Annual Market Report (2013)

Annual Market ReportIndianapolis, Indiana

2013

2 | We know The State of Real Estate®

January 2013

www.cassidyturley.com | 3

Dear Colleagues,

This annual report marks the beginning of 2013, a year that will be significant not only politically but also economically, as businesses and consumers collectively look to Washington, D.C., to provide the clarity needed to move forward with confidence. Despite slowing growth abroad and lingering public policy uncertainties at home, 2012 was characterized by improving business conditions, offering hope that growth will continue in the year ahead. Although the challenges of the past year hampered growth in the latter half, Indiana’s commercial property markets proved to be remarkably resilient as every segment of commercial real estate demonstrated strengthening fundamentals over the balance of 2012.

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 2013 Book of Lists. The Indiana Chamber of Commerce named our office as one of the Best Places to Work in the state for the sixth consecutive year.

Cassidy Turley is also enjoying success across the country in our third 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.

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 challenging economic times, keen insight and clarity is even more critical to your success, and we stand ready to assist and guide you.

Sincerely,

Jeffrey L. Henry, SIOR Regional Managing Principal

2013 Market ReportIndianapolis, Indiana

Economic Overview 4

Industrial Market 10

Office Market 18

Retail Market 26

Capital Markets 30

Land Market 36

Associates 38

Industrial Appendix

Office Appendix

Retail Appendix

CONTENTS


2013 Market Report

ECONOMYAt a glance

Economic Overview

DownturnWeak DemandHigh Vacancy

RecoveryImproving Demand

Falling Vacancy

UpturnStrong DemandTight Vacancy

MatureHistoric Demand,Vacancy, Rents

Downturn

MultifamilyIndustrial

OfficeRetail

IN CRE Fundamentals Slowly Improving

Leading Index for Indiana (LII)

U.S. Economy Forecast(Annual Metrics) 2011 2012 (e) 2013 (f)

GDP 1.8% 1.9% 2.5%

Job Growth (ths.) 1,503 1,732 2,000

Unemployment Rate 9.0% 8.1% 7.9%

CPI 3.1% 2.2% 3.0%

CCI 58 66 79

ISM 55.2 52.5 57.0

e: Estimate; f: Forecast Source: Cassidy Turley Research

Source: Cassidy Turley Research

Source: Indiana Business Research Center

Leading Index for Indiana (LII)

90

92

94

96

98

100

102

104

106

How Do You Cope With Sluggish Growth, High Debt and Uncertainty? Provide Clarity

The recovery continues, but it has

weakened. In the U.S. and other advanced

economies, growth is now too low to make

a substantial dent in unemployment, and

in major emerging markets growth that had

been strong as 2012 opened has abated. For

the most part the challenges are familiar. In

the U.S., EU and Japan, fiscal consolidation

to address high debt-to-GDP ratios and a

weakened financial system are slowing the

economic recovery. While this consolidation

is needed for these economies to get

onto a sustainable fiscal track, there is no

question that it is weighing on demand. This

presents two challenges. First, it requires

fiscal consolidation that will, at a minimum,

cause the ratio to level off in the not-too-

distant future. Second, it has to occur

in a way that will keep these economies

operating at as close to full employment as

possible—a process known as rebalancing.

Needless to say, rebalancing is an often

slow and always arduous task that clouds

the market with economic uncertainty.

Compounding this problem dramatically is

pervasive public policy uncertainty, primarily

from Washington, D.C., that has caused

even the most bullish to recoil and has

caused both businesses and consumers to

collectively shift into “wait and see” mode.

There is no easy way out of this predicament,

but one thing is clear: clarity is critical. A lack

of it will continue to stall both the corporate

and consumer sector drivers of the recovery

and weaken demand for commercial real

estate in the process. Thankfully both the

economy and the property markets are not

where they were just a year ago—underlying

fundamentals for both have strengthened

considerably—but if we are to see any

improvement in 2013, clarity is critical.

The main force supporting growth is

accommodative monetary policy with the

aim of aiding a financial system that still is

not functioning efficiently. In many countries

banks remain weak and their positions

are made worse by a stagnating economy,

causing many borrowers to struggle to obtain

needed financing, thereby diminishing

demand for commercial real estate. Central

banks around the globe continue not only

to maintain low rates but also to experiment

with programs aimed at decreasing rates

in particular markets, at helping particular

categories of borrowers, at helping financial

intermediaries in general and at increasing

the money supply by flooding financial

institutions with capital in an effort to

promote increased lending and liquidity—a

process known as quantitative easing (QE).

In the United States, the hope of the Federal

Reserve is that, by flooding the financial

system with even more credit, banks will

not only have enough to safeguard against

potential losses in Europe and the U.S. but

will also be emboldened to begin lending.

It is worth noting that the U.S. economy

has responded very well to past doses of

quantitative easing. QE1 was launched in

November 2008: equity markets surged,

over the course of the program the Dow

rose from 8,000 to 11,000, job growth

accelerated, investment sales picked up

and spreads tightened. However, it is also

clear that the more times QE is used the

less effective it becomes. QE1 had a big

impact, QE2 had a smaller impact and QE3

looks to be even smaller. In mid-December

the Federal Reserve attempted to provide

clarity and spur the market by extending

bond buying and setting a threshold for

the first time that it will use to signal its

interest rate plans. According to Federal

Reserve Chairman Ben Bernanke, the Fed

January 2013


Geography Actual Estimate Forecast2008 2009 2010 2011 2012 2013

World Output 2.8% -0.6% 5.1% 3.8% 3.3% 3.6%

Advanced Economies 0.1% -3.5% 3.0% 1.6% 1.3% 1.5%

United States -0.3% -3.1% 2.4% 1.8% 2.2% 2.1%

Euro Area 0.4% -4.4% 2.0% 1.4% -0.4% 0.2%

Germany 0.8% -5.1% 4.0% 3.1% 0.9% 0.9%

France -0.1% -3.1% 1.7% 1.7% 0.1% 0.4%

Italy -1.2% -5.5% 1.8% 0.4% -2.3% -0.7%

Spain 0.9% -3.7% -0.3% 0.4% -1.5% -1.3%

Japan -1.0% -5.5% 4.5% -0.8% 2.2% 1.2%

Emerging/Developing Economies 6.1% 2.7% 7.4% 6.2% 5.3% 5.6%

China 9.6% 9.2% 10.4% 9.2% 7.8% 8.2%

India 6.9% 5.9% 10.1% 6.8% 4.9% 6.0%

Brazil 5.2% -0.3% 7.5% 2.7% 1.5% 4.0%

Economic Forecast for Advanced and Emerging Economies

Source: International Monetary Fund, World Economic Outlook, October 2012

Overview / MARKET TRACKER

GDP Growth Rate(% Change, SAAR)

Source: U.S. Bureau of Economic Analysis (BEA),Moody’s Analytics

Source: U.S. Bureau of Economic Analysis (BEA),Cassidy Turley Research

U.S. Employment & Labor Force Participation

Labor ForceParticipation Rate

Source: U.S. Bureau of Labor Statistics, Moody’s Analytics

62.0%

62.5%

63.0%

63.5%

64.0%

64.5%

65.0%

65.5%

66.0%

-1000

-800

-600

-400

-200

0

200

400

600

GDP Growth Rate (% Change, SAAR)

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Forecast

Source: U.S. Bureau of Economic Analysis (BEA), Cassidy Turley Research

15-Year Average

Source: National Federation of Independent Businesses (NFIB)

Small Business Hiring: Net % Firms Expecting to Hire

90

93

96

99

102

105

108

111

114

117

-9-6-30369

12151821

Small Business Optimism Index Net % of Small Businesses Expecting to Hire

Source: National Federation of Independent Business (NFIB)

S&P 500 ForecastsYear-End 2013


S&P 500 Forecasts, Year End 2013

1350

1400

1450

1500

1550

1600

1650

S&P 500 in last truly healthy yearfor property markets

(year-end 2006)

Small Business Hiring:Net % Firms Expecting to Hire

U.S. Employment and Labor Force Participation

intends to keep short-term interest rates

pinned near zero, as they have been since

December 2008, until the unemployment

rate dips to 6.5 percent or lower or

inflation forecasts rise to 2.5 percent.

It’s not just U.S. policy that will affect the

commercial real estate recovery going

forward. Much of its fate depends on policy

decisions made in Europe. If we have

learned anything over the last two years,

it is that when the euro crisis worsens, the

U.S. recovery slows and vice versa. When

the calendar flipped to 2011, there was

speculation that the EU would not bail out

Portugal, raising the odds that a disorderly

break-up of the eurozone would occur.

During that period, the U.S. economy

slowed to a crawl with GDP of just 0.8

percent in the first quarter of 2011. Then, in

the summer of 2011, there was talk about

Greece being forced to leave the eurozone;

the growth rate in the U.S. slowed to just

over 1 percent. Late in 2011, the European

Central Bank (ECB) unveiled its Long-

Term Refinancing Operation (LTRO) plan

to provide over $1 trillion in cheap, short-

term loans to eurozone partners whose

economies were dragging down the EU as

a whole. Europe enjoyed a brief period of

economic stabilization and the U.S. economy

expanded by 4 percent. But as the LTRO

program faded away in March of 2012,

European sovereign debt yields began to rise

yet again and the U.S. economic recovery

faded yet again. There are other factors

that influenced U.S. economic growth, of

course, but the ongoing saga in Europe

continues to weigh heavily on the minds of

U.S. business leaders and lenders alike.

It’s not by chance that the U.S. economy

reacts to every European market jolt; there

are significant economic and financial ties

between these two massive economies.

Nearly 14 percent of U.S. GDP is attributed


2013 Market ReportEconomic Overview

Economic Forecast:Indiana Statewide Industries

Economic Forecast:Select Indiana Cities, % change 2012–13

Statewide Industry 2013 2014

Mining 5.5% 5.9%

Construction 4.5% 2.1%

Manufacturing (Durable goods) -4.4% -5.0%

Manufacturing (Nondurable goods) 2.5% 2.4%

Retail -0.5% -1.0%

Utilities 4.5% 4.7%

Wholesale 1.1% 0.9%

Transportation -1.5% -2.9%

Health care 4.7% 4.7%

Information services -0.8% -1.3%

Finance, insurance and real estate -1.3% -2.1%

Unemployment rate 7.8% 7.2%

Cities GDP Jobs Income

Indianapolis 2.0% 0.9% 3.0%

Fort Wayne 1.5% 0.9% 3.1%

Evansville 1.2% 1.0% 3.1%

South Bend 0.8% 0.4% 2.8%

Bloomington 1.1% 1.2% 3.4%

Gary 1.3% 0.4% 3.7%

Muncie 0.6% 1.2% 4.2%

Lafayette 1.1% 2.0% 3.3%

Terre Haute 0.6% 0.1% 3.3%

Anderson 0.4% -0.2% 3.0%

Elkhart 0.8% 1.3% 3.5%

Kokomo 0.6% 1.0% 3.5%

Source: Bureau of Economic Analysis and CBER calculations Source: Moody’s Analytics, IUBRC

to exports, and about 20 percent of that

goes to the EU. Thus, if the eurozone

experiences a recessionary retrenchment,

demand for U.S.-made goods and services

will take a severe hit—dropping U.S. GDP

growth anywhere from 0.5 percent to 1

percent. The financial ties are even more

alarming. U.S. banks’ gross exposure to the

entire eurozone is $729 billion, nearly 60

percent of tier 1 capital (i.e., common stock

and cash reserves). In sum, U.S. banks

have little choice but to safeguard against a

scenario where things go terribly wrong in

Europe. From a real estate perspective, it is

also worth recognizing that at this stage in

the cycle, European sovereign debt yields

and CMBS spreads largely move in tandem.

If conditions get riskier in Europe, investors

will flee from riskier real estate assets and

prices will fall for everything other than core

building assets. Recently the European

Central Bank (ECB) sent a strong signal

that it is “willing to do whatever it takes to

preserve the euro.” Equity markets in the

U.S. rallied. Perhaps we are entering into

another period of relative peace in the

eurozone but it is likely to be short-lived.

The eurozone economies have significant

rebalancing to do and that will take years.

That said, the ECB has given the markets

every reason to believe that it will do

whatever it takes to prevent a major collapse

of the euro. Our baseline assumption is

that the eurozone will experience some

mild growth in 2013 (GDP<1%).

In this way, the euro crisis continues to

suppress lending conditions and economic

growth in the U.S. The money multiplier

effect, an important metric to watch,

continues to sit at an all-time low. It

measures the amount of money a bank can

create from increases in money created

by the central bank. Historically, when

the Federal Reserve increases the money

supply by $1, banks would correspondingly

increase lending into the economy by $1

to $3. Currently, for every $1 the Federal

Reserve pumps in, banks are pumping out

just $0.80. That’s very little bang for the

buck. Fortunately, the money multiplier has

started to increase more recently, so lending

is loosening but it needs to keep going.

This is critically important because the U.S.

economy and commercial real estate will

fall far short of potential until this improves,

largely because loans make the commercial

real estate world go ’round. When loans

are flowing, capital markets are quadruple

the volume we are witnessing today.

The good news is that we know investors

once again wish to borrow to buy commercial

real estate. The Fed Senior Loan Survey

shows that 30 percent of all banks—small,

medium and large—are reporting strong

demand for loans to purchase commercial

real estate. That level of reported demand

per debt is actually stronger than what we

saw in the last commercial real estate boom

and slightly lower than the tech boom of the

late 1990s. There is also strong demand for


January 2012January 2013

Economic Forecast: Indianapolis Metropolitan Area

Indianapolis Indicator 2013 2014 2015 2016

Gross metro product ($ billions) $81.6 $84.1 $86.8 $89.3

change (year-over-year) 2.0% 3.1% 3.1% 2.9%

Total employment (000) 900.8 920.5 947.8 971.9

change (year-over-year) 0.8% 2.2% 3.0% 2.5%

Unemployment rate 7.6% 6.7% 5.8% 5.3%

Personal income growth 4.1% 6.8% 7.1% 6.0%

Population (000) 1,828.3 1,851.7 1,874.4 1,898.2

Single-family permits 5,908 11,217 13,375 13,147

Multifamily permits 2,103 2,441 2,458 2,311

Existing-home price ($ thousands) $127.6 $132.7 $140.2 $146.2

Mortgage originations ($ millions) 6,241 4,098 4,315 4,718

Net migration (000) 11.7 10.3 9.6 10.7

Source: Moody’s Analytics

Overview / MArkEt trAckEr


0

20

40

60

80

100

120

140

160

Consumer Confidence (1985=100, SA)



United States: CRE Improvement

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

U.S. Office U.S. Industrial U.S. Apartment U.S. Retail

Vaca

ncy

Rat

e

Current, Q4 12 Peak


Indiana: CRE Improvement

0%

2%

4%

6%

8%

10%

12%

14%

16%

IN Office IN Industrial IN Apartment IN Retail

Vaca

ncy

Rat

e

Current, Q4 12 Peak


Manufacturing: ISM Purchasing Managers’ Index

Source: Institute for Supply Management

United States:crE Improvement

Indiana:crE Improvement

consumer confidence(1985=100, SA)

0

10

20

30

40

50

60

70

Manufacturing: ISM Purchasing Managers’ IndexSource: Institute for Supply Management

Above 50 = Expansion

corporate loans, small business loans and

home mortgages. Demand for debt is not

the problem. We also know banks have $1.8

trillion sitting idle—five times the norm—so

capitalization is not the problem. Banks not

having the clarity needed to feel comfortable

enough to lend is the problem. Why are

banks reluctant to loosen the purse strings?

Basel III, Dodd-Frank, lawsuits related to

the LIBOR scandal, $1.7 trillion in CRE

debt that is set to mature by 2016, the euro

crisis, slowing global growth and uncertainty

surrounding fiscal policy in the U.S. are all

causing banks to safeguard against all of

these things that could still go terribly wrong.

As a result, financial institutions have been

reducing their loan volume for commercial

real estate since 2009, and they want

nothing to do with construction loans in

particular, down 58 percent from their peak.

The financial challenges facing the banking

industry are nothing compared to the fiscal

challenges surrounding the U.S. deficit. In

simplest terms, the deficit is the amount of

money the government must borrow to make

ends meet when revenues are less than

expenses. In the fiscal year that ended in

September, the U.S. was $1.1 trillion short.

If you’re an optimist, that’s better than the

year before. If you’re a pessimist, that’s

historically high. If you’re a realist, that simply

isn’t sustainable. But the political discourse

in our country isn’t framed by optimists

and pessimists; it’s framed by Democrats

and Republicans who both believe they

are realists. The good news is that there is

general consensus on both sides of the aisle

that the federal deficit needs to be reduced

substantially—by $3 to 4 trillion over the

next 10 years—and there is a realization that

changes to tax policy, federal spending and

entitlement restructuring must all play a part.

The bad news is that there is widespread

disagreement on exactly what part each

should play and an unwillingness to confront

these challenges by either political party.

As a result, the U.S. political arena features


2012 Market ReportEconomic Overview

much of the blame for pervasive public

policy uncertainty that has helped foster

the anemic recovery in the first place.

An examination of voting patterns during

the past 40 years by the Congressional

Recorder shows that political parties have

steadily diverged ideologically to the point

that they are further apart now than at any

time since the end of Reconstruction. An

exhaustive examination is thought-provoking

but isn’t necessary to see the damaging

effects. Simply watching the fiscal cliff

drama unfold on television makes clear the

depths of both the political divide and the

inability of policymakers to reach even the

most basic of compromises. This might

provide a bit of theatrical enjoyment if the

stakes weren’t so high and if it wasn’t the

only mechanism by which the country can

plot a course towards much-needed fiscal

sustainability. Under current policies the

ratio of federal debt held by the public over

GDP—the debt-to-GDP ratio—will rise

rapidly over the next decade. Specifically,

federal debt held by the public is expected to

rise from about 73 percent of GDP currently

to about 95 percent by fiscal year 2022.

One of the biggest challenges for the federal

budget is the aging baby boomer generation,

which will raise government spending on

Social Security, Medicare and Medicaid.

Consider that in 2011 the first wave of baby

boomers turned 65, with nearly 32 million

Americans projected to follow suit by 2030.

Since roughly half of an individual’s lifetime

medical expenditures occur after the age

of 65, this group stands to drive substantial

gains in health care demand and spending.

In turn, they will have a tremendous

impact on the management of real estate

assets that enable the optimal delivery

of health care services. New population

projections highlight just how transformative

the aging Hoosier baby boomers will be

on the demographic makeup of Indiana.

The Indianapolis MSA—which comprises

more than one-quarter of the state’s total

population—will see the number of people

aged 65 and older nearly double in the

next 20 years. But Indianapolis is not alone;

four other sizeable Indiana metros will see

increases of more than 80 percent in the

number of their senior citizens. This dramatic

growth isn’t limited to the metros, however;

Indiana’s non-metro areas will see growth in

excess of 50 percent over the same period.

This means we are on the cusp of seeing

a demographic-driven evolution in the

drivers and management of medical

real estate. Health care providers have

been eager to expand into desirable

communities and are increasingly looking

at new types of commercial real estate,

space that has traditionally been occupied

by office and retail tenants. One change

which is already recognizable is the

migration of ancillary medical services,

such as claims services, membership

services, medical devices and supplies

and health services communications,

from their historical hospital campuses

to off-campus commercial space.

Support services moving off-campus

also opens space to accommodate the

co-location of R&D with critical care.

Throughout all of the political theatrics,

the U.S. economy has been stunningly

resilient. Real GDP in the third quarter of

2012 was revised upward to 3.1 percent,

the fastest quarterly growth of the past year.

Help is coming from a housing recovery,

strengthening job market and healthier

household finances that are driving gains

in consumer confidence and spending.

Although the damage from Hurricane

Sandy and an anticipated tightening of

fiscal policy will likely mean growth will

decelerate in the fourth quarter of 2012

and possibly the first quarter of 2013, the

U.S. economy is poised to emerge on much

stronger footing in the second half of 2013

with gains in output and employment.

No single factor is more important for

commercial real estate than employment.

Here again there is strength. Since January

2011 the U.S. economy has created on

average 172,000 jobs per month, which

is right on par with the job growth we

experienced during the real estate boom

years of 2004-2006. Every single major

sector in this economy, other than the

government, is creating jobs. It’s also worth

noting that the Job Opening and Labor

Turnover Survey (JOLTS) data published by

the Bureau of Labor Statistics indicates that

job openings at firms have been consistently

rising since July 2009. Currently there are

3.7 million job openings, meaning that if we

took all the unemployed persons in the U.S.

and provided them one of these jobs, the

unemployment rate would be 5.8 percent.

Of course, the skills mismatch is a great

challenge for public policy makers, making

such a scenario impossible. Nevertheless,

the rise in job openings highlights the fact

that businesses are seeing better demand,

which will ultimately require more people

and commercial space to meet that demand.

Another sign of strength is that both

business and consumer balance sheets

are in much better shape. For businesses,

just four years after the worst shock to

the economy since the Great Depression,

corporate profits are stronger than ever.

In the third quarter, corporate earnings

were $1.7 trillion, up 18.6 percent from

a year ago, according to the U.S. Bureau

of Economic Analysis. Unfortunately,


January 2012

Overview / MARKET TRACKER

Source: Fed. Senior Loan Offi cer Survey

% of Banks Reporting Stronger Demand for CRE Loans

-80

-60

-40

-20

0

20

40

60

19

95

Q4

19

96

Q4

19

97

Q4

19

98

Q4

19

99

Q4

20

00

Q4

20

01

Q4

20

02

Q4

20

03

Q4

20

04

Q4

20

05

Q4

20

06

Q4

20

07

Q4

20

08

Q4

20

09

Q4

20

10

Q4

20

11

Q4

20

12

Q4

Source: Fed Senior Loan Officer Survey

Tech boomRE boom

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

Source: Federal Reserve Bank of St. Louis

Bank Liquidity Tremendous: Cash Assets, $ billionsSource: U.S. Board of Governors of the Federal Reserve System

$1.7 trillionin November

$0

$400

$800

$1,200

$1,600

$2,000

Lending Muted: Money Multiplier: Ratio of M0 to M1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Rat

io


Household Balance Sheets Look Much Better


Household Balance Sheets Look Much Better(HH Debt Service Ratio %)

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

HH Debt Service Ratio %

Bank Liquidity Tremendous:Cash Assets, $ Billions

Lending Muted:Money Multiplier (Ratio of M0 to M1)

% of Banks Reporting Stronger Demand for CRE Loans

record corporate profi ts have come at

the expense of investment and hiring as

economic and public policy uncertainty

have kept businesses cautious and reluctant

to invest; however, if clarity is provided,

corporations are in position to make the

investments in people and equipment to

meet strengthening demand. For consumers

the household debt burden has shrunk

considerably and household balance

sheets are much stronger. Over the last

three years, consumers have either paid

off or refi nanced the bulk of their debt.

The household debt-service ratio—a ratio

of debt payments to disposable income—

looks as strong as ever. At this stage in

the recovery, the U.S. consumer has

either fully deleveraged or is two-thirds of

the way there. Either way it suggests that

consumer spending will start to contribute

more positively to economic growth.

Outlook

There are many reasons to be encouraged

that the recovery will continue and

strengthen. Even in Europe, as diffi cult as

conditions are, progress is being made.

Sovereign debt yields have calmed, the stock

market is improving and the euro currency

is actually appreciating. Many things could

still go wrong, but far more things are still

going right. In the U.S. policymakers must

fi nally agree on a credible approach to the

federal budget that will reduce the long-term

defi cit and put the U.S. on a path towards

fi scal sustainability. Until this is achieved,

businesses will curb their investments in

hiring and capital spending, corporate

strategic planning will be put on hold and the

commercial real estate recovery will continue

to disappoint. If there is one area where

the dampening effect of uncertainty may be

seen, it is corporate investments, or the lack

thereof. Nationwide, business investment in

equipment and software stalled in the third

quarter of 2012 for the fi rst time since early

2009. Amid a backdrop of uncertainty, U.S.

companies are scaling back investment

plans at the fastest pace since the recession,

with half of the nation’s 40 biggest publicly

traded corporate spenders announcing plans

to curtail capital expenditures in 2013. It is

irrational to assume that fi scal policy will be

anything other than a drag on U.S. economic

growth, at least for the next few years, but

if politicians can provide even a modicum

of clarity, the U.S. economy is ready to

take the recovery the rest of the way.

Assuming policymakers can provide a

bit of clarity, the economy is actually in

pretty good shape. Encouraging signs are

forming in many indices, all suggesting that

the U.S. recovery is maturing and getting

stronger. Economic indicators for the fi nal

three months of 2012 looked encouraging.

In November the Conference Board’s

Consumer Confi dence Index rose to its

highest level in fi ve years. Consumers have

never been more confi dent in this recovery

than they are currently. The housing recovery

continues to impress. Home sales are the

highest in fi ve years, and home prices are

rising in 100 out of 132 metros tracked.

Suddenly housing is poised to contribute

1 percent to GDP growth for the next few

years, as it typically does during recovery

periods. Indeed the stage is set for a real

recovery to emerge. Much stronger growth

for 2013 is still possible; real GDP growth of

2.5 percent to 3.0 percent can be achieved,

and 3 percent to 4 percent in 2014 is not

a stretch given the latest trends in the U.S.

economy. Against this backdrop, demand for

all commercial space is poised to improve

in every segment. All we need is clarity.

January 2013


2013 Market ReportIndustrial Market

INDIANAPOLIS INDUSTRIAL MARKETAt a glance

4Q12 4Q11

Inventory SF 240,497,547 238,456,331

Vacant SF 7,992,340 10,303,229

Vacancy Rate 3.3% 4.3%

Occupied SF 232,505,207 228,153,102

Absorption (Qtr) 1,598,736 1,893,113

Absorption (YTD) 4,353,905 6,219,894

Multi-Tenant Vacancy Rate

Multi-Tenant Net Absorption (YTD)Net Absorption (YTD)

0

2,000

4,000

6,000

8,000

2006 2007 2008 2009 2010 2011 2012

Squ

are

Feet

(‘0

00

s)

Vacancy Rate

0%

2%

4%

6%

8%

10%

2005 2006 2007 2008 2009 2010 2011 2012

Historical Average

If You Build It, They Will Come

The industrial sector has demonstrated

tremendous resiliency in the face of slowing

global growth and pervasive public policy

uncertainty both in Europe and in the United

States. Nationally, the second half of 2012

was one of the strongest in this recovery and

reflects the continuation of a robust uptrend

that began in 2011. In fact, the national

industrial sector has now leased up more

space than it shed during the recession—

an important milestone and one that the

Indiana industrial market eclipsed in 2010.

Statewide, markets such as South Bend,

Mishawaka, Evansville, Fort Wayne and In-

dianapolis all continue to see positive growth

and declines in vacancy for multi-tenanted

industrial space. Despite the headwinds of

sluggish growth and continued deleveraging

at home and abroad, the fundamentals of

the industrial sector are surprisingly robust.

Notable projects from around the state and

historically strong demand metrics and

development in Indianapolis are helping to

provide a positive outlook for the industrial

market in 2013.

A slew of projects taking place across the

state offer a clear sign that demand is poised

to spread to secondary markets in the

quarters ahead. In Southeast Indiana trucks

are moving, product is being stocked and

people are being hired at Amazon’s new

one-million-square-foot fulfillment center at

the River Ridge Commerce Center in Jeffer-

sonville, Ind. The impact of this new addition

to the industrial market will not be limited

to River Ridge or Jeffersonville; expect to

see related industries that support Amazon

begin to occupy space across the Southern

Indiana landscape. In Northwest Indiana rail

is being extended at the 800-acre Inland

Logistics Port at Kingsbury that will connect

Kingsbury Industrial Park in LaPorte to a

main CSX rail line. This project promises to

greatly enhance accessibility for the region

and serve as a major draw for distribution

and advanced manufacturing enterprises.

Meanwhile, at home in Central Indiana,

industrial vacancy remains at the lowest

levels seen in decades, and this is spurring

additional development of all stripes.

By any measure, the amount of speculative

development currently underway in India-

napolis is big. With more than 3.2 million

square feet under construction, Indianapolis

is leading the Midwest in the amount of

new product it will bring online in 2013 to

meet eager tenant demand. The sheer size

of development at 3.2 million square feet

stands alone as a big number, but when

considering that 622,000 square feet of it

was already leased, the level of speculative

development occurring in Chicago (1.7 MSF),

Cincinnati (900,000 SF) and Minneapolis

(350,000 SF) and the lack of development

in other peer markets such as St. Louis,

Columbus and Louisville, the level of

development is even more impressive.

Projects currently underway include a

795,000-square-foot speculative build-

ing located in AmeriPlex by Atlanta-based

Industrial Developments International; a

771,000-square-foot bulk warehouse in

GreenParke in Plainfield by Chicago-based

Verus Partners; a 622,000-square-foot

bulk facility on Ronald Reagan Parkway by

ProLogis and locally-based Browning Invest-

ments that was leased prior to completion; a

450,000-square-foot building on Perry Road

in Plainfield by Kansas City-based VanTrust

Real Estate; and a 600,000-square-foot

warehouse, expandable to more than a mil-

lion square feet, in AllPoints at Anson via a

January 2012


January 2013

Industrial / MARKET TRACKER

East Submarket:Absorption and Vacancy Change

Downtown Submarket:Absorption and Vacancy Change



0%

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Net Absoprtion (YTD) Vacancy (%)

East Submarket: Absorption and Vacancy Change

0%

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Downtown Submarket: Absorption and Vacancy Change

Northeast Submarket:Absorption and Vacancy Change

North Submarket:Absorption and Vacancy Change



0%

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(200)

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Thou

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Northeast Submarket: Absorption and Vacancy Change

0%

2%

4%

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(500)

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(300)

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(100)

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Thou

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North Submarket: Absorption and Vacancy Change

joint venture by Browning Investments and

Duke Realty.

With so much speculative development

underway, the logical question becomes,

“Is there enough demand to absorb it all?”

Yes, definitely. Although vacancy rates will

rise closer to their historical average in the

short term when the space comes online, in

the long run this amount of space is exactly

what the market needs to continue to be

driven by distribution. Because Indianapolis

is the most centrally-located major city in the

country—75 percent of all businesses in the

U.S. and Canadian populations live within a

day-and-a-half truck drive and more inter-

state highways intersect Indianapolis than

any other region—the area has always been

a major player in logistics. The impact on the

industrial CRE market is clear: it is driven by

distribution. Indianapolis has emerged as

one of the most sought-after markets for dis-

tribution centers in the country, and this in

turn is having a tremendous impact on both

the demand we are seeing in the industrial

market and the development of much-need-

ed product to meet that demand. Central

Indiana’s strength rests on the region’s

strength in three key areas: infrastructure,

workforce and an accommodating public

policy for business. Logistics and distribution

firms have already discovered that India-

napolis offers distinct geographic advantages

for supply chain hubs, a highly skilled and

reliable workforce and some of the lowest

business costs in the Midwest, and they are

parlaying their investment in Indianapolis

into bottom-line profits.

This shows no sign of stopping, and demand

metrics confirm that Indianapolis is among

the best-performing industrial markets

in the nation, due in part to having the

space requirements necessary to meet the

needs of a growing logistics and distribu-

tion segment. This in turn is helping the

Indianapolis industrial market outshine

other peer markets—and the nation as a

whole—by posting nine consecutive quar-

ters of occupancy growth. Multi-tenanted

vacancy rates have fallen to a histori-

cally low 3.3 percent, and vacancy rates

among multi-tenant modern bulk facilities

are tracking even lower at 1.7 percent.

The tight market stems in part to a ban-

ner leasing year in 2008, when the market

absorbed over 7 million square feet at the

same time that speculative construction came

to an abrupt halt, and the 2011 leasing

by giant online retailer Amazon of nearly 2

million square feet, thereby depleting the

market of a good portion of available modern

bulk space. Since that time, net absorption

for all product types has averaged 3 mil-

lion square feet a year and overall vacancy

has continued to decline. An additional

beacon of strength is that 2012 was also

a year with bustling build-to-suit activity, a

further indication of corporate confidence

in the underlying market conditions. Some

of the notable corporations moving forward

include SMC Pneumatics, with a build-to-

suit addition of 600,000 square feet in the

Northeast submarket, and Regal Beloit, with

a 376,000-square-foot build-to-suit develop-

ment in the Southwest submarket.

While current levels of development to support

logistics and distribution are spectacular,

something just as important is playing out

in the manufacturing sector, namely the

rebound in Hoosier manufacturing. Since

the recovery began in mid-2009, Indiana

factories have added more than 60,000

workers, workers who need commercial

space to produce goods. In 2012 Central



NEW LEASES

Company Location Quarter Square Footage

Anderson Merchandisers South 1 704,000

Hartz Pet Products Southwest 4 622,000

Prime Distribution South 1 412,000

Undisclosed Northwest 1 380,000

Regal Beloit Southwest 2 376,000

Ohio Farmers Northwest 1 240,000

Atkins East 1 212,000

Smart Warehousing Southwest 1 190,000

Celadon South 3 158,000

International Paper Northwest 4 144,000

Thermal Structures Southwest 2 141,000

Fagerdala Southwest 1 120,000

AVC Southwest 3 100,000

FacadeTek Northwest 4 90,000

Zenith Freight Northwest 4 90,000

Schenker Northwest 4 86,000

Rolls-Royce Southwest 1 85,000

Fiserv Southwest 1 76,000

Total Square Feet 4,226,000

Largest Signed Industrial Transactions—YTD 2012*All square footage rounded to the nearest thousand, all transactions greater than 50,000 SF


Indiana alone saw close to 560,000 square

feet of manufacturing space absorbed and

witnessed the manufacturing vacancy rate

decline by 80 basis points (bps). The impor-

tance of manufacturing isn’t limited to the

property markets; it is also the largest sector

of Indiana’s economy in terms of output,

which last year totaled more than $278

billion. In terms of percentages, manufactur-

ing comprises over 25 percent of the state’s

GDP, a much larger share than any other

sector. In other words, as manufacturing

goes, so goes the Indiana economy, and

manufacturing went well in 2012.

Amid this backdrop the Indianapolis in-

dustrial market completed another strong

year in 2012 and is poised to continue that

trend in 2013. Leasing velocity tracked at

an impressive clip throughout the past year

with more than 4.2 million square feet of

new leasing and 6.3 million square feet of

renewals and expansions. Net absorption

for the fourth quarter registered 1,598,736

square feet, placing net growth for the year

at 4,353,905 square feet. Submarket varia-

tions in year-to-date net absorption included

the Southwest (+1,074,421 SF), South

(+915,664 SF), East (+601,995 SF), West

(+538,040 SF), Northwest (+513,251 SF),

Northeast (+357,927 SF), North (+176,181

SF), Downtown (+115,782 SF) and South-

east (+60,644 SF). As a result, the overall

industrial multi-tenant vacancy rate fell by

a full percentage point over the balance

of 2012, ending the year at 3.3 percent,

markedly lower than the Midwest industrial

average of 9 percent. Variations in submar-

ket vacancy for all product types included

the South (0.9%), Southeast (1.6%), North

(1.8%), West (2.3%), Southwest (3.1%),

Downtown (3.4%), East (4.1%), Northwest

(4.2%) and Northeast (4.8%). Across the

market, product-type variations in vacancy

included transport (0.7%), modern bulk

(1.7%), maintenance (1.8%), manufacturing

(2%), medium distribution (4.4%), tradi-

tional bulk (4.5%), office showroom (7.3%)

and flex (7.6%).

In the Downtown submarket, net absorp-

tion for the fourth quarter registered 60,935

square feet, pushing year-to-date occupancy

growth to 115,782 square feet. Downtown

product types witnessing annual growth were

medium distribution (+87,786 SF), office

showroom (+58,129 SF) and flex (+11,600

SF). Meanwhile, the manufacturing sector,

which grew in the majority of submarkets,

gave back space (-41,733 SF). Downtown

vacancy for all types currently stands at 3.4

percent, down 50 bps from a year prior.

Tracked traditional bulk, maintenance and

transport facilities in the Downtown submar-

ket were fully occupied, with other product

type variations made up of medium distribu-

tion (0.6%), flex (1.4%), office showroom

(3.6%) and manufacturing (5.6%).

In the East, net absorption through Decem-

ber was 601,995 square feet, driven in part

by 81,702 square feet of growth occurring in

the final three months of the year. Flex prod-


January 2012

RENEWALS AND EXPANSIONS

Company Location Quarter Square Footage

Hachette Book Group Northwest 4 809,000

Crossroad Centers Southwest 4 601,000

Carrier West 2 442,000

HP Northwest 2 419,000

OHL Southwest 2 413,000

Hachette Book Group Northwest 4 396,000

Jacobson Warehouse Company Southwest 1 334,000

MKM Distribution Northwest 3 312,000

Venture Logistics Southwest 2 299,000

CEVA Logistics Southwest 3 283,000

Walmart Return Service East 2 277,000

Phoenix Material Management South 3 234,000

Yusen Logistics East 3 195,000

GENCO West 2 177,600

Venture Warehouse and Distribution Southwest 2 140,000

Zee Medical Northwest 3 129,000

FedEx Southwest 3 126,000

Keller Crescent Co. Northwest 1 122,000

Cryovac Northwest 2 120,000

Hanzo Logistics Southwest 1 106,000

Würth Service Supply Northwest 2 96,000

Ingersoll Rand Southwest 3 78,000

Stericycle Southwest 2 53,000

Würth Service Supply (expansion) Northwest 2 52,000

Sim-Pac Southwest 2 50,000


Largest Signed Industrial Transactions—2012 Renewals and Expansions*All square footage rounded to the nearest thousand, all transactions greater than 50,000 SF


January 2013


Southeast Submarket:Absorption and Vacancy Change

Northwest Submarket:Absorption and Vacancy Change



0%

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Southeast Submarket: Absorption and Vacancy Change

0%1%2%3%4%5%6%7%8%9%10%

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Northwest Submarket: Absorption and Vacancy Change

South Submarket:Absorption and Vacancy Change

Southwest Submarket:Absorption and Vacancy Change



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0100200300400500600700800900

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South Submarket: Absorption and Vacancy Change

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Southwest Submarket: Absorption and Vacancy Change

uct in the East continued to be troubled, sur-

rendering 33,530 square feet; however, all

other product types posted varying shades

of growth, including modern bulk (+211,500

SF), traditional bulk (+159,755 SF), medium

distribution (+138,152 SF), manufacturing

(+73,502 SF) and office showroom

(+52,616 SF). The result was that year-over-

year vacancy declined by 1.3 percentage

points to register at 4.1 percent. Tracked

multi-tenanted maintenance, transport and

modern bulk facilities were completely occu-

pied at year-end, with manufacturing (2%),

medium distribution (4.7%), office show-



Market Mover: GreenParke I in Plainfield, Indiana, a 770,640-square-foot speculative development undertaken by Verus Partners & USAA Real Estate Company, is one of several industrial projects currently underway in metro Indianapolis that will result in the addition of more than 3.2 million square feet of new warehouse product to meet tenant demand.

room (6%), traditional bulk (7.1%) and flex

(15.8%) properties offering space for lease.

Among the notable leasing in the East during

2012 were the 211,500-square-foot lease

signed by Atkins and the 195,000-square-

foot renewal inked by Yusen Logistics.

Northeast net absorption for the fourth quar-

ter tallied 132,914 square feet, which helped

push annual occupancy gains to 357,927

square feet. Traditional bulk was a noticeable

outlier, surrendering 91,612 square feet,

but other product types such as medium

distribution (+177,097 SF), office showroom

(+144,115 SF), manufacturing (+53,472

SF), flex (+42,855 SF) and modern bulk

(+32,0000 SF) produced gains. The North-

east submarket vacancy rate for all product

types currently stands at 4.8 percent, down

120 bps from the rate in effect at the close

of 2011. Meanwhile, variations in individual

vacancy rates for those product types which

were not fully leased include traditional bulk

(4.5%), office showroom (5.8%), medium

distribution (7.3%) and flex (11.6%).

Quarterly absorption in the North submar-

ket for the final three months was 67,115


at 176,181 square feet. Segments seeing

year-end growth were medium distribution

(+158,706 SF), flex (+34,554 SF) and man-

ufacturing (+12,000 SF), while traditional

bulk was flat (+194 SF) and office showroom

experienced slight declines (-29,273 SF).

Correspondingly, the overall North submar-

ket vacancy rate registered 1.8 percent, with

variations by product tracking well below the

market as multi-tenanted traditional bulk

and manufacturing options were leased and

medium distribution (0.6%), flex (1.1%)

and office showroom (5.7%) fared favorably

compared to other submarkets.

In the Northwest submarket, net absorption

for the fourth quarter of 2012 registered

380,178 square feet, elevating year-to-date net

absorption to 513,251 square feet. Variations

in annual net absorption included modern

bulk (+356,600 SF), office showroom

(+125,212 SF), flex (+85,298 SF), manufac-

turing (+32,835 SF) and medium distribu-

tion (+18,680 SF), offset by traditional bulk

(-105,374 SF). Currently vacancy in the sub-

market stands at 4.2 percent, with variations

by product type including manufacturing,

maintenance and transport (0%), modern

bulk (3.1%), medium distribution (3.6%), flex

(4.8%), traditional bulk (5.5%) and office

showroom (9.4%). Among the notable new




Office/Showroom Submarket:Absorption and Vacancy Change

West Submarket:Absorption and Vacancy Change



0%

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0100200300400500600700

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Net Absorption (YTD) Vacancy (%)

Office/Showroom: Absorption and Vacancy Change

0%

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(400)(300)(200)(100)

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West Submarket: Absorption and Vacancy Change

Medium Distribution Submarket:Absorption and Vacancy Change

Traditional Bulk Submarket:Absorption and Vacancy Change



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Medium Distribution: Absorption and Vacancy Change

0%1%2%3%4%5%6%7%8%9%10%

(1,500)

(1,000)

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Absorption (YTD) Vacancy (%)

Traditional Bulk: Absorption and Vacancy Change

leasing in the Northwest were deals signed by

International Paper (144,000 SF), Facade-

Tek (90,000 SF), Zenith Freight (90,000

SF) and Schenker (86,000 SF). Additionally,

2012 saw several notable renewals with

Hachette Book Group (809,000 SF), HP

(419,000 SF), MKM Distribution (312,000

SF), Zee Medical (129,000 SF), Cryovac

(120,000 SF) and Würth Service Supply

(96,000 SF) all active in the submarket.

The Southeast followed a rocky growth tra-

jectory that ended with 60,644 square feet

positively absorbed through December. After

see-sawing for much of the year, 38,605

square feet of fourth-quarter growth helped

end the year on a positive note. Nearly all of

the growth for both the fourth quarter and the

year was the result of leasing activity for

medium distribution product. It alone

comprised 82,359 square feet of annual

growth, which was offset by declines in

manufacturing (-4,335 SF), office showroom

(-7,273 SF) and flex (-10,106 SF) product.

The overall vacancy rate rose slightly by 10

bps from a year earlier, although it currently

registers at a very low 1.6 percent. Segments

seeing the greatest movement in vacancy

rates were office showroom (ending the year

at 2.8%), medium distribution (ending the

year at 4.6%) and flex (ending the year at

10.7%).

In the South submarket, net absorption

for the fourth quarter of 2012 registered

352,710 square feet, placing net growth

for the year at 915,664 square feet. South

variations in year-to-date net absorption

by product type included modern bulk

(+627,475 SF), manufacturing (+231,560

SF), medium distribution (+60,000 SF), flex

(20,509 SF) and office showroom (-23,880

SF). The overall South submarket vacancy

rate currently stands at 0.9 percent, down

690 bps from a year prior. Differences in

vacancy by product type include fully oc-

cupied traditional bulk, modern bulk and

transport facilities, manufacturing (0.7%),

medium distribution (1.1%), flex (6.2%) and

office showroom (9%). Among the notable

new leasing that occurred in 2012 were

deals by Anderson Merchandisers (704,000

SF), Prime Distribution (412,000 SF) and

Celadon (158,000 SF). Notable renewal ac-

tivity included Phoenix Material Management

(234,000 SF).

The epicenter of logistics and distribution,

the Southwest, once again set the pace for

the market with annual occupancy gains

of 1,074,421 square feet. Fourth-quarter

gains of 442,392 square feet helped raise

the final tally driven by leasing in modern

bulk (+541,443 SF), medium distribution

(+413,814 SF), traditional bulk (+211,508

SF), office showroom (+31,975 SF), trans-

port (+8,475 SF), maintenance (+7,500 SF),

flex (-14,566) and manufacturing (-125,728

SF). As a result, the submarket vacancy rate

fell to 3.1 percent, with differences by prod-

uct type consisting of traditional bulk (1%),

transport (1.3%), modern bulk (1.7%),

manufacturing (2.5%), maintenance (4.3%),

medium distribution (6.8%), flex (9.7%) and

office showroom (14%). Corporations which

helped drive these gains included Regal

Beloit (376,000 SF), Smart Warehousing

(190,000 SF), Thermal Structures (141,000

SF), Fagerdala (120,000 SF), AVC (100,000

SF), Rolls-Royce (85,000 SF) and Fiserv

(76,000 SF). Additionally, a sizable amount

of renewal activity was led by Crossroads

Centers (601,000 SF), OHL (413,000 SF),

Jacobson Warehouse Company (334,000

SF), Venture (140,000 SF), FedEx (126,000

SF), Hanzo Logistics (106,000 SF), Steri-



Louisville, Ky.

Columbus

Chicago Elkhart

Kokomo

Lafayette

Michigan

City

Cincinnati,

Ohio

Evansville

Fort Wayne

SouthBend

Anderson

Indianapolis

Bloomington

Muncie

TerreHaute

Louisville, Ky.

Columbus

Chicago Elkhart

Kokomo

Lafayette

Michigan

City

Cincinnati,

Ohio

Evansville

Fort Wayne

SouthBend

Anderson

Indianapolis

Bloomington

Muncie

TerreHaute

Manufacturing Employment Forecast for Indiana Metro Areas

cycle (53,000 SF) and Sim-Pac (50,000 SF).

In the West submarket, net absorption for

the fourth quarter of 2012 registered 42,185


at 538,040 square feet. West variations

in year-to-date net absorption by product

type included manufacturing (+325,189

SF), traditional bulk (+176,588 SF), office

showroom (+19,812 SF), transport (+12,096

SF) and medium distribution (+4,335 SF).

Correspondingly, the vacancy rate fell by 260

bps over the balance of the year, ending De-

cember at 2.3 percent, with rates among the

product types including modern bulk, main-

tenance and transport (0%), manufacturing

(1.9%), medium distribution (2.7%), office

showroom (4.8%), flex (5%) and traditional

bulk (10.7%). High-profile renewals taking

place during 2012 in the West submarket

included leases signed by Carrier (442,000

SF) and GENCO (178,000 SF).

Outlook

On the upside, housing and the auto industry

appear poised to continue to power stronger

demand for the industrial sector. The National

Association of Realtors announced that as

2012 came to a close the Pending Home

Sales Index increased to its highest level

since April 2010 (106.4). This marked the

third straight month of gains and is another

sign that the housing market recovery is real

and that homebuilding activity will continue

to increase. Residential building materials

account for 12 percent of Hoosier warehouse

inventory, so a rebound in homebuilding is a

very welcome development. Separately, the

Institute for Supply Management-Chicago

business barometer increased to 51.6 in

December from 50.4 in November, the

second straight month of growth, indicating a

rebound in new industrial orders. In addi-

tion, the latest figures on auto sales appear

quite healthy. U.S. auto sales are expected to

end 2012 strongly, increasing 14 percent in

December on top of an impressive November

tally. With annual sales finishing on a strong

note, total sales for the year are expected to

ring in at 14.5 million, suggesting that 2013

will be one step closer to a stable growth rate

for autos with volume above 15 million units.

On the downside, the International Monetary

Fund recently cut its forecast for world growth

as Europe, Japan and the U.S. continue

to cope with high debt and difficult rebal-

ancing, while at the same time emerging

markets continue to be confronted with

sluggish growth. Moreover, it is evident

that business growth is being restricted by

political uncertainty, causing many users of

Metropolitan AreaQ3–Q42012

Q1–Q22013

AnnualAverage

Indiana 1.60% 0.50% 1.00%

Anderson 1.10% 0.32% 0.70%

Bloomington 2.32% 0.64% 1.48%

Chicago–Joliet–Naperville 0.49% 0.14% 0.32%

Cincinnati–Middletown 2.17% 0.63% 1.40%

Columbus 1.20% 0.35% 0.78%

Elkhart–Goshen 0.42% 0.12% 0.27%

Evansville 2.49% 0.72% 1.60%

Fort Wayne 0.41% 0.12% 0.26%

Indianapolis–Carmel 0.13% 0.04% 0.08%

Kokomo 0.81% 0.24% 0.52%

Lafayette 1.95% 0.57% 1.26%

Louisville–Jefferson County 2.55% 0.74% 1.64%

Michigan City–LaPorte 3.14% 0.91% 2.03%

Muncie 3.02% 0.88% 1.95%

South Bend–Mishawaka 0.75% 0.22% 0.48%

Terre Haute 1.96% 0.57% 1.27%

Source: 2012 Manufacturing + Logistics Indiana Report, Center for Business and Economic Research (CBER)


January 2013


Flex:Absorption and Vacancy Change

Modern Bulk:Absorption and Vacancy Change



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Flex: Absorption and Vacancy Change

0%2%4%6%8%10%12%14%16%18%20%

0

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2,000

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4,000

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6,000

Thou

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s


Modern Bulk: Absorption and Vacancy Change

Manufacturing:Absorption and Vacancy Change

Average Asking Rates:Absorption and Vacancy Change



0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

(800)

(600)

(400)

(200)

0

200

400

600

800

1,000

Thou

sand

s


Manufacturing: Absorption and Vacancy Change

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

All Product Types Warehouse Flex

Average Asking Rates by Product Type

industrial space to collectively shift into “wait

and see” mode. With so much riding on

critical policy decisions and with leaders in

Washington, D.C. seemingly unable to agree

upon anything, fear and uncertainty have

slowed the wheels of production. In many

markets across the country there was a no-

ticeable uptrend in short-term leases signed

in the industrial sector during the third and

fourth quarters—a clear sign that businesses

across the U.S. may elect to simply stay the

course for the moment until they receive

greater clarity on public policy.

Policy aside, it is clear that fundamentals

in the Indiana industrial sector are getting

much stronger. The clear lack of new supply

in secondary Hoosier markets is helping to

erode vacancy. In many parts of the state

where vacancy remains stubbornly high,

development is on par with levels seen in

the early 1990s, nearly 65 percent below the

peak. Meanwhile, the construction of new

product in Central Indiana is helping the

market rebalance to meet the need for larger

blocks of contiguous space here. Assuming

no major policy missteps, expect net de-

mand for statewide industrial space to range

between 7.5 and 8.0 million square feet in

2013, which will drop vacancy rates another

60 bps from where they currently stand.

Supply-demand fundamentals indicate the

overall industrial sector is on the cusp of

entering a period of sustained rent growth,

which we expect to occur within the next

three to six months.

The Indianapolis industrial market has dem-

onstrated tremendous resiliency in the face

of a slowing global economy. In the midst of

turmoil, the industrial sector managed to ab-

sorb a historically healthy amount of space.

The key engines driving growth continue to

be technology, housing, auto and distribu-

tion centers related to internet sales. Indeed,

most of the strongest-performing markets

in the nation are propelled by at least one

of these economic engines; Indianapolis is

being powered by all of them. The underlying

fundamentals in the Indianapolis market

remain strong, the industrial climate as a

whole is strengthening, and new product is

being provided to a diverse tenant mix eager to

receive it, providing promise that 2013 will be

another profitable year for the Indianapolis

industrial market.

ISM Index & Indiana Manufacturing Employment

Indiana ManufacturingEmployment (Thousands, SA)

420

440

460

480

500

520

540

560

30

35

40

45

50

55

60

65

ISM

EXP

AND

S

ISM

CO

NTR

ACTSM

anuf

actu

ring

Ind

ex (

ISM

)

Source: Institute for Supply Managemenet, BEA, Cassidy Turley Research

ISM Index & Indiana Manufacturing Employment


2013 Market Report

INDIANAPOLIS OFFICE MARKETAt a glance

Office Market


Fiscal Drag Slows Growth As Clarity

Becomes Critical for Outlook

Through the first half of 2012 the U.S. office

market exhibited an impressive 21.5 million

square feet of growth, thereby eclipsing the

total amount of growth witnessed during the

entire year of 2010 (19.6 MSF). Meanwhile,

the Central Indiana multi-tenant office

market experienced its best consecutive

six-month period of occupancy gains since

the recession with more than 300,000

square feet absorbed through midyear.

Unfortunately, both the U.S. and Indianapolis

office sectors shifted into low gear over the

latter half of 2012 as businesses became

increasingly uneasy amid a climate rife

with economic uncertainty and political

brinksmanship. Vacancy rates—which had

generally been trending downward since

2011—fell flat and so too did office rents.

Unlike the first half of the year when the

majority of U.S. markets and Indiana

counties reported steady gains in occupancy,

the latter half of 2012 revealed a general

softening of demand. Of the 80 U.S. metros

tracked by Cassidy Turley, 54 percent

reported either negligible gains or negative

absorption over the second half of the

year. Closer to home, markets such as Fort

Wayne, Evansville and Indianapolis posted

positive absorption, but office markets such

as South Bend, Jeffersonville and New

Albany, which were flat, were more the norm.

In fact, statewide office growth in Indiana

declined in the third quarter by 65 percent

from the start of 2012, and although Hoosier

markets rebounded a bit in the fourth, the

pace of statewide office growth was off

12 percent as the year came to a close.

This was disappointing but hardly

surprising. After starting the year strong,

the economy clearly lost a substantial

amount of steam as the year unfolded.

Certainly some of the pullback can be

linked to a slowing global economy. The

International Monetary Fund recently cut

its forecast for world GDP growth to 3.3

percent, down from the 4 percent it was

previously predicting. This drawback was

evident in declining exports to Europe (a

major Indiana trading partner) and China,

Indianapolis Vacancy and Absorption Trends

0%

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10%

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20%

25%

(300)

(200)

(100)

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300

400

Thou

sand

s

Net Absorption Vacancy (%)

Indianapolis Vacancy and Absorption Trends

4Q12 4Q11

Vacancy 19.7% 20.4%

CBD 19.1% 18.7%

Suburban 20.1% 21.3%

Absorption (Qtr.) -19,938 94,000

CBD -13,907 -49,000

Suburban -6,031 143,000

Absorption (YTD) 203,785 20,000

CBD -43,472 -224,000

Suburban 247,257 244,000


Multi-Tenant Net Absorption (YTD)Multi -Tenant Net Absorption (YTD)

-425

-300

-175

-50

75

200

325

450

2006 2007 2008 2009 2010 2011 2012

Squ

are

Feet

('0

00

s)


14%

16%

18%

20%

22%

2006 2007 2008 2009 2010 2011 2012

Historical Average

January 2013


Office / MARKET TRACKER

Multi-Tenant Office Overall Market:Absorption and Vacancy Change

Multi-Tenant Office Suburban:Absorption and Vacancy Change

Multi-Tenant Office Market CBD:Absorption and Vacancy Change




off 4 percent and 5.5 percent respectively

from levels registered earlier in the year.

But the primary culprit for diminished

demand was the uncertainty surrounding

the U.S. elections and the looming fiscal

cliff. It is not unusual for the economy and

property markets to pause during an election

season. What was particularly unusual about

the 2012 election was the wildly different

scenarios that could occur based on who

was elected and the immediacy of key

issues. With so much riding on critical policy

decisions regarding sequestration, taxes,

the deficit, healthcare reform and financial

regulatory reform, Hoosier businesses

collectively shifted into “wait and see” mode.

The clarity provided by the election was

more than offset by the immediacy and

lack of transparency surrounding the

self-imposed fiscal cliff crisis. Two key

components defined the fiscal cliff and

gave both businesses and consumers

reason to pause: spending cuts and tax

increases. According to the nonpartisan

Congressional Budget Office, the one-two

punch of tax hikes and automatic cuts (i.e.,

sequestration) would drain $543 billion out

of the U.S. economy in 2013. Tax increases

account for about two-thirds of the fiscal

drag and the sequestration cuts make up

the bulk of the rest. If the U.S. had taken

a dive off the fiscal cliff, the immediate

result would have been increasing taxes

for nearly everyone that would be evident

in workers’ very first paycheck in January

2013. Consumer spending would slow

immediately. Thereafter, effects snowball:

spending slows, business profits decline,

job growth stalls, confidence plummets,

and consumer spending falls even further—

creating an undesirable feedback loop.

The impact of sequestration cuts would

also take effect immediately. Discretionary

spending would be reduced by 9 percent

across the board. Thus, federal agencies

and government contractors would begin

cutting staff immediately and furloughing

employees in order to work within the new

parameters of a smaller budget. The net

result of all of this is that real GDP would be

2.9 percent lower than it would otherwise

be if current policies were extended. The

U.S. economy has been growing only

at an average annual rate of 2 percent

throughout this recovery (2009-2012).

Thus, the estimated 2.9 percent fiscal drag

on growth would, in all probability, sink the

U.S. economy back into recession in 2013.

The drop in economic output would result in

800,000 net job losses by the end of 2013.

This isn’t to suggest that somehow the

sky is falling; underlying fundamentals are

actually dramatically improved. It is to make

clear three key points for the Indianapolis

office market: first, although the fiscal

cliff may be avoided (whether averted in

the first instance in 2012 or retroactively

addressed when the new Congress

convenes in January 2013), the fiscal drag

on the economy and property markets most

certainly has not been avoided; second,

clarity on public policy is absolutely critical

to provide Indiana firms the confidence to

move forward with more robust hiring and

leasing; and third, spending by the federal

government, which plays an important

role in the national and local economy,

will diminish in 2013 in an effort to bring

spending in line with revenue regardless of

any fiscal cliff compromise. The first two

points are relatively straightforward and

have been evident over the last six months,

having reached a particularly fevered pitch

since the November elections. The third,

the importance of federal spending and the

potential ill effects of drawbacks on the U.S.

and Indianapolis economy and property

15%

16%

17%

18%

19%

20%

21%

(400)

(300)

(200)

(100)

0

100

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400

500

Thou

sand

s


Multi-Tenant Office Overall Market: Absorption and Vacancy Change

0%

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(300)

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Multi-Tenant Office Market Suburban: Absorption and Vacancy Change

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Multi-Tenant Office Market CBD: Absorption and Vacancy Change

Multi-Tenant Office Class A:Absorption and Vacancy Change


0%

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(200)(150)(100)(50)

050

100150200250300350

Thou

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s


Multi-Tenant Office Class A: Absorption and Vacancy Change


2013 Market ReportOffice Market

markets, warrants a bit more discussion.

The U.S. Federal Government, for all its

controversy and drama, plays a critical

role in the larger economy. In 2012 gross

consumption and investment by the

government sector totaled $2.49 trillion, the

equivalent of 18 percent of real GDP. The

Federal Government accounts for nearly

8 percent of that total, while state and

local governments account for 10 percent.

For context, $2.49 trillion is larger than

the entire GDP of most countries in the

world except for China, Japan, Germany

and France. Its sheer size means that the

Federal Government has a major impact

on commercial real estate markets across

the country, including Indianapolis. The

Federal Government employs 2.8 million

civilian workers in the U.S., with over

16,000 of them located in Indianapolis.

Federal agencies lease 167 million square

feet of privately owned office space across

the nation, with 923,000 square feet of

that space located in Indianapolis.

However, the more significant impact

comes from commercial real estate’s link

to government contractors. More than one

out of every six dollars of federal spending

goes to government contractors, many of

whom utilize office space. In fiscal year

2012, nearly $450 billion was allocated

to contractors in support of the Federal

Government’s strategic goals and objectives.

Government contractors are major tenants

in many commercial real estate markets,

occupying more than 208 million square feet

in the United States. That is nearly seven

times the size of the total office inventory

in Indianapolis. Under the sequestration

scenario, government expenditures for

contractors would be reduced by 9 percent

in 2013. The contracting world would be

turned on its head, resulting in massive

layoffs. Assuming demand for office

space by such government contractors

drops by a proportionate amount to the

sequestration cuts, then potentially 18.7

million square feet will be rendered empty

across the U.S. This does not include the

other 44 percent of smaller government

contractors whose demand for space

would also shrink due to the cuts. It is

difficult to pinpoint the exact impact on

Indianapolis, but a conservative estimate

would be the loss of at least 95,000 square

feet of growth and asking rate declines of

1.0-1.5 percent. That is just to start: the

feedback loop referenced earlier would

certainly compound the problem, thereby

driving absorption further into negative

territory and dropping asking rates lower.

It is evident that Indianapolis would not

be immune from the effects of proposed

tax hikes and sequestration cuts, and

businesses are well aware of this fact.

Both Indianapolis, where federal spending

accounts for 16 percent of gross metro

product, and the state of Indiana as a whole

would be negatively impacted by proposed

sequestration. The aggregate economy, of

which Indianapolis is the primary driver,

could expect to see employment fall 1.2

percent and personal income shrink 1.3

percent more than it would otherwise.

The resulting drag on the Indianapolis

economy would mute commercial real

estate demand, with the office segment

being hit particularly hard. Based on our

scenario analysis, the Indianapolis region

would see at least 100,000 square feet

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

2012 11,430,000 0 (43,000) 80.9% 9,245,000 19.1% 2,185,000


Central Business District


January 2013

of space returned to the market, thereby

causing vacancy rates to rise 120 bps to

20.6 percent. This would effectively erase

the vacancy rate improvements experienced

thus far in the recovery and would be

particularly burdensome for the metro’s

Central Business District. Should a deal be

reached by early 2013, Indianapolis is quite

well positioned and should see continued

growth in both employment and demand

for office space. The takeaway is not that

the sky is falling; the takeaway is that when

businesses are confronted with existing

U.S. law that tells them the sky will fall if

Congress and the President fail to act, not

because of weak underlying fundamentals

but because of public policy designed to

produce just such an effect, they pause.

Fiscal cliff drama and uncertainty aside,

companies have been slower to expand

than they have in previous recoveries. In

all, employers have added just 36.7 million

square feet since they began expanding

their office space again in 2011. That is

well shy of the 141 million square feet of

office space businesses shed between

2008 and 2010. This makes debate and

compromise on policies to address the U.S.

federal deficit without harming the fragile

economic recovery all the more difficult.

Discussions, both public and private, on the

best compromise towards fiscal sustainability

have dragged on for weeks; they may last

months. The most likely scenario is that the

short-term budget deal reached in early

January will be the basis for a longer-term

budget deal that will be settled at a future

date. It is also worth noting that the new

Congress that takes office in early January

can change policy retroactively. Indeed,

the longer we go without a long-term deal,

the weaker the economy will become,

creating an even greater sense of urgency

to scale back the cuts and tax hikes.

The stalemate cannot go on forever. At

some point policymakers must finally

agree on a credible approach to the federal

budget that will reduce the long-term

deficit and put the U.S. back on a path

towards fiscal sustainability in the longer

term. Until this is achieved, businesses will

curb their investments in growth (such as

hiring and increasing capital spending),

corporate strategic planning will be put

on hold, and the commercial real estate

recovery will continue to disappoint.

Against this backdrop it isn’t surprising that

vacancy in the Indianapolis multi-tenant

office market remained relatively unchanged

over the last half of 2012 at 19.7 percent;

the positive is that this rate is 70 bps below

the rate in effect a year prior. The Central

Business District (19.1%) continued to

track lower relative to vacancy than the

Suburban market (20.1%), but that gap is

tightening. Submarket variations in vacancy

included Keystone (15.6%), Fishers (16%),

Midtown (17.6%), North/Carmel (18.6%),

East (18.8%), Downtown (19.2%), South

(21%), Northeast (24.3%) and West (36.4%).

Total vacant space at the end of the fourth

quarter totaled 6.1 million square feet. This

was comprised of 2.2 million square feet of

vacant space in the Central Business District

and 3.9 million square feet of vacant space

in the Suburban market. Analysis by class

of space for the entire market demonstrates

Class A vacancy remained unchanged over

the last half of 2012 at 19.6 percent, Class B

vacancy rates declined slightly by 10 bps to

20.1 percent, and Class C vacancy ticked up

by 90 bps, ending the year at 18.9 percent.

The Central Business District’s Class A

vacancy rate dipped slightly during the

fourth quarter to 21.2 percent after having

climbed to 21.6 percent during the first

three quarters of 2012. Meanwhile the


Multi-Tenant Office Class C:Absorption and Vacancy Change

Multi-Tenant Office Class B:Absorption and Vacancy Change



17%

18%

18%

19%

19%

20%

(80)(70)(60)(50)(40)(30)(20)(10)

01020

Thou

sand

s


Multi-Tenant Office Class C: Absorption and Vacancy Change

16%

17%

18%

19%

20%

21%

(200)(150)(100)(50)

050

100150200250300

Thou

sand

s


Multi-Tenant Office Class B: Absorption and Vacancy Change

Multi-Tenant Office Downtown:Absorption and Vacancy Change

Multi-Tenant Office Midtown:Absorption and Vacancy Change



0%

5%

10%

15%

20%

25%

(80)

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Thou

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Multi-Tenant Office Downtown: Absorption and Vacancy Change

0%

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Multi-Tenant Office Midtown: Absorption and Vacancy Change



Suburban Class A vacancy rate ended

the year lower at 18.6 percent, more than

two percentage points lower than a year

earlier. Although still elevated, Class A

vacancy in the Suburbs is now tracking at

its lowest level since exiting the recession.

Among the submarkets, Class A vacancy

rates varied dramatically, including West

(50.6%), Northeast (32.6%), Midtown

(23.4%), Downtown (21.1%), North/Carmel

(17.9%), Northwest (16.1%), Keystone

(15.8%), South (7.3%) and Fishers (7.2%).

Meanwhile, overall Class B space in

Indianapolis also saw vacancy rates decline

slightly during the final three months of

the year, ending 2012 at 20.1 percent.

This was the result of 240,000 square

feet of occupancy growth occurring over

the first half of 2012 that was offset by

96,000 square feet of negative absorption

in the latter half. Within the Central

Business District, Class B vacancy ticked

up in the fourth quarter but remains 2.1

percentage points lower than the year

prior. In the Suburban market Class B

vacancy remains stuck above 20 percent

but has trended down since the end of

2011. Class B submarket variations in

vacancy rates included West (36.7%),

South (27.6%), Fishers (24%), Northwest

(24%), Northeast (22.2%), North/Carmel

(20.8%), East (17.3%), Downtown (15.8%),

Keystone (15.3%) and Midtown (8.4%).

The amount of sublease space available in

the Indianapolis market declined to 183,000

square feet at the end of December, with

176,000 square feet listed as vacant.

The majority of vacant sublease space

is located in the Suburban market, but

there are several full-floor and multi-floor

sublease options in the Central Business

District which will garner interest for tenants

seeking 75,000 to 125,000 square feet.

A positive harbinger for the health of the

existing tenant mix may be found in the

fact that both available sublease space and

vacant sublease space have declined for six

consecutive quarters and are now tracking

at the lowest rate since the recession.

A negative, but not surprising, harbinger

is that the Indianapolis multi-tenant office

market retrenched a bit during the fourth

quarter, experiencing 19,938 square feet

of negative absorption driven primarily by

occupancy loss in the Central Business

District. Despite what was essentially a

flat quarter, total net absorption for the

year registered at 203,785 square feet,

marking the second consecutive year that

net absorption finished in positive territory.

At year’s end the Suburban market posted

247,257 square feet of growth and the

Central Business District gave back 43,472

square feet. Submarket variations in year-end

net absorption included Keystone (+179,961

SF), North/Carmel (+151,921 SF), Northeast

(+44,441 SF), South (+42,077 SF), Midtown

(+25,415 SF), East (+1,917 SF), Fishers

(-6,693 SF), West (-62,893 SF), Downtown

(-68,887 SF) and Northwest (-103,474 SF).

Class A space drove occupancy gains in the

Indianapolis market in 2012, accounting

for 66 percent of the total net absorption.

This same trend is playing out in markets

across the United States, where Class

A office space has accounted for 75

percent of the net absorption since the

beginning of 2011. This stark dichotomy

between Class A and other assets mirrors

the pattern of the economic recovery.

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

2012 19,559,000 81,000 247,000 79.9% 15,626,000 20.1% 3,933,000


Suburban Market


January 2013

The Great Recession put 282,000 U.S.

firms out of business, and the survivors

are opting to lease higher-quality space in

what has largely been a tenant’s market

where leasing rates have been appealing.

Although this flight to quality is all part of

the recovery process, it is not representative

of a healthy commercial real estate market.

A healthy market is one that has enough

growth for demand to extend to lower-quality

product. In 2006, the last truly healthy

year for the property markets, net demand

for U.S. office space was nearly evenly

split between Class A and Class B space.

Although growth dynamics in Indianapolis

are not evenly split (Class A at 66%; Class

B at 33%; Class C at 1%), the balance

is much closer to the distribution seen

during a robust, healthy property market.

Turning to rents, it is clear that rental rates

are posting year-over-year improvements,

but it is also clear the pace of improvement

has been painfully slow. In the Indianapolis

market the average quoted asking rental

rate for available office space in all classes

was $16.03 per square foot per year at

the end of the fourth quarter of 2012.

This represented a negligible change from

midyear when rents were $16.02 per square

foot. The average quoted rate within Class A

was $17.99 at the end of the fourth quarter,

while the Class B rate stood at $15.65 and

the Class C rate at $13.13. At midyear, the

Class A rate was $17.89 per square foot,

the Class B rate was $15.69 and the Class

C rate was $13.19. As the year drew to a

close, the average quoted asking rental

rate in the Central Business District was

$17.14, while the average in the Suburban

market was $15.69. At midyear, quoted

rates were $17.29 in the Central Business

District and $15.61 in the Suburban market.

On the development front, 2012 saw the

first completely speculative commercial real

estate office development in the Indianapolis

area since 2008 with the groundbreaking

of a new 80,699-square-foot, multi-tenant

office space at 8335 Keystone Crossing.

The Keystone submarket has consistently

outperformed other submarkets, and

growth in white-collar jobs, albeit slower

than we might wish, is helping to backfill

underutilized space generated during the

recession and nudging such development

activity forward. The three-story Class A

office space will house 75,000 leasable

square feet and offer new tenant amenities

that will be desirable in a market where

such amenities have become increasingly

important to those assessing space options.


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

Multi-Tenant Office Fishers:Absorption and Vacancy Change

Multi-Tenant Office Keystone:Absorption and Vacancy Change

Multi-Tenant Office Northeast:Absorption and Vacancy Change





0%

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10%

15%

20%

25%

(200)

(150)

(100)

(50)

0

50

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Thou

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s


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

0%

5%

10%

15%

20%

25%

(20)

(10)

0

10

20

30

40

50

Thou

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Multi-Tenant Office Fishers: Absorption and Vacancy Change

0%

5%

10%

15%

20%

25%

30%

(250)(200)(150)(100)(50)

050

100150200250

Thou

sand

s


Multi-Tenant Office Keystone: Absorption and Vacancy Change

0%

5%

10%

15%

20%

25%

30%

(80)

(60)

(40)

(20)

0

20

40

60

Thou

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s

Absorption (YTD) Vacancy (%)

Multi-Tenant Office Northeast: Absorption and Vacancy ChangeBuyer Location Size (SF)Ascension Health Ministry Service Center Northwest 144,000

True North Management North/Carmel 240,000

BPG Properties Northwest 97,000

Citimark Keystone 80,000

Steak ’n Shake of Indianapolis Downtown 63,000

Sycamore Springs Partners Northeast 42,000

Select Medical Northeast 38,000

RCS Holdings Northwest 23,000

The Corydon Group Downtown 17,000

Total Square Feet 744,000

2012 Notable Office Sale TransactionsAll square footage rounded to the nearest thousand. All transactions greater than 12,000 SF.



Outlook

In the near term, growth will continue to

be restricted by political uncertainty. The

odds are very much stacked against the

economy posting anything other than subpar

growth and disappointing job creation

for the early part of 2013. Until clarity

on public policy is provided, businesses

will remain reluctant to launch capital

spending projects. Even with corporate

profit margins rising to all-time highs, fixed

investment continues to move at its slowest

pace in more than a year as companies

continue to hold off on investment in

equipment, software, structures and—most

importantly—people. Until the fog is lifted,

expect little hiring and an elevated vacancy

rate. Assuming political uncertainty abates,

professional and business service payrolls

in Indianapolis should catch a second

wind by the third quarter of 2013, with the

metro area completing its jobs recovery

by mid-2014, in line with the nation.

The outlook is murky for the latter half

of 2013 and is largely dependent upon

policymakers’ ability to form consensus

in handling the deficit without sinking the

recovery. While lawmakers are working

through these issues, growth will resemble

what we have seen for the last six to

twelve months—slow GDP growth and

some employment growth but well below

potential. Assuming lawmakers can work

it all out with a fair amount of urgency,

the fundamentals in the economy actually

look reasonably healthy. Real GDP will

accelerate in the second half of 2013,

averaging better than 2.5% and even more

so in 2014 to 3.5%. If the recovery follows

this script, then office vacancy rates will

tighten in 2013 and will finally resemble

pre-recession levels by mid-2014.

Market Trend: 2012 saw the first completely speculative multi-tenant office development in the Indianapolis area since 2008 as Sourwine Real Estate Services broke ground on an all-new, 80,699 gross square feet, multi-tenant office space at 8335 Keystone Crossing. The three-story Class A office space will house 75,000 leasable square feet when it comes online in 2013.


January 2012

Name Location Size (SF)JP Morgan Downtown 204,000

Freedom Mortgage Fishers 75,000

USDA Northwest 56,000

Travelers Insurance North/Carmel 55,000

Bell Techlogix North/Carmel 54,000

City Securities Downtown 52,000

Republic Airways Northeast 46,000

U.S. Attorney's Office Downtown 44,000

WebMD Keystone 37,000

Ogletree Deakins Nash Smoak & Stewart Downtown 36,000

Verizon Wireless North/Carmel 36,000

Carrington Mortgage Services Northeast 35,000

Ricoh Company Northwest 32,000

Belden, Inc. North/Carmel 31,000

Indiana Court of Appeals Downtown 28,000

Stanley Security Solutions Fishers 26,000

Eli Lilly Credit Union Downtown 26,000

Southern Wine & Spirits of Indiana Keystone 25,000

First Internet Bank Keystone 25,000

GSA Midtown 25,000

Liberty Mutual North/Carmel 24,000

DuCharme, McMillen & Associates Northeast 22,000

FinishMaster Downtown 22,000

ExactTarget Downtown 22,000

Goodwill Education Initiatives East 22,000

Guggenheim Life & Annuity Company North/Carmel 21,000

State Farm Insurance Keystone 20,000

Orbit Medical Northeast 20,000

Indiana Institute of Technology Northwest 20,000

Briljent Northeast 19,000

Indiana Railroad Keystone 19,000

Shepherd Insurance North/Carmel 19,000

T2 Systems Keystone 18,000

Angie’s List Downtown 17,000

ARCADIS U.S. Downtown 17,000

Principal Financial Group Northwest 17,000

GE Capital Real Estate Downtown 17,000

Virtual Marketing Strategies North/Carmel 16,000

Indiana Economic Development Corporation Downtown 15,000

The RND Group Northeast 14,000

Wild Birds Unlimited North/Carmel 13,000

CPI Northeast 13,000

Appirio Downtown 13,000

SXC Health Solutions Downtown 12,000

Quintiles Downtown 12,000

Little Star Center North/Carmel 12,000

Wells Fargo Bank Midtown 12,000

Theoris Keystone 12,000

Assurant Employee Benefits Keystone 12,000

Semio Northwest 12,000



Multi-Tenant Office East:Absorption and Vacancy Change

Multi-Tenant Office West:Absorption and Vacancy Change

Multi-Tenant Office South:Absorption and Vacancy Change

Multi-Tenant Office Northwest:Absorption and Vacancy Change





0%

5%

10%

15%

20%

25%

30%

(30)(25)(20)(15)(10)(5)05

101520

Thou

sand

s


Multi-Tenant Office East: Absorption and Vacancy Change

0%

5%

10%

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25%

30%

35%

40%

(80)

(60)

(40)

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60

Thou

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Multi-Tenant Office West: Absorption and Vacancy Change

0%

5%

10%

15%

20%

25%

30%

(20)

(10)

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10

20

30

40

50

Thou

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Multi-Tenant Office South: Absorption and Vacancy Change

0%

5%

10%

15%

20%

25%

(150)

(100)

(50)

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100

150

200

Thou

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Multi-Tenant Office Northwest: Absorption and Vacancy Change

2012 Notable Office Lease TransactionsAll square footage rounded to the nearest thousand. All transactions greater than 12,000 SF

January 2013


2013 Market Report

INDIANAPOLIS RETAIL MARKETAt a glance

Retail Market

Name Trade Area

Bagger Dave’s Legendary Burger Tavern Michigan Road

Brewstone Beer Company Keystone at the Crossing

Cheddar's Casual Café Avon

DiBella’s Multiple Areas

Drake’s Keystone at the Crossing

Elevation Burger Keystone at the Crossing

First Watch Multiple Areas

Flat Top Grill Hamilton Town Center

Freshii Keystone at the Crossing

Jack in the Box Multiple Areas

Matt the Miller’s Tavern Carmel

Menchie’s Frozen Yogurt Hamilton Town Center

Ocean Prime Keystone at the Crossing

Pancheros Mexican Grill Keystone at the Crossing

Piada Italian Street Food Carmel

Pinkberry Keystone at the Crossing

Punch Burger Downtown

Ralston’s DraftHouse Downtown

Toppers Pizza Carmel


Vacancy Rate (All Types)

0%

2%

4%

6%

8%

10%

2007 2008 2009 2010 2011 2012

Historical Average

Net Absorption (All Types) (YTD)

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2006 2007 2008 2009 2010 2011 2012

Squ

are

Feet

('0

00

s)

Net Absorption (Retail)

4Q12 4Q11Vacancy

All Retail Types 7.1% 7.5%

Neighborhood Centers 11.5% 12.0%

Community Centers 10.9% 10.9%

Power Centers 6.7% 6.5%

Strip Centers 10.4% 13.1%

Malls 7.4% 7.3%

Net Absorption (Qtr.)

All Retail Types 336,079 314,874

Neighborhood Centers 46,682 52,617

Community Centers -5,443 177,651

Power Centers 6,971 30,679

Strip Centers 56,460 -4,140

Malls 5,202 26,315

2012 Notable New Restaurant Activity

Vacancy Rate (Retail)



Retail Shows Reason for Cautious Optimism

Much like other segments of the property

markets, the retail recovery followed a

bumpy road in 2012. A confident start to

the year, spurred in part by unseasonably

warm weather, gave way to a pullback

in consumer spending over the summer

months and the slow return thereafter.

While this seemed to stymie the national

retail sector, keeping vacancy rates flat

at 10.8 percent, the Indianapolis retail

market continued to show improvement by

registering vacancy declines of 30 bps and

posting its best growth of the year in the final

quarter. In fact, vacancy rates for all types

of Indianapolis retail continue to track lower

than the national average at 7.0 percent.

In the fourth quarter Indianapolis registered

336,079 square feet of quarterly net

absorption for all retail types. This came

on the heels of a third quarter that saw

188,476 square feet of growth. Although

these numbers remain below the growth

routinely witnessed in a vibrant commercial

real estate market, they mark the best

six-month period of net occupancy gains

seen in all retail types in over two years and

helped net absorption for the year climb to

508,380 square feet. Product type variations

in quarterly net absorption included strip

centers (+56,460 SF), neighborhood centers

(+46,682 SF), power centers (+6,971

SF), malls (+5,202 SF) and community

centers (-5,443 SF). Meanwhile, vacancy

January 2013


Name Trade Area

Earth Fare Hamilton Town Center

Five Below Multiple Areas

Free People Keystone at the Crossing

Gordmans Avon

Kate Spade Keystone at the Crossing

Lucy Keystone at the Crossing

Microsoft Keystone at the Crossing

Salon Lofts Multiple Areas

Sperry Top-Sider Keystone at the Crossing

West Elm Keystone at the Crossing


2012 Notable New Retailers Activity

January 2013

Retail / MARKET TRACKER




Keystone Centers:Absorption and Vacancy


0%

1%

2%

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80

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Keystone Centers: Absorption and Vacancy

0%

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60

80

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Castleton Centers: Absorption and Vacancy

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4%

6%

8%

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(50)

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200

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Carmel Centers: Absorption and Vacancy

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

(20)

0

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40

60

80

100

120

140

Thou

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s


Greenwood Centers: Absorption and Vacancy

Carmel Centers:Absorption and Vacancy

Greenwood Centers:Absorption and Vacancy

Castleton Centers:Absorption and Vacancy

rates included power centers (6.7%), malls

(7.4%), strip centers (10.4%), community

centers (10.9%) and neighborhood centers

(11.5%). Correspondingly, average quoted

asking rental rates for all retail types rose

during the fourth quarter, ending the year

at $11.80 PSF. That compares to $11.64

PSF in the third quarter of 2012 and $11.95

at the end of the fourth quarter of 2011.

Average asking rates among product types

for the final quarter of 2012 included power

centers ($16.42), strip centers ($13.97),

community centers ($11.34), malls ($10.76)

and neighborhood centers ($10.95).

Behind the headline numbers some

notable retail trends, familiar and new,

are emerging in the Indianapolis market

which provide cautious optimism for the

year ahead. First, growth continues to

occur at each end of the spectrum with

both luxury and value-oriented retailers

recognizing gains. Second, strengthening

market fundamentals have provided a boost

that has helped significantly rebalance the

prime trade areas in the form of stronger

shopping center metrics, positively

absorbed mid-box space and increased

competition. Third, price-savvy mobile-

empowered shoppers are changing the way

retailers look at the shopping experience

and prompting an increasing number of

them to embrace omni-channel retailing.

The trends continue to point to a bifurcated

market with growth occurring for luxury

and value-oriented retailers, often at the

expense of mid-priced retailers where the

pace of sales improvement has been slow.

The dollar store sector is entering its third

year of explosive growth with most chains

considering everything from inline space

at shopping centers to more and more

freestanding locations. Though footprints

range from 3,000 square feet to 15,000

square feet, this sector alone stands to

account for 15 million square feet of national

occupancy growth in the coming year when

an estimated 2,000 new stores take root.

Those planning the biggest moves in 2013

include: Dollar General opening as many as

625 stores; Family Dollar expecting to open

at least 500 new stores; and Dollar Tree

planning at least 300 new units. Likewise,


2013 Market ReportRetail Market

high-end luxury and organic grocers also

remain in expansion mode, with Whole

Foods Market on track to open 70 new stores

nationwide within the next two years that will

occupy an estimated 2.8 million square feet.

The retail recovery is making solid progress.

Even with a summer slowdown, net demand

for neighborhood and community center

retail space will easily be the strongest of any

year in the recovery. It is also worth noting

that the economic data that correlates well

with the retail sector is largely promising.

There is a growing list of encouraging

signs pointing to better retail growth in

2013. First, household balance sheets look

incredibly healthy. Based on the debt service

ratio, household finances look as good as

they have since 1993. In other words, if

policymakers can come through and provide

a healthy dose of clarity, then the stage is

set for a much stronger rebound in the retail

sector. Second, although the 24/7 montage

of fiscal cliff coverage dampened consumer

outlook considerably in November and

December, up until that time consumers

didn’t appear terribly concerned about the

state of the economy, as evidenced by the

Consumer Confidence Index reaching its

highest level in nearly five years in October.

Third, the major sea change in the recovery

in 2012 was due to housing. Single-family

home prices have risen in 100 out of 134

metros tracked since the beginning of 2012,

according to the National Association of

REALTORS®. It is well established that

rising home values creates a wealth effect

that leads to stronger consumer spending.

For every $1 increase in home values,

consumer spending typically rises by 5

cents. While that may seem small, the

aggregate effect in the economy and upon

retail is immense. Fourth, consumers are

getting a boost from declining gas prices.

The price of unleaded gas is down almost

20 cents per gallon after peaking at nearly

$3.90 in early September. Given the recent

softening in the world economy coupled with

oil production levels which are near record

highs, gas prices are likely to remain low in

the near term. This bodes well for increased

sales because throughout the recovery the

statistical correlation between gas prices and

retail sales has been an astonishing 0.85.

It’s not surprising then to see that retail sales

have largely trended positive over the latter

half of 2012, with sales of motor vehicles,

clothing and accessories, electronics and

appliances performing well. It was a pleasant

surprise to see that December retail sales

ended with better-than-expected results,

despite setbacks in the form of Hurricane

Sandy and consumer concern related

to the fiscal cliff. Sales for the month of

December rose 4.8 percent excluding

drug stores, according to Retail Metrics,

whose most recent forecast was for a 3.4

percent gain. Costco and Nordstrom led the

gains and lifted the overall rate, with sales

increases of 9 percent and 8.6 percent,

respectively. Other retailers also saw sales

beat expectations, with TJ Maxx and Ross

stores each recognizing 6 percent gains.

Unfortunately, other retailers witnessed

less impressive sales, including Target

reporting that sales were flat compared to

a year earlier, with virtually no change in

comparable store sales and just an 80 bps

increase in total sales. Several of Indiana’s

publicly traded retailers are particularly

vulnerable after having experienced

tepid holiday traffic. HHGregg, Finish

Line and Shoe Carnival all watched share

prices drop over the final two months

of 2012 amid a tough selling season.

On a more positive note, 2012 found

landlords and tenants finding common

ground in deal economics, resulting in

increased leasing activity for well positioned

shopping centers. Neighborhood and

community centers across the Indianapolis

market have been retenanted with yogurt

shops, cell phone stores, restaurants,

automotive parts and service retailers,

fitness centers and health and well care

services. Retailers within these segments

who have been active in taking space

include: Orange Leaf, Yo-Yo Yogurt, T-Mobile,

Verizon, First Watch, DiBella’s, Flap-Jacks,

Firehouse Subs, O’Reilly Auto Parts,

AutoZone, Anytime Fitness, Planet Fitness,

Avon, Salon Lofts and Massage Envy. As

a result, Class A and B shopping centers

are finding their balance with vacancy

decreasing and rents now trending up.

In the prime trade areas of the market,

fundamentals have grown even stronger.

As a result, many mid-box spaces that had

been sitting vacant for a few years were

finally occupied. Burlington Coat Factory,

Shoe Carnival and Forever 21 are a few

of the concepts that expanded and took

advantage of the opportunity to resize their

footprint or reposition in a trade area. The

past year also saw new store growth with

the expansion of Hobby Lobby, Gordmans,

rue21, First Watch and others who opened

multiple units. In select trade areas, like

Keystone at the Crossing where demand

outpaced availability, we saw pop-up or

tenant-driven development where retailers

were willing to pay a premium to out-

position their competition by going into a

two- or three-tenant free-standing building.

Demand for these prime trade areas and

the low cost of capital inspired landlords to

reinvest in their real estate with complete



Retail / MARKET TRACKER

Source: Fed. Senior Loan Officer Survey

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


Carmel Centers:Rental Rates and Vacancy

Greenwood Centers:Rental Rates and Vacancy

Castleton Centers:Rental Rates and Vacancy


0%

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8%

$0.00

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$25.00

$30.00

Avg. Asking Rates Vacancy (%)

Keystone Centers: Rental and Vacancy

0%

2%

4%

6%

8%

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12%

$0.00

$4.00

$8.00

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Castleton Centers: Rental Rates and Vacancy

0%

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4%

6%

8%

10%

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$0

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Carmel Centers: Rental Rates and Vacancy

0%

1%

2%

3%

4%

5%

6%

7%

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$0.00

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$20.00


Greenwood Centers: Rental Rates and Vacancy

Keystone Centers:Rental Rates and Vacancy

redevelopment or remodeling of a façade.

While these improvements are noticeable

from the outside, important changes to

how retailers are responding to customer

demands on the inside, through omni-

channel retailing, is also becoming clear.

Omni-channel retailing is very similar to, and

an evolution of, multi-channel retailing, but is

concentrated more on a seamless approach

to the consumer experience through all

available shopping channels (e.g., mobile

phones, tablets, computers, brick-and-mortar,

television, catalog, etc.). It is a consumer-

driven approach where all shopping

channels work from the same database

of products, prices and promotions that

provide consistency across all retail channels.

In essence, the brick-and-mortar stores

become an extension of the supply chain in

which purchases may ultimately occur at the

counter but are researched elsewhere. By

investing large amounts of capital to create

real-time inventory tracking systems and

using existing stores as fulfillment centers,

retailers are seeking the ability to track and

deliver a purchase in the quickest, most

cost-effective manner possible, which may

include same-day pick-up or even same-day

delivery. Nordstrom, Best Buy and Macy’s

are a few retailers that are embracing omni-

channel shopping and exploring new ways

to leverage inventory. Macy’s has doubled

its effort to use its retail stores as distribution

centers; in 2011 Macy’s had 23 stores being

used as fulfillment centers, and by the end

of 2012 they expected that number to grow

to 292 stores. As the world of technology

is changing, so are customer expectations,

and omni-channel retailing is one important

way retailers are also rebalancing in pursuit

of sales. The growth rate for omni-channel

sales strategy could outpace the growth

rate for both e-commerce and retail sales

overall and thus will continue to play a critical

role in retailers’ strategy moving forward.

Looking forward there are many reasons

to believe that strengthening fundamentals

will continue and translate into profitability

in 2013. Improved balance sheets, by both

retailers and households, will translate into

increased retail sales and leasing activity.

Our retail forecast continues to call for an

increase in overall retail and restaurant

sales, particularly in the fast casual segment.

Expect growth at both ends of the spectrum

to continue, with value and discount retailers

in particular posting higher sales volume.

We will see large retailers like JCPenney and

Best Buy adapt footprints and incorporate

new approaches to merchandising. We also

expect to see continued redevelopment of

existing assets and ground up development

that will be tenant-driven. It is likely that

outlet mall expansion will occur, with new

outlet malls being constructed as more

tenants enter the outlet arena. Finally, expect

to see fewer store closures as the retail

market continues to adapt and rebalance.




January 2013Capital Markets

2013 Market Report

INDIANAPOLIS CAPITAL MARKETSAt a glance

The Big Picture: Average U.S. Cap Rates by Property Type

5%

6%

7%

8%

9%

10%

Multifamily Industrial Office (CBD) Office (Suburban) Retail

U.S. Cap Rates by Property Type

Source: Real Capital Analytics

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Indianapolis Investment Sales Rolling 12-month ($ mil.)Source: Real Capital Analytics, Cassidy Turley Research

050

100150200250300350400450500

Indianapolis Investment Sales Quarterly Volume ($mil.) Source: Real Capital Analytics, Cassidy Turley Research

Central Indiana Investment Sales Rolling 12-month ($ mil.)

Central Indiana Investment Sales Quarterly Volume ($ mil.)

2012 2011

Office Sales (SF) 3,664,000 900,000

Industrial Sales (SF) 7,348,000 7,329,000

Retail Sales (SF) 364,000 514,000

Multifamily Sales (Units) 6,500 6,900

10-year Gov't. Bond 2.8 1.9

WSJ Prime Rate 3.3 3.3




The Investment Path Feels Familiar

But Opportunity Lies Ahead

The overall trajectory of the 2012

Indianapolis investment market closely

followed the path forged in 2011. Both

years followed a bumpy road with promising

gains in momentum stymied by uncertainty.

In 2011 the concern emanated from the

unsure footing of the U.S. economy and

the continued deleveraging in Europe

as sovereigns and banks grappled

with the ongoing debt crisis. In 2012

continued economic turbulence in Europe

accompanied by pervasive public policy

uncertainty in the U.S. dampened the

lending environment and hampered the

pace of investment sales. The investment

path forward into 2013 feels familiar, with

macroeconomic worries and political

uncertainty making the going rough,

but strengthening fundamentals in both

the economy and the property markets

signal that opportunity lies ahead.

The past year presented a number of

noticeable trends across product types.

First, owners focused on rebalancing,

renovating, retenanting and in some cases

refinancing their properties. Second,

increased availability of debt coupled with

better financing terms allowed investors to

compete more aggressively for properties

and this in turn drove investment sales

higher. Third and most surprising, the

distressed asset piece of the puzzle did

not represent as much of the investment

sales market as originally anticipated.

A few smaller distressed properties did

trade; however, the majority of distressed

Indianapolis assets did not hit the market.

Central Indiana’s strong industrial market

fundamentals—including historically low

vacancy rates, robust net occupancy gains

and increasing rents—piqued investor

interest for industrial property, with new

investors entering the market seeking

improved yields for quality assets. As a

result, the Indianapolis industrial investment

market registered an impressive 7.3 million

square feet of sales in 2012 with a total


U.S. Investment Sales Volume (All Types)

$0

$10

$20

$30

$40

$50

$60

$70

$80

Bill

ions

U.S. Investment Volume (All Types)


January 2013

Investment / MARKET TRACKER

Central Indiana Industrial:Sales by Total $ (mil)

Central Indiana Multifamily:Sales by Total $ (mil)



0

100

200

300

400

500

600Rolling 12-mo. Total Quarterly Vol.

Sales by Total $ (mil): IN Industrial

050

100150200250300350400450500

Rolling 12-mo. Total Quarterly Vol.

Sales by Total $ (mil): IN Multifamily

Central Indiana Retail:Sales by Total $ (mil)



050

100150200250300350400450500


Sales by Total $ (mil): IN Office

0

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Sales by Total $ (mil): IN Retail

Central Indiana Office:Sales by Total $ (mil)

estimated sales volume of $254 million.

Although below the level of sales witnessed

in 2006 ($472.9M), this dollar volume

is markedly higher than 2009 and 2010

($100.6M and $65.2M, respectively) and

is on par with 2011 sales ($272.7M).

Nearly half of the industrial properties which

traded in 2012 were Class A core assets,

thereby proving that investor flight to quality

is continuing. Among the notable sales

transacted over the past year were Axcess

70, Building 1 (423,000 SF), 558 Airtech

Parkway (798,096 SF) and the Mount

Comfort Distribution Center (456,000 SF).

The balance of the remaining properties

which sold were Class B and C assets,

due in large part to the fact that many

institutional owners in the Indianapolis

market continued to retain their modern

bulk assets, prompting investors to look to

older and second-generation properties.

There was a mixture of both one-off asset

sales and portfolio sales in the industrial

arena over the past year. Approximately

2.9 million square feet, or 40 percent,

of the industrial investment transactions

were individual building sales. There

were, of course, notable portfolio sales

which included the Hillsdale Flex Portfolio

(445,385 SF), the KPJV/Prologis Portfolio

(including 2.2 MSF in Indianapolis) and

the JB Management National Portfolio

(with nearly 1 MSF in Indianapolis).

Cap rates across industrial classes

compressed, with the greatest decrease

occurring in Class A assets (150-200 bps).

Single-tenant assets, such as the Epson

building (751,000 SF) and the Central

Restaurant Supply building (103,000 SF),

saw cap rates in the low-to-mid 7 percent

range. Meanwhile, Class B/C properties

witnessed cap rates compress between

45-75 bps, with properties trading in the

mid-9 percent to upper-10 percent cap

rate range. Despite this compression,

the corresponding average price per

square foot did not increase and in fact

posted year-over-year declines, due in

part to the large number of second-


2013 Market ReportCapital Markets

generation transactions that occurred.

In the office arena the bifurcation in the

market continued, with core Class A office

properties performing well while older,

lower-occupied assets continued to struggle.

The economic recovery has been merciless

when choosing winners and losers. The

winners are the well-located Class A

assets; the losers are essentially everything

else. Class A space has accounted for

over 65 percent of net absorption in the

Indianapolis multi-tenant office segment

since the beginning of 2011. Although this

flight to quality is a necessary part of the

recovery process, it is not representative of

a healthy commercial real estate market.

A healthy market is one that has enough

growth for demand to extend to lower-

quality products. In 2006, the last truly

healthy year for the property markets, net

demand for office space was nearly evenly

split between Class A and Class B space.

At first glance investment sales volume for

Indianapolis office product skyrocketed in

the past year, up 275 percent from 2011,

to $461 million. The key to unlocking these

numbers is the recognition that Chase Tower

(1,057,852 SF) traded twice in calendar

year 2012, once in January to Beacon

Capital Partners as part of a larger portfolio

and then a second time in October when

CommonWealth REIT took ownership.

Excluding these two notable investment

deals in 2012, the Indianapolis market

experienced $89 million in volume with 1.5

million square feet transacted, compared

to a 2011 investment sales tally of $124

million with 900,000 square feet transacted.

Here too first glances are deceiving, namely

because 2011 followed a similar pattern as

2012 with a single transaction, the sale of

INTECH 1-3 for $85 million, elevating the

annual sales volume and the square feet

transacted. Excluding these outliers from

both years provides a much more insightful

perspective and shows that 2012 office

investment sales were double the levels

witnessed in 2011. Quite simply, more

office investment deals closed and they are

transacting in a plethora of ways: off-market

sales, 1-2 bidder transactions, portfolio

sales, auctions, partner buyouts and loan

sales have all occurred. Nevertheless, it is

encouraging to see properties that have been

on the market for a while finally garnering

the investor interest needed to trade.

Strengthening office market fundamentals

and the emergence of well-located, high-

quality assets is supporting the increase in

investment activity and has resulted in cap

rates compressing over the last two years.

As a result, the market is now seeing stable

office properties which previously traded

in the 10-percent-plus cap rate range in

2010 trade in the 8 percent cap rate range

in 2012. It is also worthy to note what the

market did not see, namely large distressed

asset sales. With only three of the notable

office deals in 2012 associated with bank or

REO sales, expect to see several large REO

deals proceeding to market in 2013 or 2014.

On the retail front, the Indianapolis market

is beginning to see a resurgence of investor

interest in all types of retail property—single-

tenant, Class A, Class B and distressed—

because the yields are higher than that

which investors can obtain in multifamily, yet

Property Name Address City Square Feet

KPJV/ProLogis Portfolio Sale (6 Bldgs.) Plainfield 2,248,000*

JB Management National Portfolio Sale (4 Bldgs.) Greater Indianapolis 1,000,000*

Epson DC 2350 Stafford Rd. Plainfield 751,000

2001 Commerce Parkway 2001 Commerce Pkwy. Indianapolis 704,000

Crossroads Distribution Package Portfolio Sale (2 Bldgs.) Greenwood/Mt. Comfort 539,000

Franklin Road Business Center 3131 N. Franklin Rd. Indianapolis 489,000

Hillsdale TechneCentre Portfolio Sale (6 Bldgs.) Indianapolis 446,000

Axcess 70, Building 1 3023 N. Distribution Way Mount Comfort 423,000

Building 56/Piper Logistics 8175 Allison Ave. Indianapolis 300,000

Central Restaurants 7750 Georgetown Rd. Indianapolis 103,000

4400 W. 96th St. 4400 W. 96th St. Carmel 97,000

Zionsville Three 7750 N. Zionsville Rd. Indianapolis 80,000

Jefferson Building 5945 W. 84th St. Indianapolis 73,000

ARS Service Express 25 Woodrow Ave. Indianapolis 72,000

Park 465 3315-3353 W. 96th St. Indianapolis 24,000

Notable Greater Indianapolis Investment Industrial Sales—YTD 2012Arranged by square feet transacted

*Indianapolis component (SF). Source: Cassidy Turley Research


January 2013




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Central Indiana Multifamily:Cumulative Monthly Volume $ (mil)

Central Indiana Office:Cumulative Monthly Volume $ (mil)

Central Indiana Industrial:Cumulative Monthly Volume $ (mil)

Central Indiana Retail:Cumulative Monthly Volume $ (mil)

the risks are not considered as high as they

might be for some office or industrial assets.

All in all, retail sales are beginning to reflect

a tightening of cap rates with ranges moving

from the 10+ percent seen from 2009 to

2011 to a current range of 8.0 to 8.5 percent

for high-quality, well leased retail centers.

Meanwhile, select single-tenant retail

assets are trading in the 7 percent range.

Retail sales, on a square foot basis,

occurring in Indianapolis during 2012 were

a bit lower but in line with the prior year.

Taking a slightly broader look at the Central

Indiana retail market, the metrics are better

with year-over-year gains of 30 percent. It is

striking to note that the increase in square

feet transacted in the Central Indiana retail

market was primarily the result of numerous

small retail centers trading hands and



Chase Tower* 1 E. Ohio St. Indianapolis 1,100,000

Penn Mark I/II 11555-11595 N. Meridian St. Indianapolis 248,000

Heritage Park I/III 6606-6612 E. 75th St. Indianapolis 246,000

Parkstone I-IV 9001-9101 N. Wesleyan Rd. Indianapolis 202,000

Consolidated Building 115 N. Pennsylvania St. Indianapolis 187,000

Fortune Park 11 4040 Vincennes Cir. Indianapolis 150,000

Heritage Park II 6666 E. 75th St. Indianapolis 84,000

Haverstick I/II 8200-8250 Haverstick Rd. Indianapolis 80,000

Meridian Technology Park Bldg. 11711 N. College Ave. Indianapolis 74,000

Pennwood I/II 11405 N. Pennsylvania St. Indianapolis 73,000

Clifton Gunderson 9335 Priority Way Indianapolis 63,000

Allen-Christy/Approved Mortgage Bldg. 107 N. SR 135 Greenwood 57,000

Notable Greater Indianapolis Investment Office Sales—YTD 2012Arranged by square feet transacted

*Sold twice in calendar year 2012. Source: Cassidy Turley Research


Riverplace Center 152-180 W. Logan St. Noblesville 74,000

Indian Creek Commons 10625 Pendleton Pike Indianapolis 60,000

Crooked Creek Center 7818-7880 N. Michigan Rd. Indianapolis 51,000

116th Street Centre 820 E. 116th St. Carmel 46,000

Carmel Shopping Center 1017 W. Main St. Carmel 37,000

Raceway Commons 55 S. Raceway Rd. Indianapolis 33,000

Fishers Crossing Shopping Center 7254 Fishers Crossing Dr. Fishers 30,000

Notable Greater Indianapolis Investment Retail Sales—YTD 2012Arranged by square feet transacted


2013 Market ReportCapital Markets

was not the product of one or two large

assets or portfolio sales elevating the total

amount. The greatest retail investment

activity was focused on Class B product, as

investors pursued opportunities with upside

through lease-up and or repositioning.

The sale of Riverplace Center (74,000

SF) in Noblesville is one such example.

Distressed sales (typically bank- or special-

servicer-owned) in all property types

occurred to a lesser degree in 2012 than

in the previous year. One likely reason

for the decrease was the low interest

rate environment, which provided some

owners enough room to maneuver out of

potential foreclosure through refinancing.

Because distressed assets typically involve

a significant amount of turnaround and

lease-up costs, those distressed properties

which did trade largely sold on a price-per-

square-foot basis at a significant discount

to replacement costs. With strengthening

fundamentals underlying the retail segment

and positive signs emerging, including

increased leasing velocity due to a higher

number of retailers seeking to open stores,

fewer distressed retail assets sales are

expected moving forward. Further, continued

improvement in the retail investment market

is likely as owners who have retenanted and

renovated, while anxiously waiting for the

market to recover, bring rebalanced Class

A, B and C properties to market for sale.

The multifamily sector remained the

perennial favorite for investors, whether

selling, buying, or developing. Investor

interest seems to be driven by several

factors, including inherent yield growth

attained due to the structure of shorter-term

leases; strong market fundamentals such

as positive net absorption, low vacancy

rates and corresponding increase in rental

rates; and multiple sources of available

financing. In Indianapolis the multifamily

sector remains in reasonable growth mode

with year-over-year vacancy declines and

a vacancy rate tracking below 6 percent.

Despite the delivery of approximately

2,500 units in 2012, rates are expected

to continue to decline for the next 24

months. Further, strong demand metrics

are expected to drive new development in

2013 with an anticipated 1,500 new units

slated for delivery in the months ahead.

With nearly 6,500 units sold in 2012,

multifamily sales volume remained robust.

Increased investor interest in Central Indiana

has compressed cap rates to the mid-to-low

6 percent range, nearly 100 bps below prior

year levels. Because cap rate compression in

primary markets has dropped into the mid-

to-low 5 percent range, investors continue to

seek higher yield opportunities in secondary

markets like Indianapolis. This is expected

to continue in 2013 as investors, especially

out-of-town buyers, continue their search

for higher yields in secondary markets

with strong underlying fundamentals.

Looking forward, there are reasons to remain

confident in the Indianapolis investment

market and there are several trends to

watch. First, financing will remain available.

Accommodating monetary policy and a

CMBS market that is expected to actively

pursue lending opportunities in secondary

markets bodes well for Indianapolis. Second,

there will be more recapitalization. With

an estimated $1.7 trillion in commercial

real estate debt maturing by 2016, 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,

moving pricing closer to the levels

experienced in 2005, 2006 and 2007.Source: U.S. Labor Dept., U.S. Dept. of Commerce, Federal Reserve

Monetary Policy: Federal Reserve Thresholds for Interest Rates

-3%

-1%

2%

4%

6%

8%

10%

2005 2006 2007 2008 2009 2010 2011 2012

Jobless Rate Hits 6.5%or Inflation Forecast Rises Over 2.5%

Unemployment Rate

Inflation

Source: U.S. Labor Department, U.S. Department of Commerce, Federal ReserveMonetary Policy: Federal Reserve Thresholds for Interest Rates

January 2013



Central Indiana Multifamily: Buyer Profile

Central Indiana Office: Buyer Profile

Central Indiana Retail: Buyer Profile

January 2013

Property Name Address City Units

Cottages of Fall Creek 6802 E. 56th St. Indianapolis 753

Astoria Park 3640 Beluga Ln. Indianapolis 470

Forest Hills 5615 Pleasant Hills Cir. Indianapolis 420

Oaktree 9012 Pinehurst North Dr. Indianapolis 396

Salem Courthouse 7007 Courthouse Dr. Indianapolis 388

Hillcrest Woods 6201 Newberry Rd. Indianapolis 384

Emerson Village 5325 Emerson Ave. Indianapolis 352

Northlake Village 1100 Northlake Dr. Noblesville 348

Stone Ridge 7111 Vedder Place Indianapolis 320

Brockton 5778 Brockton Dr. Indianapolis 284

Gladden Farms I & II 311 Country Ln. Plainfield 220

Cosmopolitan on the Canal 310 W. Michigan St. Indianapolis 218

Hermitage 2226 Hermitage Way Indianapolis 208

Vineyard at Apple Creek 10101 Montery Rd. Indianapolis 198

Runaway Bay 2030 Runaway Bay Dr. Indianapolis 192

Oak Lake at Crooked Creek 3885 Oak Lake Cir. Indianapolis 192

Arlington Green 6046 E. 21st St. Indianapolis 180

Autumn Trails 7975 Red Mill Dr. Indianapolis 164

Gardens of Greenbriar 1344 Viburnum Dr. Indianapolis 121

Harbour Town 401 Harbourtown Dr Noblesville 104

Greenway 5300 E. 21st St. Indianapolis 96

Glen Ridge Manor 4737 E. 19th St. Indianapolis 80

Frederick Square 6046 E. 21st St. Indianapolis 65

Fox Hill 1300 W. Fox Hill Dr. Indianapolis 60

Woodview Terrace 9122 E. 10th St. Indianapolis 57

Cold Springs Manor 2638 Cold Springs Manor Dr. Indianapolis 51

Willow Brook 2111 East 52nd St. Indianapolis 51

La Casa 1368 N. Arlington Rd. Indianapolis 45

Ritter Manor 2302 Ritter Ave. Indianapolis 42

Meadow Drive 268 Meadow Dr. Greenwood 12

Source: Real Capital Analytics, Cassidy Turley Research

Notable Greater Indianapolis Investment Multifamily Sales—YTD 2012Arranged by number of units

Institutional34%

Public Listed/REITs23%

Private36%

User/Other7%

Indiana Industrial Sales: 2012 Investment Buyer Profile

Institutional27%


Private60%

Indiana Multifamily Sales: 2012 Investment Buyer Profile

Institutional34%


Private15%

User/Other2%

Indiana Office Sales: 2012 Investment Buyer Profile


Private61%

User/Other15%

Indiana Retail Sales: 2012 Investment Buyer Profile





Central Indiana Industrial: Buyer Profile

January 2013

www.cassidyturley.com | 3636 | We know The State of Real Estate®

INDIANAPOLIS LAND MARKETAt a glance

An Idle Land Market Finally Receives a Glimmer of Hope as 2012 Fades

The Central Indiana commercial land market experienced a slowdown in 2012, with completed parcel transactions below 2011 numbers. With a decline in available capital and an almost nonexistent demand for new inventory, speculative land purchases fell to new lows as investors struggled to move inventory. Developers, sensing a renewed demand in industrial applications, are choosing to develop inventory purchased in prior years instead of increasing holdings. While transaction numbers were down, the land picture in Central Indiana is not entirely bleak. Residential development, both multi- and single-family, continued to increase at a steady if tentative pace, and the number of traded parcels exceeding assessed values climbed to 95 percent during 2012. Additionally, Midwest agricultural parcels began changing hands at a greater rate as food producers sought to acquire productive cropland in order to reap better benefits in a surging grain market.

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 not significantly pre-leased. As such, speculative development has been practically nonexistent 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. Industrial sector commercial development began to increase in 2012, but with few exceptions developers chose to build on parcels they already held. As access to capital becomes easier, development may slowly begin to return to the Indianapolis speculative multi-tenant office market but

U.S. Housing Market Index (SA)Source: National Association of Home Builders

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Arbor Homes

Pulte Group

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Beazer Homes

Westport Homes

Fischer Homes

MI Homes

Ryan HomesDavid Weekley Homes

Central IN Residential Construction by Builder (Nov. YTD, 25+ units)Source: Permit Analysis Report

U.S. Housing Market Index (SA)

Central Indiana Residential Construction by Builder (Nov. YTD, 25+ units)

2012 (e) 2013 (f)

Population (000) 1,803.5 1,828.3

Single-family permits 3,878 5,908

Multifamily permits 1,768 2,103

Existing-home price ($ths) 127.3 127.6

Mortgage originations ($mil) 9,014 6,241

Net migration (000) 11.8 11.7

e: Estimate; f: Forecast Source: Cassidy Turley Research

Source: National Association of Home Builders

Source: Permit Analysis Report

with tighter capital requirements and not on the scale previously seen. Within the retail sector, development activity continued to decline as it has for 24 months, off nearly 60 percent, as both the size and scope of development projects shrank due to slack tenant demand and elevated vacancy rates.

The land market remained depressed in 2012 when compared to pre-recession rates, but the indicators were not all grim. Nationally, total housing starts increased at a rate of 18 percent from 609,000 in 2011 to 740,000 in November 2012, which was reflected in Central Indiana’s increase of 8 percent in the same period. Multifamily housing was the belle of both the national and local balls, with a national increase of 52 percent and a local increase of 8 percent over 2011 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. The 2012 median price for single-family homes was $122,938, up from $103,000, while the 2012 average single-family home price rose to $130,228 from 2011’s $126,087. With single-family housing starts up 2 percent from 2011, Central Indiana is actually doing better than the rest of the country, in which single-family housing starts declined 4.1 percent from 589,000 to 565,000.

Depressed land prices and recession-stalled residential developments are becoming an opportunity for builders who survived the housing crash beginning in 2007. Many such developments have existing infrastructure in place and are available at discount prices, making them attractive to builders seeking low-priced acreage to revive. An example of this trend is the March 2012 purchase of Persimmon Grove, a 37-acre subdivision located in Avon, Indiana, near Ronald Reagan Parkway and County Road 200 North. Originally envisioned as a duplex community aimed at buyers 55 and older

January 2013Land Market

2013 Market Report

January 2013


in 2006, Persimmon Grove’s development stalled when economic factors rendered the properties unattractive to the intended clientele. Pulte Homes, a Michigan-based homebuilder, purchased and reimagined the development and rezoned the land for single-family homes on larger lots. This resulted in 123 home sites that will accommodate ranch-style homes starting in the low $100,000s, comfortably below the $130,228 average price. Unfortunately, the supply of such attractive, partially-developed properties is dwindling in Central Indiana, according to Arbor Homes, a locally based builder. Arbor Homes itself purchased 13 struggling developments and has had good results in selling its homes. As the number of available partially developed properties declines, developers are eyeing raw land to develop, but starting from scratch is more expensive, and thus developers will tread carefully when returning to the land market. Currently, the rebound in home sales hasn’t exhausted the inventory of lots already planned before the housing market crash, so raw land demand should continue to be low in 2013.

Midwest agricultural land sales continued an upward trend in 2012, with lower buyer interest rates added to the specter of ownership higher taxes resulting in a flurry of increased demand and largely cash purchases. Increased demand over the past several years has led to a steady increase in the per-acre value of farmland in the Midwest, which seemed to spur on owners previously hesitant to sell. The result has been a change in the current seller profile with non-farming ownership selling to local farmers seeking to capitalize on higher production values as well as acquire previously unavailable local land holdings.

Farmland values in Indiana also showed an increase of value in the first half of 2012, with the Purdue Land Value Survey reporting a 16.3 percent value increase over the previous 12 months. The Federal


Reserve Bank of Chicago also found the value of “good” farmland in the Chicagoland area climbed 15 percent by mid-year 2012. Although farmland values should remain high in 2013, a normal growing season and higher productivity should conspire to slow the rate of increase.

Looking forward to 2013, bankers and regulators anticipate farmland prices to moderate in part because many buyers are farmers acquiring land with cash instead of speculators using borrowed money. Even with this year’s drought, farmers buying land have cash on hand from crop insurance payouts and, when possible, record incomes from corn and soybeans harvested during the year. Farmland values also depend on factors such as long-term interest rates, real estate taxes, and alternate investment opportunities.

Although sales were light in 2012, 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 multifamily 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.

Land / MARKET TRACKER

Source: REIS, Cassidy Turley Research

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Indianapolis Industrial Completions & Rents

Forecast

Note: Hamilton and Marion Counties Only REIS, Cassidy Turley Research



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Indianapolis Multifamily Completions & Rents

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Indianapolis Industrial Completions & Rents

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Executive Management Team

Jeffrey L. Henry, SIORRegional Managing Principal

Patrick B. Lindley, SIORSenior Managing Director, Principal

Timothy J. Michel, CPASenior Managing Director, PrincipalProperty Management

Industrial Services

J. Bart Book, SIORSenior Vice President, Principal

Fritz A. Kauffman, SIORVice President, Principal

Grant M. LindleyAssociate

Patrick B. Lindley, SIORSenior Managing Director, Principal

Bryan W. Poynter, SIOR, CCIMVice President

Donald A. TreibicSenior Vice President, Principal

Todd T. Vannatta, SIORSenior Vice President, Principal

Michael W.M. Weishaar, SIORSenior Vice President, Principal Industrial Division Manager

Luke J. Wessel, SIORSenior Managing Director, Principal

Office Services

Darrin L. Boyd, SIOR, CCIMManaging Director, Principal

John A. Crisp, SIORSenior Managing Director, Principal

Gerry “Spud” DickAssociate

Andrew D. Martin, SIOR, CCIMSenior Vice President, Principal Office Division Manager

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

David A. Moore, SIOR, CCIMManaging Director, Principal

Jon R. Owens, SIORManaging Director, Principal

Michael R. Semler, SIORSenior Managing Director, Principal

Russell A. Van TilAssociate Vice President

Bennett M. WilliamsAssociate

Retail Services

John G. ByrneVice President

Bill S. FrenchSenior Managing Director, Principal

Allison Hawley, CCIMVice President

Jacqueline Haynes, CCIMSenior Vice President Retail/Land Division Manager

Donald R. WilliamsSenior Vice President, Principal

Capital Markets

J. Jeffrey Castell, SIOR, CCIMSenior Managing Director, 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

James M. “Bo” Leffel IVAssociate Vice President

Auction Services

J. Robert GettsDirector

G. Raymond Simons III, ALCAssociate Vice President

Kelly L. Williams, CCIM, LEED APAssociate Vice President

Project and Development ServicesRobert A. DuggerDirector, Principal

Location Advisory and Incentives Services

Kathleen Z. Culp, MBASenior Managing Director, Principal

Sarah CrabtreeSenior Manager

Property Management

Cheri L. Shepherd, CPMManaging Director, Principal

Melissa Day, CPM, RPAVice President, Principal

Marketing Services

Jennifer Tuttle BlattlerMarketing Director

Alan L. Inkenbrandt Graphic Designer

Barbara H. MatthewsAssociate

Danelle L. NagelAssociate

Research Services

Jason W. Tolliver, J.D.Research Director

Shawn L. StroudResearch Associate

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Suite 1300

Indianapolis, IN 46282

Phone: 317.639.0515

Fax: 317.639.0504One American Square, Suite 1300Indianapolis, IN 46282317.634.6363cassidyturley.com

About Cassidy TurleyCassidy Turley is a leading commercial real estate services provider with more than 3,700 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 $22 billion in 2011, manages 455 million square feet on behalf of institutional, corporate and private clients and supports more than 28,000 domestic corporate services locations. Cassidy Turley serves owners, investors and tenants 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. Cassidy Turley enhances its global service delivery outside of North America through a partnership with GVA, giving clients access to commercial real estate professionals in 65 international markets. Please visit www.cassidyturley.com for more information about Cassidy Turley.

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

Core Services

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• Corporate Services - Facilities Management - Portfolio Administration - Project Management - Strategic Consulting - Transaction Management

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Annual Market Report (2013)

Real Estate

Transcript of Annual Market Report (2013)