Hat World Northwest 144,000

Krunchers Northwest 132,000

International Metals East 131,000

Hat World (expansion) Northwest 128,000

FiServe Southwest 113,000

BD&A (expansion) Southwest 100,000

Capital City Container Northwest 94,000

ABC Supply Northwest 83,000

Commercial Warehouse & Cartage Southwest 70,000

American Tire Southwest 70,000

Stephen Gould Northwest 62,000

American Tire (expansion) Southwest 52,000


Largest signed Industrial transactions—2011 Renewals and Expansions*All square footage rounded to the nearest thousand, all transactions greater than 50,000 SF


January 2012



a few docks and drive-in doors. Medium distribution facilities are designed to meet the needs of intermediate-sized distributors and typically range from 12,000 to 75,000 square feet. These facilities possess 14–20 foot ceilings, multiple docks and drive-in doors, and are sometimes rail-served. Traditional bulk buildings are designed for large-scale distributors and are typically over 100,000 square feet in size. For our classifications traditional bulk facilities are those facilities constructed prior to 1995 which have 20–28 foot ceilings, are usually rail-served, and have multiple dock height trucks doors complete with levelers and seals. Modern bulk buildings are also designed for large-scale distributors but these facilities are usually substantially larger than 100,000 square feet, have been constructed subsequent to 1995

and possess ceilings of 28 feet or higher. Flex facilities provide a combination of office and warehouse and are typically under 30,000 square feet with asking rates that are typically lower than asking rates for comparable office buildings. Manufacturing buildings have a wide range of sizes but are designed primarily for the research or development of goods. Both maintenance and transport facilities are small buildings, typically under 20,000 square feet, that are purposed primarily for the vehicle repair and storage.

Year-end examination by product type shows that growth is occurring across virtually every type of industrial product in the market, excepting maintenance facilities. Modern bulk remains the market leader with year-end net absorption of 2.2 million

square feet, of which 560,000 square feet occurred in the fourth quarter. Traditional bulk product also posted noticeable annual growth with 1.2 million square feet of absorption through December, spurred in large part by strong second-quarter and third-quarter growth. Additional occupancy gains ranged from medium distribution (+746,000 SF), office showroom (+519,000 SF), flex (+189,000), manufacturing (+55,000 SF) and transport (+22,000 SF).

OutlookMost recent indicators suggest the recovery in the industrial sector will slow, but demand will remain positive. The biggest threat remains the European Sovereign debt crisis, although the U.S. has what appears to be manageable exposure to problematic European

Market Mover: Amazon.com has added nearly 1.8 million square feet to its existing 2 million square feet in the marketplace, thereby becoming a major market mover.


Indianapolis West submarket: Absorption and Vacancy Change

Indianapolis Modern Bulk:Absorption and Vacancy Change

Indianapolis Medium Distribution: Absorption and Vacancy Change

Indianapolis Flex: Absorption and Vacancy Change

Industrial / MARkEt tRACkER


300

100

100

300

2007

2008

2009

2010

2011

Thou

sand

s S

quar

e Fe

et

0%

2%

4%

6%

8%

10%

Absorption Vacancy

User Sales


Victory 4 LLC Northwest 300,000

4350 Airport Expressway East 263,000

3011 N. Franklin Road East 242,000

410 S. Enterprise Northwest 214,000

Barrett-Skodjt Northwest 209,000

421 S. Emerson Avenue South 135,000

2615 Endress Place South 101,000

1040 Sierra Drive South 98,000

3233 N. Post Road East 84,000

Ontario Limited (aka St. Regis) East 84,000

Bosma Northwest 59,000


Largest signed Industrial transactions—2011 User sales*All square footage rounded to the nearest thousand, all transactions greater than 50,000 SF





0

1,000

2,000

3,000

4,000

5,000

2007

2008

2009

2010

2011

Thou

sand

s S

quar

e Fe

et

0%

4%

8%

12%

16%

20%

Absorption Vacancy

120

180

480

780

1,080

1,380

2007

2008

2009

2010

2011

Thou

sand

s S

quar

e Fe

et

0%

2%

4%

6%

8%

10%

Absorption Vacancy

110

10

90

190

290

390

490

2007

2008

2009

2010

2011

Thou

sand

s S

quar

e Fe

et

0%

4%

8%

12%

16%

20%

Absorption Vacancy

debt and EU leaders and the European Central Bank are taking active steps to tackle the issue. As a result business and consumer confidence levels have risen in recent months and the hope is that retail spending, and the corresponding increase in warehouse demand, will follow suit.

Still, most economic factors point to continued resiliency and improvement. Most notably the ISM index continues to track above 50, indicating continued growth in the U.S. manufacturing segment. A review of the 2011 Katz, Sapper & Miller Indiana Manufacturing Survey is both insightful and promising for the Indiana manufacturing segment as well. According to the survey, and consistent with market conditions, the majority of Hoosier manufacturers identified their 2009–2010 strategy as one of holding course. However, looking ahead nearly 80 percent of responding companies see moderate expansion in 2012, and this number jumps to 85 percent

by 2013–2015. Even more optimistically, 20 percent of manufacturing companies surveyed forecast rapid growth in 2012 and expect the pace of growth to accelerate in 2013. Just as encouraging, the relentless tide of cost-cutting witnessed over the past few years seems to have given way to a renewed interest in increasing capital investment as over half of the respondents identified their strategy for 2012 to include increasing investment in areas that are important for revenue growth.

Additionally, industrial employment has continued to grow, businesses are still accumulating inventories in anticipation of growing demand and railroad freight traffic has generally been trending upward since the middle of 2011. Overall, the industrial sector may decelerate from its current trajectory, but demand for warehouse space in particular will remain positive, vacancy will continue to decline and the slow climb towards full recovery will continue.

January 2012


2012 Market Report

InDIAnAPOLIs OFFICE MARkEtAt a glance

Office Market


U.s. Office MarketDespite the darkening clouds forming over the global economy, the U.S. office sector continues to exhibit improving fundamentals. In the third quarter of 2011, net demand for office space registered at 16.1 million square feet. This marked the largest quarterly gain in four years. Demand for office space slowed in the fourth quarter, but vacancy continued to inch downwards and rents remained steady. For the year, the U.S. office sector recorded the strongest level of demand for office space since 2007. The latest quarterly figures show that net absorption for U.S. office space registered at 11.7 million square feet in the fourth quarter of 2011. This marks the seventh consecutive quarter of positive demand for office space. For all of 2011, the U.S. office sector absorbed 50.4 million square feet, up from 18.7 million square feet recorded in 2010.

Of the 80 metropolitan statistical areas tracked, 65 registered positive net absorption, compared to only 43 markets in 2010. Further, the data shows that the recovery is

broad-based, with all four census regions recording a significant upturn in demand for office space in 2011. U.S. office vacancy fell 20 bps from midyear to 16.1 percent at the end of the fourth quarter. On a national basis, vacancy has trended downwards for five consecutive quarters but still remains 200 bps above its 20-year historical average of 14 percent. Average asking rents, which have generally been flat for a solid year, inched up 4 cents in the fourth quarter to $21.50. After a positive, albeit bumpy, 2011 the U.S. office sector is still a solid 12 months away from registering consistent upward movement in rents across the country.

Total inventory under construction at the end of December was 41.2 million square feet, up from 38.7 million square feet registered in the third quarter. Nevertheless, new supply remains extremely constrained, two-thirds below the norm. Even if 2012 looks the same as 2011 in terms of economic recovery, meaning only modest demand for office space, most markets will be in a much stronger position to push rents upwards by mid-2013.

Indianapolis Vacancy and Absorption trends

-250

-200

-150

-100

-50

0

50

100

150

200

250

2005

1Q

2005

3Q

2006

1Q

2006

3Q

2007

1Q

2007

3Q

2008

1Q

2008

3Q

2009

1Q

2009

3Q

2010

1Q

2010

3Q

2011

1Q

2011

3Q

Thou

sand

s, S

q. F

t.

0%

5%

10%

15%

20%

25%

14%

16%

18%

20%

22%

2005 2006 2007 2008 2009 2010 2011

Historical Average

-425

-300

-175

-50

75

200

325

450

2006 2007 2008 2009 2010 2011

Squ

are

Feet

('0

00

s)

4Q11 4Q10

Vacancy 20.3% 20.1%

CBD 18.9% 17.1%

Suburban 21.2% 22.0%

Absorption (Qtr.) 94,000 248,000

CBD -49,000 14,000

Suburban 143,000 234,000

Absorption (YTD) 20,000 101,000

CBD -224,000 59,000

Suburban 244,000 42,000

Vacancy Rate (Office)

net Absorption (Office)

January 2012


Office / MARkEt tRACkER

Multi-tenant Office Overall Market:Absorption and Vacancy Change

Multi-tenant Office Market CBD:Absorption and Vacancy Change

Multi-tenant Office suburban:Absorption and Vacancy Change

Source: BLS; Cassidy Turley Research



s pt ac a ge

425

225

25

175

375

575

2007

2008

2009

2010

2011

Thou

sand

s

Square Feet

0%

4%

8%

12%

16%

20%

24%

Absorption Vac %

Mult Ten n Offi e Ma ket CBD:i a a

175

75

25

125

225

2007

2008

2009

2010

2011

Thou

sand

s

Square Feet

0%

4%

8%

12%

16%

20%

Absorption Vac %

Mu i-Tena t O fice Suburban:Abs rpt on and ac n y Ch nge

300

100

100

300

500

2007

2008

2009

2010

2011

Thou

sand

s

Square Feet

0%

4%

8%

12%

16%

20%

24%

Absorption Vac %

The details behind the improvement were especially encouraging. In previous quarters occupancy gains were largely concentrated in Class A office space. During the latter half of 2011, there was a noticeable pick-up in demand for Class B product, which accounted for nearly 50 percent of overall net demand. The amount of vacant sublease space continued to decline, falling 0.5 percent from the previous quarter. A drop in sublease space is often a positive harbinger for the office sector as it indicates that businesses are taking back space in anticipation of future payroll growth. It is also worth noting that the spread between rent and sublease space and direct rents is narrowing, down to $3.00 per square foot. Sublease space was $4.50 cheaper than direct space in 2008. The narrowing delta bodes well for future rent growth, as it suggests landlords will be under less pressure to mark down rents to compete for new tenants.

U.S. investment sales slowed in recent months. According to Real Capital Analytics, investment sales volume slipped in November 2011 to $2.9 billion, down 27 percent from November 2010. For the year, office sale volume is up 56 percent compared to 2010. Further, national office cap rates inched up 10 bps in November compared to the previous month to 7.4 percent, but remained 150 bps below the peak of 8.9 percent in December 2010. Part of the slowdown was no doubt due to the numerous economic shocks that occurred in the summer accompanied by a pervasive sense of uncertainty. As a result, many buyers and sellers are delaying decisions until there is greater clarity on the direction of economic conditions. Not surprisingly given the elevated risks, there has been a noticeable resurgence in demand for core assets, accompanied by a renewed fear related to value-add assets. However, unlike the last few years when investors were targeting only top-tier markets, in 2011 demand spread to core assets in a larger basket of markets.

Indianapolis Office MarketThe Indianapolis multi-tenant office market is comprised of 31.7 million square feet in 407 buildings, with 38 percent of multi-tenant space located in the Central Business District and the remaining 62 percent located in the Suburban market. The Central Business District is comprised of two submarkets encompassing 82 buildings and 11.9 million square feet. The Suburban market is comprised of eight submarkets consisting of 325 buildings and 19.8 million square feet. For Cassidy Turley reporting purposes, medical office buildings and owner-occupied buildings are not included in our statistical analysis. The most relevant statistics for commercial real estate are inventory, vacancy rate and net absorption. This market report reveals these key statistics for all ten of the Indianapolis submarkets and all three classes of space.

2011 was a year marked by frustratingly slow growth within the multi-tenant office market which seemed to be confined to a few submarkets, further deepening the divide between portions of the market which are growing and those that are still struggling. Improvement was the greatest in the Keystone, Northwest, and Fishers submarkets which helped the Suburban market dramatically outperform the Central Business District as it relates to multi-tenant office real estate.

The distinction between multi-tenant and single-tenant is important as one of the year’s largest overall lease signings was the inking by Rolls-Royce North America to fully occupy 149,000 square feet at Faris Building 1 in the Downtown submarket. Because this is not a multi-tenanted commercial space, it isn’t included in the statistical analysis; however, the decision by Rolls-Royce to locate Downtown was a major story for 2011 and will undoubtedly help to further promote the commercial development of the south end of the Downtown submarket.


2012 Market ReportOffice Market

Within the multi-tenant segment of the market, overall growth continued to be driven primarily by leasing within business and professional services, the traditional driver of office space demand, accounting for nearly 58 percent of total leasing activity for the year. Net leasing activity for 2011 accelerated in the healthcare, technology, and education segments of the market and declined in the traditional professional and business services segment. Direct healthcare leasing accounted for 16 percent of the market activity, compared to 12 percent the year before, and direct technology leasing now comprise over 10 percent of the active market, up from 7 percent in 2010. If we broaden the scope to include healthcare-related leasing, as well as technology-related leasing, the percentages are even higher. It is striking to note that the traditional driver of Indianapolis office space, professional and business services, has declined both in terms of square footage and overall percentage of deals leased every year since the recession. Thus, although the professional and business service segment remains an important component of Indianapolis office demand, it is no longer propelling the market. Both near-term and long-term growth in the Indianapolis office

market will increasingly rely on technology, healthcare and education.

Vacancy in the Indianapolis multi-tenant office market declined to its lowest point of the year at 20.3 percent. Although overall vacancy remains stubbornly high, this marked the third consecutive quarter in which the overall vacancy rate has fallen. The Central Business District continued to track lower relative to vacancy than the Suburban market; however, vacancy has begun falling in the Suburban market while it continues to inch upward in the Central Business District. At 18.9 percent the Central Business District continued to track lower relative to vacancy than the Suburban market where vacancy registered 21.2 percent. However, vacancy has now declined for two consecutive quarters in the Suburban market while it has risen for two consecutive quarters in the Central Business District. Submarket vacancy variations included Fishers (12.1%), Northwest (16.2%), Downtown (17%), East (19.6%), Keystone (20.2%), North/Carmel (20.9%), South (25.7%), Northeast (26.3%), West (30.7%) and Midtown (31.6%).

The amount of sublease space available in

the Indianapolis market declined to 426,000 square feet at the end of December, with 261,000 square feet of that listed as vacant. Nearly 90 percent of vacant sublease space is located in the Suburban market, primarily within the North/Carmel (98,000 SF), Keystone (62,000 SF), Northwest (42,000 SF), and West (34,000 SF) submarkets. A positive harbinger lies in the fact that both available sublease space and vacant sublease space declined in all of these submarkets over the last half of 2011.

The Indianapolis multi-tenant office market experienced 94,000 square feet of positive absorption during the fourth quarter of 2011. This quarterly growth came on the heels of a positive third quarter and was finally enough to push the overall net absorption for the year into positive territory at 20,000 square feet. Although the overall market posted quarterly and year-end occupancy gains, the difference between the Central Business District and Suburban market was stark. The final three months of 2011 saw the Suburban market grow by 143,000 square feet, while the Central Business District continued to shrink by losing 49,000 square feet. Net numbers for the year clearly show a marked difference between the two with the Central

Year Inventory

(SF)

New Supply

(SF)

Net Absorption

(SF)

Occupancy

Rate (%)

Occupancy

(SF)

Vacancy

Rate (%)

Vacancy

(SF)

2001 11,289,000 355,000 11,000 81.5% 9,200,000 18.5% 2,105,000

2002 11,289,000 0 117,000 82.5% 9,313,000 17.5% 1,983,000

2003 11,305,000 16,000 193,000 84.2% 9,512,000 15.8% 1,783,000

2004 11,366,000 62,000 128,000 84.9% 9,650,000 15.1% 1,717,000

2005 11,306,000 (60,000) 18,000 85.5% 9,666,000 14.5% 1,638,000

2006 11,370,000 64,000 (84,000) 84.3% 9,584,000 15.7% 1,786,000

2007 11,427,000 147,000 208,000 84.9% 9,702,000 15.1% 1,725,000

2008 11,905,000 478,000 203,000 83.2% 9,905,000 16.8% 1,999,000

2009 11,905,000 0 (86,000) 82.5% 9,819,000 17.5% 2,086,000

2010 11,909,000 4,000 59,000 82.9% 9,878,000 17.1% 2,031,000

2011 11,909,000 0 (224,000) 81.1% 9,654,000 18.9% 2,255,000


Central Business District


January 2012

Office / Market tracker

Multi-tenant Office North/carmel:absorption and Vacancy change

Multi-tenant Office keystone:absorption and Vacancy change

Multi-tenant Office Fishers:absorption and Vacancy change




Multi-Tenant Office North/Carmel:Absorption and Vacancy Change

-220

-160

-100

-40

20

80

140

2007

2008

2009

2010

2011

Thou

sand

s

Square Feet

0%

4%

8%

12%

16%

20%

24%

Absorption Vac %

Multi-Tenant Office Keystone:Absorption and Vacancy Change

-200

-160

-120

-80

-40

0

40

80

2007

2008

2009

2010

2011

Thou

sand

s

Square Feet

0%

4%

8%

12%

16%

20%

24%

28%

Absorption Vac %

Multi-Tenant Office Fishers:Absorption and Vacancy Change

-30

-20

-10

0

10

20

30

40

50

60

2007

2008

2009

2010

2011

Thou

sand

s

Square Feet

0%

4%

8%

12%

16%

20%

Absorption Vac %

Business District enduring 224,000 square feet of negative absorption and the Suburban market growing by 245,000 square feet. Submarket variations in year-end net absorption included Downtown (-152,000 SF), North/Carmel (-137,000 SF), Midtown (-72,000 SF), Northeast (-25,000 SF), South (-12,000 SF), West (7,000 SF), East (16,000 SF), Fishers (59,000 SF), Northwest (145,000 SF) and Keystone (191,000 SF).

The average quoted asking rental rate for available office space in all classes was $16.86 per square foot at the end of the fourth quarter 2011. This represented a 0.5 percent increase in quoted rental rates from the end of the third quarter of 2011, when rents registered $16.78 per square foot.

The average quoted rate within the Class A sector was $18.80 at the end of December, while Class B rates stood at $16.43 and Class C rates at $14.02. At the end of the third quarter 2011, Class A rates were $18.85 per square foot, Class B rates were $16.30 and Class C rates were $13.99.

Within the Central Business District the average quoted asking rental rate was $18.38 at the end of the fourth quarter 2011 and $16.24 in the Suburban market. In the third quarter 2011, quoted rates were $18.36 in the Central Business District and $16.18 in the Suburban market.

During the fourth quarter, one building totaling 15,000 square feet was completed in the Indianapolis market. This compares to two buildings totaling 67,000 square feet in the third quarter, no buildings in the second quarter, and one building totaling 23,000 square feet completed in the first quarter. Some of the notable 2011 deliveries include: 13225 North Meridian Street, a 60,000-square-foot facility that delivered in the third quarter, and the Hopper Building, a 23,000-square-foot building with street retail located in the North/Carmel submarket that delivered in the first quarter. The

largest project currently underway is the 20,000-square-foot building located at 355 North Indiana Avenue, which is expected to be completed in the first quarter of 2012.

analysis by Submarket and classVacant space at the end of the fourth quarter totaled 6.5 million square feet in the combined Central Business District and Suburban market with a 20.3 percent vacancy rate. This was comprised of 2.3 million square feet of vacant space in the Central Business District for a vacancy rate of 18.9 percent, and 4.2 million square feet in the Suburban market for a vacancy rate of 21.2 percent. Analysis by class of space for the entire market demonstrates Class A vacancy held stubbornly high at 20.2 percent during the final three months of the year; Class B vacancy declined by 0.8 percent, moving from 21.3 percent to 20.5 percent; and Class C vacancy was flat, declining by only 0.1 percent to 20.4 percent.

The Central Business District’s Class A vacancy rate continued to climb for the fourth consecutive quarter, reaching 19.9 percent. While a solid year of Class A vacancy increases in the Central Business District isn’t welcome news, a positive sign from the year-end numbers is that the pace of vacancy increases is starting to abate. Another positive sign is that Class A vacancy in the Suburban market continues to decline. Suburban Class A vacancy ended the year at 20.4 percent, its lowest level of 2011. Although still elevated, Class A vacancy in the Suburbs has now declined for six straight months and now stands at its lowest level since exiting the recession. Among the submarkets Class A vacancy rates varied dramatically, including Northeast (33.8%), West (26.3%), Midtown (23.7%), South (22.8%), Keystone (21.4%), North/Carmel (21.1%), Downtown (19.5%), Northwest (12.7%) and Fishers (8.6%).

Class A office space experienced negative net absorption of 36,000 square feet at

18 | We know the State of real estate®

2012 Market ReportOffice Market

the end of December. This was comprised of the loss of 169,000 square feet in the Central Business District offset by 133,000 square feet of occupancy growth in the Suburban market. The submarkets where Class A leasing activity increased the most throughout 2011 were Keystone (117,000 SF), Fishers (60,000 SF), and the Northwest (16,000 SF). Alternatively, Class A leasing decreased the most in the North/Carmel (-117,000 SF), Downtown (-89,000 SF) and Midtown (-80,000 SF) submarkets.

Overall, Class B space in Indianapolis fell during the final three months of the year, ending at 20.5 percent. This was the result of 111,000 square feet of occupancy growth in the fourth quarter, which helped Class B space outperform all other classes of space by ending the year with 87,000 square feet of growth. Within the Central Business District, Class B vacancy fell slightly from 17.3 percent to 17.2 percent. Although slight, Class B leasing in the Central Business District inched into positive territory during the fourth quarter by registering 5,000 square feet of quarterly occupancy growth during the final three months of 2011. Meanwhile, Suburban Class B vacancy fell from 23.4 percent to 22.2 percent as a result of 106,000 square

feet of fourth-quarter leasing. For the year, Class B Suburban absorption posted 125,000 square feet of occupancy gain with Class B growth being the greatest in the Northwest (129,000 SF), Keystone (23,000 SF), and East (16,000 SF) submarkets.

The Class C inventory across the market saw vacancy remain flat and elevated at 20.4 percent. Class C vacancy has now risen for five consecutive quarters as a result of tenant flight to quality. In fact, Class C space has experienced negative annual absorption every year since 2008. The only Indianapolis submarket which seems to be bucking this trend is the West, where Class C vacancy rates are declining and annual net absorption was on the plus side at 20,000 square feet.

OutlookTypical of a deleveraging recovery, the economy will continue to improve in fits and starts, but assuming nothing else goes wrong, it will not retrench. It is worth noting that at least part of the deceleration in economic growth in 2011 was due to temporary disruptions related to the disaster in Japan, extreme weather in the U.S., and costlier fuel and food. None of these disruptions are permanent. If we push those

anomalies issues aside, there are still solid reasons to be optimistic. The economy is not in the same perilous position it was in during 2008, 2009 or 2010. For the office sector, it is worth noting that even with economic growth having nearly stalled in the first half of 2011, U.S. job creation and net demand for office space remained in positive territory.

Economic fundamentals across the board are much stronger, and recent indicators suggest the recovery remains on solid footing. Most notably, jobless claims have trended downwards since the end of June, the ISM manufacturing index remains in expansion mode, equity markets and CMBS have remained mostly resilient and gas prices have fallen from their midyear highs, allowing consumer confidence and consumer spending to increase. Moreover, banks and businesses are flush with cash, and as jitters subside hiring should resume, albeit most likely slowly. Thus, most signs still suggest the deleveraging recovery will continue, which translates into bumpy growth, uncomfortably slow growth at times, but generally on the positive path towards strengthening commercial real estate fundamentals.

Technology in particular is helping to keep

Year Inventory

(SF)

New Supply

(SF)

Net Absorption

(SF)

Occupancy

Rate (%)

Occupancy

(SF)

Vacancy

Rate (%)

Vacancy

(SF)

2001 16,519,000 919,000 716,000 84.0% 13,876,000 16.0% 2,688,000

2002 16,958,000 439,000 (66,000) 81.2% 13,770,000 18.8% 3,184,000

2003 17,516,000 575,000 136,000 79.3% 13,890,000 20.7% 3,620,000

2004 17,950,000 434,000 691,000 81.3% 14,593,000 18.7% 3,363,000

2005 18,217,000 267,000 314,000 81.8% 14,902,000 18.2% 3,316,000

2006 18,563,000 346,000 594,000 83.2% 15,254,000 16.8% 3,085,000

2007 18,779,000 544,000 192,000 81.8% 15,358,000 18.2% 3,421,000

2008 19,635,000 855,000 306,000 79.8% 15,664,000 20.2% 3,971,000

2009 19,797,000 162,000 (258,000) 77.8% 15,406,000 22.2% 4,391,000

2010 19,830,000 34,000 (1,000) 77.7% 15,404,000 22.3% 4,426,000

2011 19,801,000 109,000 245,000 78.8% 15,605,000 21.2% 4,195,000


Suburban Market


January 2012

Office / Market trackerthe office market on a positive path. High-tech services, a primary user of technology-related office space, are growing at nearly four times the rate of other office-using employment categories. In fact, nearly 25 percent of all office-using jobs created since 2010 have been in technology-related services. Technology is not only impacting the demand for space, it is also changing the way firms utilize office space. Workforce dynamics are changing, and as these trends become more impactful owners are required to be more forward-looking in order to remain competitive. With the growth in technology, software and life science sectors in particular, the next generation of C-suite leadership is emerging. This generation places a high priority on corporate culture, employee comfort, modern and collaborative

environments, health and fitness, and entrepreneurship.

Outside the technology sector, most economists forecast slow job growth in the first half of 2012 with possibly a slight acceleration in the second half of the year. Sustained job growth, a prerequisite for improvement in the office sector, needs to occur on a much broader scale in order to propel absorption with much force into greater positive territory. As a result, expect absorption to remain bumpy, vacancy to continue to slowly erode with year-over-year improvements but painstakingly slow quarterly gains and rents to remain flat, with downward pressure of an elevated vacancy rate and slow rebound in labor markets continuing to make it a tenants’ market in 2012.

Multi-Tenant Office Northeast:Absorption and Vacancy Change

-60

-40

-20

0

20

2007

2008

2009

2010

2011

Thou

sand

s

Square Feet

0%

4%

8%

12%

16%

20%

24%

28%

Absorption Vac %

Multi-Tenant Office East:Absorption and Vacancy Change

-25

-15

-5

5

2007

2008

2009

2010

2011

Thou

sand

s

Square Feet

0%

4%

8%

12%

16%

20%

24%

28%

Absorption Vac %

Multi-Tenant Office South:Absorption and Vacancy Change

-10

0

10

20

30

40

50

2007

2008

2009

2010

2011

Thou

sand

s

Square Feet

0%

4%

8%

12%

16%

20%

24%

Absorption Vac %

Multi-tenant Office Northeast:absorption and Vacancy change

Multi-tenant Office east:absorption and Vacancy change

Multi-tenant Office South:absorption and Vacancy change




Market trend: technology, healthcare, and education continue to outperform other segments of the job market and are emerging as important drivers for central Indiana office space.


2012 Market Report

InDIAnAPOLIs REtAIL MARkEtAt a glance

Retail Market

Name Location

California Pizza Kitchen 49 West Maryland Street, Indianapolis

MacKenzie River Pizza Kitchen 4939 East 82nd Street, Indianapolis

Harry and Izzys 4050 East 82nd Street, Indianapolis

10-01 Food and Drink 1001 Broadripple Avenue, Indianapolis

Potbelly Sandwich Company 55 Monument Circle, Indianapolis

Pei Wei Asian Diner 6159 North Keystone Avenue, Indianapolis

Detour 110 West Main Street, Carmel

Late Harvest Kitchen 8605 River Crossing Boulevard, Indianapolis

Boom Bozz Pizza & Tap House 2454 East 146th Street, Carmel

Dibella's Subs 5640 West 86th Street, Indianapolis

U.s. RetailThe U.S. retail sector is gradually exhibiting a few flashes of positive economic data; it is subtle, but the picture is improving. Retail sales are rising, wages are rising, and household finances are in a better position, thus enabling consumers to spend slightly more aggressively. This improvement affirms the notion that at least part of the economic slowdown in the first six months of 2011 was due to temporary disruptions. What we have missed in the second half of 2011 is enough positive economic news to promote job growth, propel disposable income upward or raise consumer confidence to levels needed to translate into noticeable increases in retail spending. Although it may not seem so, the underlying strength of the consumer remains intact and this is of critical importance to the overall economy and to the retail sector. Assuming there are no additional shocks to the economy or financial markets, consumers should continue to modestly increase their spending and the retail sector will see improving demand.

To be clear, the retail recovery did lose a tremendous amount of steam in 2011 as several one-time events stalled economic growth. Most notably, surging gasoline prices, caused in large part by the turmoil

in the Middle East and North Africa in the beginning of the year, essentially stopped the economic recovery in its tracks, particularly for the retail sector. In Indiana, the price of unleaded fuel rose from $2.77 per gallon in May 2010 to nearly $4.10 per gallon in May 2011. It is no coincidence that personal consumption expenditures dropped from 3 percent to 0.4 percent over the same time period. Because three-fourths of gross domestic product is consumer spending, the impact on the overall economy was dramatic, effectively halting the economic recovery. Although Hoosier gas prices have trended down since the summer peak, year-over-year increases of 26 percent have hurt disposable income and battered consumer confidence. Nevertheless, with prices trending down at the pump, consumers suddenly have more money in their pockets that they can spend on things other than fuel. Against this backdrop there was really only one direction to go: up.

The dust is now settling, and the consumer data is looking brighter. According to the U.S. Census Bureau, retail sales rose 0.6 percent in September 2011, the largest gain in six months and by the end of November year-over-year retail sales increased 6.6 percent. Fortunately, the underlying


0%

2%

4%

6%

8%

2007 2008 2009 2010 2011

-300

-225

-150

-75

0

75

150

225

2007 2008 2009 2010 2011

Squ

are

Feet

('0

00

s)

Vacancy Rate (Retail)

net Absorption (Retail)

4Q11 4Q10

Vacancy

All Retail Types 7.5% 7.1%

Neighborhood Centers 16.0% 16.2%

Community Centers 14.2% 14.1%

Power Centers 7.6% 6.2%

Malls 6.7% 7.8%

Absorption

All Retail Types 122,000 191,000

Neighborhood Centers 51,000 -156,000

Community Centers -7,000 8,000

Power Centers 55,000 1,000

Malls -99,000 -6,000

2011 notable new Restaurant Activity


Retail / MARkEt tRACkERfundamentals continue to point toward improvement. The clearest indication of this comes from household balance sheets, which are in much better shape. After more than three years of deleveraging, the household debt-to-service ratio is down to 11.5 percent, right at trend. Consumers are not alone; retailers are also seeing their balance sheets improve, and this dramatically reduces the likelihood of large-scale closures and bankruptcies. This isn’t to suggest that no retailers will be forced to reorganize and shutter underperforming stores, but many have already embarked on this process. Retailers across the board have sought to optimize locations by closing under-performing stores and opening new ones in an attempt to not only weather the recession but also strategically reposition themselves for growth. Although the departure of retailers such as Borders have left many vacant spaces across the national landscape, including in Indianapolis, general merchandise, apparel, furniture and other categories continue to shutter fewer locations. With consumers and retailers on stronger financial footing, even modest economic growth will be enough to sustain year-over-year improvement in retail fundamentals and diminish the number of retailers force to close their doors.

Indianapolis RetailThe Indianapolis retail market experienced a slight improvement in the fourth quarter with overall vacancy declining for the first time in 2011. Total retail vacancy rose from 7.4 percent in the first quarter to 7.7 percent at midyear, where it remained stuck before taking a step down to 7.5 percent at the end of December. Certainly, a 20 bps decline isn’t cause for celebration, but in this market improvement of any kind is welcome news. The submarkets with the lowest vacancy were Midtown (3.9%), Uptown (3.8%) and Keystone Crossing (3.5%). Among retail product types, vacancy rates included from neighborhood centers (16%), community centers (14.2%),

power centers (7.6%) and malls (6.7%).

Among the year’s retail vacancies, few garnered as much attention as the departure of Nordstrom from the site it had held in Circle Centre Mall since the mall’s opening in 1995. It is important to note that Nordstrom’s decision to leave the downtown mall was much more the result of the demographic and geographic reality that many of its sought-after customers now shop at the chain’s newer store at The Fashion Mall at Keystone, and less of a judgment on the Indianapolis retail environment. In fact, Nordstrom not only continues to post impressive profits at its store at The Fashion Mall, but it opened the first Indiana location for its off-price chain Nordstrom Rack in the fall at the Rivers Edge shopping center at 82nd and Dean Road.

Overall retail net absorption finally moved into positive territory for the first time in three quarters as the year closed by registering 122,000 square feet. Net absorption in the Indianapolis shopping center sector has totaled 129,000 square feet over the past four quarters. Among power centers 55,000 square feet of retail space was positively absorbed in 2011. Meanwhile, malls recorded negative net absorption of 99,000 square feet through December.

Average quoted asking rental rates in the Indianapolis retail market fell during the fourth quarter, ending 2011 at $12.17 per square foot per year. That compares to $12.34 per square foot in the third quarter and $12.31 per square foot at the end of 2010. This represents an 82 bps decrease in rental rates in the current quarter and a 114 bps decline from a year prior. Across retail types, rent growth has remained close to zero or slightly negative, knocking rents back to levels last seen three to four years ago. Asking rates in 2011 continue to be highest among malls ($15.18 PSF) and power centers ($12.84 PSF), although rent growth has been minimal with both

$200,000

$220,000

$240,000

$260,000

$280,000

$300,000

$320,000

$340,000

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan -0

7

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Retail Sales and Food Services, Excluding Auto and Gas

Thou

sand

s, U

SD

+18%

0

25

50

75

100

125

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-11

Recession Low

Consumer Confidence Index

February

October

November

Delinquency Rate, % by $ Volume, NSA

First mortgageBankcardAuto

06 07 08 09 10 11

8

7

6

5

4

3

2

Retail sales Have Recovered from Bottom

Consumer Confidence turned Positive in november

Indiana’s Consumer Finances Have Improved

Source: Census Bureau

Source: The Conference Board

Sources: Equifax, Moody’s Analytics, Cassidy Turley

January 2012


2012 Market ReportRetail Market

segments mirroring closely the rates in effect during the balance of 2010.

On the supply side, retail properties are dealing with a glut that isn’t hampering other segments of the commercial property markets. According to the research firm Reis, Inc., national retail inventory growth moved along at a steady average of 1.6 percent per year from 2000 to 2008, spurred in large part by a housing bubble that promoted outlet developments to complement the many rising subdivisions across the country. Within Central Indiana the growth rate wasn’t as high, averaging slightly less than 1 percent for the same time period; nevertheless the local housing dynamic during the bubble had a similar effect on retail.

Since the recession few retail sectors have experienced the level of robust growth and expansion of the restaurant segment, and among this segment no type of restaurant has grown more quickly than fast casual. Generally speaking, fast casual is a type of restaurant that doesn’t offer full table service but promises a higher quality of food and atmosphere than a typical fast food restaurant. It is a relatively new and growing concept in the U.S., positioned between fast food and casual dining, and one that has experienced accelerating sales growth every quarter since before the recession. This category is outpacing the restaurant industry as a whole, growing at nearly four times the rate of the full-service restaurant segment. As restaurant operators continue to face challenges caused by the slow recovery, the fast casual chains are perfectly positioned for the economic climate. As a result, expect the dynamic growth within this segment to continue into 2012 and beyond.

Another retail group that has bucked the recessionary trend has been the discount and value-oriented retailers. The value offered by these retailers was especially

popular following the financial crisis when frugality became the norm as consumers struggled with high unemployment and falling home prices. With economic growth continuing to be less than impressive, the business model for these retailers continues to impress. Without question the economy is in much better shape than even a few years ago, and likewise luxury retailers are on much stronger footing. Nevertheless, given the stubbornly high unemployment rate, high gas prices, and shaky consumer confidence, shoppers continue to seek value. This is occurring even among upper-income shoppers who continue to exercise much greater conservatism. In essence there continues to be a type of “trading down” effect, a trend whereby shaky consumer confidence and an expanded customer base are propelling consumers to seek value by stretching their dollars and looking for bargains. The result has been strong demand and sales for value-oriented retailers, giving rise to new stores across Indiana.

The TJX Company, parent of TJ Maxx, Marshall’s and HomeGoods is an example. TJX expects 2012 sales growth of 7 percent with 2 percent coming from comparable store sales and 5 percent from new stores. This retailer not only plans added revenue but also added stores in smaller Indiana communities such as Marion, Richmond, and Warsaw. Another discount retailer with active Indiana plans for 2012 is California-based Ross Stores, commonly known as Ross Dress for Less. It recently announced a 20-store expansion in the Chicagoland area and is scouting options in northwest Indiana and southern Indiana in Clarksville.

This isn’t to suggest that all is rosy in the land of retail. It is true that we have experienced increased activity in 2011; however, the decision-making process remains slow and tedious for many in the commercial real estate profession. This is the

result of several factors. First, limited capital and an unwillingness to invest resources in a marginally performing store mean retailers have little margin for error in their decision-making process. Resources remain scarce and must be allocated carefully to ensure a specific location will provide superior returns and enable future growth. Second, the lending environment remains very tight with banks continuing to be conservative with capital. Third, currently there are many more layers of approval for leasing by both tenants and landlords. Even in cases where this level of scrutiny is wise, the net effect is to expand the deal-making horizon and slow the overall leasing velocity occurring in the market.

OutlookOur 2012 forecast is for a modest increase in overall retail and restaurant sales, particularly within the fast casual segment. Continued growth in online shopping and electronic retail will continue to drive sales and traffic to shopping centers and restaurants, and we will see savvy retailers adapting to and further utilizing this medium. We will see growth at both ends of the retail spectrum, with value and discount retailers as well as luxury brand retailers posting higher sales volume. Retailers will continue to examine their portfolios and shift capital to more profitable stores and locations. Although the pace of closures, consolidations, and strategic conversions will be slower than 2009–2010, retailers, including such notables as Sears, will close underperforming locations. On the development front, expect more mixed-use developments constructed in dense market areas and limited demand for select multi-tenant or speculative development in primary locations, with more widespread development at least 24 to 36 months away. Finally, A- and B-quality properties will see increased occupancy in 2012, but at net effective rents frequently less than the levels seen five years ago.


Investment Market

2012 Market Report

InDIAnAPOLIs InVEstMEnt MARkEtAt a glance

Indianapolis Investment MarketIn 2011, the Indianapolis investment market reflected a year of two halves—two dramatically different halves. The first half of the year demonstrated a significant increase in market confidence which was manifested in boosted transaction volume. There were numerous factors impacting the increased activity including dramatically improved credit availability, positive leverage created by increased spread differentials and acquisition quotas which prompted investors to turn their attention away from primary markets and seek opportunities in secondary markets. Transaction volume for the first half of 2011 nearly doubled that during the same time in 2010. Unlike 2010, we witnessed investor interest tick upward across all property types.

In second half of 2011, investor confidence declined and transaction activity dropped, with the exception of multifamily which continued to post noticeable gains. The slowdown in total transaction volume wasn’t unique to the Central Indiana market. Investor confidence waned nationally as well. The Eurozone debt

crisis, the historic downgrade of the U.S. credit rating, and ongoing fiscal policy uncertainty all battered investor confidence and slowed transaction volume.

Despite this uncertainty there were some big stories in 2011. Multifamily remained a big story, garnering much interest by investors. Nationally and in Central Indiana, multifamily has continued to be the highly sought after “safe haven” for commercial real estate investors. Due in part to the tumultuous market, high unemployment and a general scarcity of jobs, there is a larger number of former homeowners entering the rental market. Investors enjoy the inherent yield growth attained due to the structure of shorter-term leases for multifamily properties; with one-year leases in place, an owner is more easily able to increase rents than owners of other property types. Multifamily property also gained favor due to the multiple sources of available financing. Government agencies, life insurance companies and local and regional banks were all engaged in multifamily financing. Expect investors to continue to chase multifamily while Fannie

the Big Picture: Average U.s. Cap Rates by sector (2008–2011)

5.5%6.0%6.5%7.0%7.5%8.0%8.5%9.0%9.5%

Jan-

08

Apr-0

8

Jul-0

8

Oct-08

Jan-

09

Apr-0

9

Jul-0

9

Oct-09

Jan-

10

Apr-1

0

Jul-1

0

Oct-10

Jan-

11

Apr-1

1

Jul-1

1

Oct-11

Multifamily

CBD Office

RetailSuburb OfficeIndustrial

Source: Real Capital Analytics

-60

-40

-20

0

20

40

60

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Squ

are

Feet

(M

illio

ns)

-8%

-6%

-4%

-2%

0%

2%

4%

Job

Gro

wth

(y/

y %

chg)

Office Absorption Industrial Absorption Private Sector Jobs

y

0

5

10

15

20

25

30

35

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-09

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-11

Closed Offered

The Big Picture: Total Closed & Offered By Month (2008–2011)

Commercial Real Estate on the Rise

Investors Remain Cautious

2010 2011

Real GDP (a) 3.0 1.6

Unemployment Rate 9.6 9.1

CPI Inflation (a) 1.7 3.0

CCI 54 55

Fed Funds Rate 0.2 0.1

10-year Gov’t Bond 3.2 2.8

Source: Bureau of Labor Statistics; Cassidy Turley Research

Source: NAHB/Wells Fargo; U.S. Census Bureau; Cassidy Turley Research

Source: Bloomberg


2012 Market ReportInvestment Market

Mae and Freddie Mac are still available in 2012, as their availability in 2013 remains unclear. Multifamily transaction volume nearly doubled in 2011 from 2010 with over 30 transactions completed by year end.

Expect renter demand to remain brisk for multifamily. The economic and demographic shifts in the market continue to drive

demand for multifamily rental space. Since the fallout of the subprime market, underwriting standards for mortgage lenders have become much more stringent. Gone are the days of 100 percent loan-to-value ratios and questionable income-verification practices for single-family mortgages. Under the new underwriting standards, a meaningful segment of the population

no longer qualifies for a home loan. Thus, there is a clear substitution effect that is spurring demand for multifamily. A slow-growing economy only serves to strengthen this demand. For 2012 and beyond, these factors present investors with a very favorable outlook for multifamily space and a very profitable investment opportunity.

Single-tenant NNN and “mega” portfolios were additional themes for 2011. In terms of single-tenant NNN, investors love minimal risk from tenants such as CVS, Walgreens, FedEx and Rite Aid. As a result, NNN transactions were estimated to be $25 billion in 2011. This comprised approximately 20 percent of the total investment sales volume in the year. At the other end of the size spectrum was investment activity in mega portfolios, or those portfolios in excess of $100 million. During the first half of 2011 several mega portfolios were introduced across property types. Examples include a 92-million-square-foot Centro Retail portfolio which was traded to BRE Retail Holding, an affiliate of Blackstone Real Estate Partners; a 9.8-million-square-foot Duke Realty suburban office portfolio purchased by Blackstone Real Estate Partners VII; a 5.7-million-square-foot Pinchal industrial portfolio bought by Exeter Property Group; and a 2.8-million-square-foot multimarket industrial portfolio by Prologis which was taken by Clarion Partners.

Among the industrial investment sales which occurred in the past year were two distinctively different classes of industrial properties: core assets and distressed assets. Core assets garnered the most attention in 2011. Over 6 million square feet of Indianapolis industrial property traded hands in 2011, nearly twice the volume of the previous year. In addition to increased volume, the Indianapolis industrial investment market witnessed an average $5 per square foot increase for the properties trading hands. Among those properties, 4.2 million square feet of this Class A space could be

Property Name Address City Square Feet

Whirlpool Airwest 2801 Airwest Blvd Plainfield 804,586

Quadrangle Bldg One 800 Commerce Pkwy Greenwood 795,237

Redcats USA 3003 Reeves Rd Plainfield 741,221

Mount Comfort 103 6579 W 350 N Greenfield 630,000

760 S Graham Rd 760 S Graham Rd Greenwood 612,000

Bldg 140 5045 W 79th St Indianapolis 504,164

2150 Stanley Rd 2150 Stanley Rd Plainfield 493,500

Airwest IX 2675 Reeves Rd Plainfield 482,000

Southport Industrial Center 7445 Company Dr Indianapolis 355,780

2363 Hadley Road 2363 Hadley Rd Plainfield 346,800

North By Northeast Business Center 9715 Kincaid Dr Fishers 306,408

4350 Airport Expressway 4350 Airport Expy Indianapolis 262,540

3011 N Franklin Road 3011 N Franklin Rd Indianapolis 241,896

fmr Oxford Automotive Facility 370 N Manhattan Rd Greencastle 220,620

6450 Hanna Avenue 6450 Hanna Ave Indianapolis 220,000

Building 125 7555 Woodland Dr Indianapolis 195,080

Southtech Park 2011-2121 Southtech Dr Greenwood 163,200

Building 130 7601-7687 Winton Dr Indianapolis 152,000

421 S Emerson Ave 421 S Emerson Ave Greenwood 135,000

fmr Smurfit Stone 6400 English Ave Indianapolis 120,869

Eastside District Center 3333 Pagosa Ct Indianapolis 116,800

2615 Endress Place 2615 Endress Place Greenwood 101,350

1040 Sierra Dr 1040 Sierra Dr Greenwood 98,000

fmr FedEx 7250 E 96th St Indianapolis 89,000

fmr OfficeMax 3233 N Post Rd Indianapolis 83,712

7768 Zionsville Road 7768 Zionsville Rd Indianapolis 60,100

notable Greater Indianapolis Investment Industrial sales—ytD 2011Arranged by square feet transacted


January 2012


January 2012

Investment / MARkEt tRACkERconsidered a flight to quality. Strikingly, of this 4.2 million square feet, just over 2 million square feet was located within our Southwest submarket in Plainfield.

Office investment sales activity began the year with noticeably increased interest and activity levels than seen in 2009 or 2010. Improving market fundamentals, combined with an active lending environment, led many would-be sellers to the market. Stabilized buyers, seeking higher yields than could be achieved in primary markets, began to explore the Indianapolis market for core assets in the Central Business District as well as in the healthier Suburban submarkets. In the second half of the year, opportunistic buyers came out in force in response to several office offerings from lenders who controlled these assets in receivership or via REO. Many of these offerings will not close until 2012; however, they reflect increased activity levels in this sector.

The sale of INTECH One, Two and Three represents the largest core office transaction to occur in Indianapolis for

several years. Anchored by several GSA tenants, these three Class A buildings enjoy strong tenancy, excellent conditions, and an attractive location. The sale of this complex nearly set a new high-water mark for multi-tenant investment office sales in Indianapolis, and as such helps establish post-recession pricing for good-quality office assets in Indianapolis.

Another transaction, though not captured in our office sales figures, is the sale of Heather Glen II, a medical facility on the St. Vincent Indianapolis healthcare campus. The recently constructed, single-tenant building is fully occupied by St. Vincent Hospital on a long-term lease. The high interest levels seen for this offering reflect the overall health of the medical office sector, as well as the high interests in these assets from investors.

In 2011 office sales activity reflected increased activity levels, with nearly twice as many assets trading as the prior two years combined. This increased activity is a direct result of investors seeking Secondary Market opportunities which

0

100

200

300

400

500

600

700

800

Q1 '08 Q1'09 Q1'10 Q1'11

Rolling 12-mo Total Quarterly Vol

0

100

200

300

400

500

600

700

Q1 '08 Q1'09 Q1'10 Q1'11


050

100150200250300350400450

Q1 '08 Q1'09 Q1'10 Q1'11


0

100

200

300

400

500

600

Q1 '08 Q1'09 Q1'10 Q1'11






sales by total $ (mil): In Multifamily

sales by total $ (mil): In Industrial

sales by total $ (mil): In Office

sales by total $ (mil): In Retail


Sears at Noblesville Creek Shopping Center

301 Noble Creek Dr Noblesville 115,504

Greenwood Shoppes 884 US Hwy 31 Greenwood 80,257

Rockville Plaza 50-150 S Girls School Rd Indianapolis 59,038

Arlington Square 1137 N Arlington Ave Indianapolis 56,606

Hobby Lobby 212 Gable Crossing Dr Avon 56,100

LA Fitness 9030 Rockville Rd Indianapolis 45,000

Echelon 5252 E 82nd St Indianapolis 30,817

Best Buy 4625 Lafayette Rd Indianapolis 30,000

Fishers Gateway Shop 8961-9001 E 116th St Fishers 21,330

Meijer Shops of Carmel 1430 W Carmel Dr Carmel 10,600

Washington Square Commons 1010 E Washington St Indianapolis 9,076


notable Greater Indianapolis Investment Retail sales—ytD 2011Arranged by square feet transacted


2012 Market ReportInvestment Market

offer greater yield and less risk than Primary Markets. The first half of the year saw more closings, with the August debt ceiling arguments and resulting credit downgrade stalling out many asset trades which relied on financing. However, during the fourth quarter we have seen renewed optimism, as well as listing activity, which has set the table for a significant number of office investment closings in 2012.

Similar to office and industrial markets, retail investment activity reached three-year highs in 2011, with many assets trading. In contrast to the office investment market, a high percentage of those sales were direct sales from owners versus lender-directed sales. Single-tenant retail assets dominated the sales activity in the retail sector, including Hobby Lobby in Avon, Best Buy on Lafayette Road and several

drug stores as well as restaurant sales.

Multi-tenant retail investment sales were dominated by fully-leased, Class A centers in good locations which traded to stabilized investors. Greenwood Shoppes, the largest of the multi-tenant centers to trade in 2011, represents a well-leased center on a dominant corner in the Greenwood Mall trade area which sold to an out-of-town investor in late 2011. Several small outlot centers, less than 10,000 square feet each, also traded as fully-leased, stabilized assets during the year. Cap rates on stabilized retail assets remain in the mid-8-percent range for those centers in strong trade areas.

Less common in 2011 were sales of distressed retail assets, although we continued to see a high level of distress and bank activity in these assets. The vast majority of distressed retail centers were not brought to market in 2011, with the lenders instead opting to stabilize the centers prior to sale in 2012 or beyond. This is a reflection of the perception that the retail leasing market is improving and the opportunity to lease up the centers is available to the lenders without significant holding costs or time. We recorded just three major sales of distressed retail assets in 2011; primarily these were centers in inferior locations or with an inferior design such that the lender did not see a quick path towards stabilization and value creation. These types of retail assets will continue to be traded to opportunistic investors on a price-per-square-foot basis.

With positive signs emerging in the retail markets, including increased levels of leasing activity due to a higher number of retailers seeking to open stores, we anticipate fewer truly distressed asset sales in 2012. Instead we anticipate several lender-owned, yet stabilized, centers coming to market in 2012. Additionally, we anticipate a higher number of retail properties will be brought to market by sellers who have long waited for a recovery in this sector before offering Class A


Coppertree 2202 Fair Oaks Dr Indianapolis 772

Cottages of Fall Creek 6802 E 56th St Indianapolis 753

Chesapeake Landing 3640 Beluga Ln Indianapolis 478

Keeneland Crest 5540 Ashview Dr Indianapolis 424

Harrison Point 9093 Bourbon St Indianapolis 386

The Orchard 5350 Cider Mill Ln Indianapolis 378

Brookstone 5816 W 38th St Indianapolis 366

Lawrence Landing 6875 Faris Ave Indianapolis 354

Lighthouse Landings 6640 Heron Neck Dr Indianapolis 336

Fisherman's Village 2975 Coast Dr Indianapolis 328

Washington Quarters 40 Capital Dr Avon 256

Thompson Village 139 Thompson Way Indianapolis 240

Nottingham Village 9300 E 21st St Indianapolis 240

Bayhead Village 7311 Back Bay Ct Indianapolis 202

Woodbrook 5302 Woodbrook Dr Indianapolis 196

Waterstone 2755 Merlin Lake Dr Indianapolis 192

Quail Run 1380 Saylor Dr Zionsville 166

Harbour Town 222 Waterfront Ct Noblesville 165

Meadowood 5573 Buttercup Ln Indianapolis 129

Somerset 3202 E 76th St Indianapolis 120

Arborstone 9108 E 38th St Indianapolis 104

42nd Street Studios 8932 E 42nd St Indianapolis 100

Georgetown Woods 5360 Georgetown Rd Indianapolis 90

Towne View 5 Crosby Rd Mooresville 88

Arcadia Studios 4848 N Post Rd Indianapolis 48


notable Greater Indianapolis Investment Multifamily sales—ytD 2011Arranged by number of units


Investment / MARkEt tRACkER

January 2012

and B centers for sale. Single-tenant assets will continue to trade in the retail sector, as private investors continue to look for low-risk investment opportunities in 2012.

Overall, we are confident we will see continued activity in 2012 as the economy slowly recovers, and there will be some major trends to watch. First, financing will remain available. The Federal Reserve has pledged an extended low-interest rate environment, and the CMBS market is expected to actively lend and pursue offerings in Secondary

Markets. Second, there will be more recapitalization. There is approximately $2 trillion of debt maturing between 2011–2015, which means lenders and special servicers will be faced with determining whether to work out these loans or foreclose. Third, total transaction volume will continue to rise. Across all property classes core assets will still be preferred but sellers should be able to leverage a competitive buying environment to get pricing closer to what we experienced in 2005, 2006 and 2007.

Leases


Intech I II & III 6325 Digital Way Indianapolis 433,927

Meridian Technology Center 111 Congressional Blvd Carmel 178,986

The Precedent Building 86 9225 Priority Way W Dr Indianapolis 75,000

Carmel Office Court 301 E Carmel Dr Carmel 53,052

3510 E 96th Street 3510 E 96th St Indianapolis 34,000

Merchant's Pointe 2325 Pointe Pkwy Carmel 30,305

notable Greater Indianapolis Investment Office sales—ytD 2011Arranged by square feet transacted


-200%

-100%

0%

100%

200%

300%

400%

500%

600%

Q1'08 Q1'09 Q1'10 Q1'11

-200%

0%

200%

400%

600%

800%

1000%

Q1'08 Q1'09 Q1'10 Q1'11

-200%

-100%

0%

100%

200%

300%

400%

Q1'08 Q1'09 Q1'10 Q1'11

-500%

0%

500%

1000%

1500%

2000%

2500%

Q1'08 Q1'09 Q1'10 Q1'11





Changes in sales (year Over year): In Multifamily

Changes in sales (year Over year): In Industrial

Changes in sales (year Over year): In Office

Changes in sales (year Over year): In Retail

January 2012


2012 Market ReportLand Market

InDIAnAPOLIs LAnD MARkEtAt a glance

Indianapolis Land MarketCentral Indiana commercial land sales, while still below pre-recession levels, maintained a steady rate in 2011, with multifamily and assisted living developments showing positive movement. Single-family permits held firm with a slight improvement over 2010’s numbers and a better outlook at the end of the year than at the beginning. Agricultural land sales were a bright spot. According to the Indiana Department of Local Government Finance, 73 percent of total agricultural sales brought prices in excess of assessed values. Even though sales activity remained low, the amount of new land being brought onto the market held steady as lenders continued to foreclose on distressed assets.

Central Indiana saw multifamily housing starts up 56 percent from 2010 and single-family starts down 9 percent, with each expected to increase 14 percent in 2012. Nationally, single-family home sales continued to decline in 2011 but the rate of that decline slowed and economists forecast the trend to correct in 2012.

Consumers and builders witnessed a partial thaw in economic conditions in 2011, and this has led to a steady consumer demand and improved builder confidence. Builder confidence in the market for newly built, single-family homes continues to improve slightly, according to the Urban Land Institute’s Real Estate Trends in Indiana 2012, with 80 percent of respondents expecting capital rates to hold steady or improve. The Real Estate Trends in Indiana is an annual poll held by the ULI of its members, of which 50 percent are either developers or professional service firms. Respondents were asked to rate expectations on a number of fronts, including land development. Among the respondents, 36 percent expected prospects for land development to be fair or good, which is a 15 percent increase from the previous year. Expectations of

profitability increased in general, with 69 percent of respondents expecting fair-to-excellent profits for the coming year.

Central Indiana total single-family home sales declined in 2011, but both median and average prices improved over those of 2010. The 2011 median price for single-family homes was $103,000, up from $99,900, while the 2011 average single-family home price rose to $126,087 from 2010’s $117,708. With single-family housing starts down 6 percent from 2010, Central Indiana is actually doing better than the rest of the country, in which single-family housing starts declined from 471,000 to 427,000 a drop of 9 percent. With economists predicting national single-family housing starts to increase to 501,000 a 17 percent improvement, the picture also improves in Central Indiana, which should lead to increased numbers of single-family housing starts in 2012.

The past year also proved to be better for multifamily apartment and assisted-living developments. Banks used 2011 as an opportunity to clean their books of various distressed assets. One example is the sale of 300+ acres in Whitestown, Indiana to Baptist Homes, who plan to develop assisted-living facilities on the property, along with smaller retirement communities developed by others in both Hamilton and Marion Counties. With retail and multifamily land prices being near farmland cost outside the CBD, subdivision sales have greatly increased all across the state.

Although overall land profitability steadily increased throughout 2011, the shining light of the year has been student housing development projects. Highlighted by the opening of Indiana University Purdue University Indianapolis’ “1201 Indiana,” a new student housing development comprised of 253 units with 667 beds, it is the first attempt to accommodate the estimated 5,000-bed demand on

Washington

Johnson

Hamilton

Shelby

Madison

Marion

Hendricks

Boone

Hancock

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011M12

2011 Central Indiana Residential Construction Activity by County

nAHB/Wells Fargo Housing Market Index (HMI)

2010 2011

Population (000) 1,764 1,786

Single-family permits 3,793 3,701

Multifamily permits 2,128 1,304

Existing-home price ($ths) 123 119

Mortgage originations ($mil) 10,720 8,561

Net migration (000) 6 9


Source: NAHB/Wells Fargo; U.S. Census Bureau; Cassidy Turley Research


Land / MARkEt tRACkERthe campus. It is estimated that only 4 percent of students at IUPUI live on campus, leaving a huge capacity for growth in this market. In an attempt to further capitalize on this housing demand, “The Avenue” plans to open by January 2012. With 142 units available for lease at launch, they hope to appeal to the influx of short-term Super Bowl customers, as well as the youth of Indianapolis.

Although prices remain 40 to 60 percent off their high, investors and developers remain bearish on the commercial land market in Indiana. Financing has been largely unavailable for any development that is not significantly pre-leased. As such, speculative development has been practically non-existent in the market. There has been a small level of activity among companies looking to purchase land for the development of space which they can ultimately occupy. Even among these owner-users, development of new space competes directly against existing space, which continues to be marketed at discounted prices.

Commercial development within the industrial sector was slow during 2011, with large-scale modern-bulk low, build-to-suit levels declining, and overall construction levels diminishing well below the five-year historical average of 4.8 million square feet. We also saw limited activity in the development of multi-tenant office properties. This continued a 36-month decline in multi-tenant office construction, where total construction levels have declined by over 40 percent from the five-year construction average of 470,000 square feet annually. As access to capital becomes easier, development may slowly begin to return to the Indianapolis speculative multi-tenant office market but with tighter capital requirements and not on the scale previously seen. Within the retail sector, development activity has declined for 24 months, off nearly 60 percent as both the size and scope of development

projects declined as a result of slack tenant demand and elevated vacancy rates.

The land market remained depressed in 2011 when compared to pre-recession rates, but the indicators were not all grim. Total housing starts increased nationally, from 585,000 in 2010 to 605,000 in 2011, which was reflected in Central Indiana’s incremental increase of 2 percent in the same period. Multi-family housing was the belle of both the national and local balls, with a national increase of 64 percent and a local increase of 3 percent over 2010 numbers. Single-family home sales decreased in number both nationally and locally, but local median and average sale prices not only held their ground but increased slightly, indicating a higher value for sellers when purchases were made.

Although sales were light in 2011, local professionals estimate that the era of incredible land bargains in great areas has largely passed; those able to hold onto ground through the downturn did so, while those who couldn’t sold land at bargain prices. These bargain prices are, for the most part, gone. Local agricultural land prices are rising due to slightly increased demand, and farmers who may have sold ground a few years ago won’t do so due to the tremendous returns in agriculture.

Local real estate professionals seem to hold cautious optimism for the land sector, with increased numbers anticipating good or excellent profitability in the market. Opinions are universal that job growth remains the dominant factor in accelerating an economic recovery. However, given the strength of both national and local multi-family markets, and absent an abrupt increase in unemployment or a further downturn in the economy, we can look forward to the land sector increasing demand and prices incrementally in the next 12 months, with a possible positive prognosis in the next 24 to 36 months.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

19911993

19951997

19992001

20032005

20072009

2011

6%

10%

14%

18%

22%

Deliveries Vacancy

Mill

ions

of

SF


0500

1,0001,500

2,0002,500

3,0003,500

19911993

19951997

19992001

20032005

20072009

2011

0%

2%

4%

6%

8%

10%

12%

Deliveries Vacancy

Uni

ts

Central Indiana Multifamily Construction

Source: Reis; Cassidy Turley Research

012345678

19911993

19951997

19992001

20032005

20072009

2011

2%

4%

6%

8%

10%

Deliveries Vacancy

Mill

ions

of

SF

Central Indiana Industrial Construction


Central Indiana Office Construction

January 2012

30 | We know The State of Real Estate®

Executive Management Team

Jeffrey L. Henry, SIORRegional Managing Principal

Patrick B. Lindley, SIORPresident, PrincipalNational Brokerage Services

Timothy J. Michel, CPASenior Managing Director, PrincipalProperty Management

Daniel R. Meador, SIORManaging DirectorBrokerage Services

Industrial Services

J. Bart Book, SIORSenior Vice President, Principal

William W. ByramSenior Vice President

George C. Charbonneau, SIORSenior Vice President

Fritz A. Kauffman, SIORVice President, Principal

Patrick B. Lindley, SIORPresident, Principal

Jack B. Pence, SIORSenior Vice President

Bryan W. Poynter, SIOR, CCIMVice President

Donald A. TreibicSenior Vice President, Principal

Todd T. Vannatta, SIORSenior Vice President, Principal

Michael W.M. Weishaar, SIORVice President, Principal

Luke J. Wessel, SIORSenior Vice President, Principal

Kelly L. Williams, CCIM, LEED APAssociate Vice President

Office Services

Darrin L. Boyd, SIOR, CCIMSenior Vice President, Principal

John A. Crisp, SIORSenior Vice President, Principal

Gerry “Spud” DickAssociate

Andrew D. Martin, SIOR, CCIMVice President, Principal

G. Bryan Miller, J.D., SIOR, CCIMAssociate Vice President

David A. Moore, SIOR, CCIMSenior Vice President, Principal

William J. MooreSenior Vice President

Jon R. Owens, SIORSenior Vice President, Principal

Michael R. Semler, SIORSenior Vice President, Principal

Russell A. Van Til, J.D.Associate Vice President

Bennett M. WilliamsAssociate

Retail Services

John G. ByrneVice President

William S. FrenchSenior Vice President, Principal

Jacqueline D. Haynes, CCIMVice President

Allison N. Tiefel, CCIMAssociate Vice President

Donald R. WilliamsSenior Vice President, Principal

Capital Markets

J. Jeffrey Castell, SIOR, CCIMSenior Vice President, Principal

Michael B. Drew, CCIMSenior Vice President, Principal

T. Scott Pollom, CCIMSenior Vice President, Principal

Rebecca L. Wells, CCIMSenior Vice President

Angela J. Wethington, J.D., CCIMSenior Vice President

Land Services

William F. Flanary, ALCSenior Vice President

Abigail W. Hohmann, CCIM, WBESenior Vice President, Principal

James M. Leffel, IVAssociate Vice President

G. Raymond Simons, III, ALCAssociate Vice President

Auction Services

J. Robert GettsDirector

Project and Development Services

Robert A. DuggerSenior Vice President, Principal

Location Advisory and Incentives Services

Kathleen Z. Culp, MBASenior Vice President, Principal

Timothy J. Monger, CRE, LEED APSenior Vice President

Marketing Services

Jennifer Tuttle BlattlerMarketing Director

Alan L. Inkenbrandt Graphic Designer

Barbara H. MatthewsMapping Coordinator

Danelle L. NagelMarketing Coordinator

Property Management

Cheri L. Shepherd, CPMManaging Director, Principal

Melissa Day, CPM, RPAVice President, Principal

Research Services

Jason W. Tolliver, J.D.Research Director

Shawn L. StroudResearch Associate

One American Square, Suite 1300Indianapolis, IN 46282317.634.6363www.cassidyturley.com

About Cassidy turley

Cassidy Turley is a leading commercial real estate services provider with more than 3,400 professionals in more than 60

offices nationwide. The company represents a wide range of clients—from small businesses to Fortune 500 companies, from

local non-profits to major institutions. The firm completed transactions valued at $18 billion in 2010, manages 455 million

square feet on behalf of private, institutional and corporate clients and supports more than 25,000 domestic corporate services

locations. Cassidy Turley serves owners, investors and occupiers with a full spectrum of integrated commercial real estate

services—including capital markets, tenant representation, corporate services, project leasing, property management, project

and development services, and research and consulting. In 2010, the firm enhanced its global service delivery outside of

North America through its partnership with GVA. Please visit www.cassidyturley.com for more information about Cassidy Turley.

Copyright © 2012 Cassidy Turley. All rights reserved.

Integrated, tailored solutions

• Cassidy Turley provides clients with a full suite of comprehensive real estate solutions, including investor services, occupier services, specialty services and industry-specific services.

• By partnering with Cassidy Turley, clients gain a true business advocate.

• Our nimble approach and service delivery model allow our professionals to devise the most appropriate, comprehensive response to each client’s needs.

• Auction Services

• Distressed Assets

• Financial Advisory

• Food and Beverage

• Golf and Resort Properties

• Government Contracting

• Government Services

• Healthcare

• Higher Education

• Hospitality

• Investment Services

• Law Firm

• Life Sciences

• Location Advisory and Incentives

• Mission Critical

• Net Lease

• Not-for-profit

• Private Client

• Supply Chain Logistics

• Sustainability Services

Core services

• Corporate Services

- Facilities Management

- Portfolio Administration

- Project Management

- Strategic Consulting

- Transaction Management

• Capital Markets

- Debt Placement

- Investment Sales

- Structured Finance

• Project Leasing

• Project and Development Services

• Property Management

• Tenant Representation

Real Estate

• Industrial

• Land

• Multi-family

• Office

• Retail

Practices and specialties

Our practice groups include professionals with considerable expertise unique to particular property types and within specific industries.

Annual Market Report (2012)

Documents

Transcript of Annual Market Report (2012)