DTZ Regional Vice President Jason Tolliver says the state's commercial real estate market is “coming out of the gate a little slow” this year. However, he tempered the “disrupted” performance by adding that all segments showed growth in the first quarter, compared to the same period last year. During an interview on Inside INdiana Business Television, Tolliver said the statewide market for industrial space continues to be “the Little Engine That Could,” including in smaller Hoosier communities. Tolliver remains optimistic for a positive year, despite a sluggish beginning. May 6, 2015

First Quarter Market Analysis Notes Provided by DTZ, Jason Tolliver

Lackluster Start: The bad news is that the U.S. economy had another disappointing start to a new year. The good news, however, is that most of the lackluster performance was due to temporary factors including unseasonably cold and snowy weather (yet again), west coast port disruptions and weak exports resulting primarily from a sluggish global economy.

But, Solid Economic DNA: It is also promising news that the solid economic DNA that had been driving the current expansion – improved household and corporate balance sheets, low interest rates, rising confidence – remains firmly intact. Thus far, 2015 seems to be following in 2014’s footsteps – shaky the first quarter, but ultimately a healthy year for the economy and commercial real estate.

Lower Oil Prices: Lower oil prices continue to be a major tailwind for growth in 2015. Although consumer spending patterns have been muted so far this year, business and consumer confidence are soaring and that bodes well for spending growth down the road.

Spring Is In The Air: As we enter the warmer spring season, it is likely that a ramp up in consumer spending will reemerge. Indeed, the most recent figures on auto sales and home sales both suggest the data is turning more upbeat as we move away from the winter blues.

Will Employment Bloom? Employment trends over the past few months reinforce the prospects for consumers as well as reflect improving business conditions for the employer. Still, we need to smooth certain outliers to gauge the real underlying trend. The March job numbers were lousy – just 126,000 net new nonfarm payroll jobs were added. But look at a six-month moving average and the U.S. economy is creating jobs at a pace of 260,000 per month. One needs to go back 16 years to find job growth numbers that strong.

Office

-Across the state the pace of office leasing slowed; however, 43 percent of the markets remained in expansion mode with another 35 percent holding firm. So, in other words, 78 percent of the state's office markets are growing or poised to grow.

-Despite the first quarter slowdown, Indiana's office vacancy rate still fell by 10 basis points (bps) – from 12.5 percent to 12.4 percent in the first quarter of this year.

-Indiana's vacancy rate has now fallen by a full percentage point over the last year and is currently tracking below the long-run historical average.

On the development front, new construction is beginning in Indianapolis on the River North project. The developer, PK Partners, recently held a groundbreaking for the estimated $40 million project which will add 100,000 square feet of Class A office space to the Keystone submarket. It will be located just a short distance east of Keystone Crossing at 8801 River Crossing Parkway. The Gene B. Glick Co., a partner in the building, announced it will lease 24,000 square feet, making it a key tenant.

Industrial

-The Indiana industrial sector was seemingly unfazed by the first quarter's cold weather and economic turbulence. The industrial sector posted net occupancy gains of nearly 3 million square feet as a full 73 percent of Indiana markets witnessed varying degrees of occupancy gains.

-Even more impressive is that statewide industrial leasing has now translated into 9 consecutive quarters of net occupancy gains.

-Warehouse and distribution space continues to account for the bulk of new leasing activity driven by consumer spending and e-commerce. However, flex space, which typically leases to smaller tenants that face more restrictive access to capital, has seen an uptick in leasing activity, reflecting improvements in lending conditions.

-Manufacturing space is also in demand. Manufacturers are requiring smaller and more modern space as they compete in a marketplace with increasingly advanced technologies. Incorporating robotics, skilled labor and intellectual property considerations into the equation, more manufacturers see the U.S. as an attractive location in which to operate. Indeed, demand has become more broad-based than at any other point in the cycle.

Looking ahead, the industrial sector stands to benefit from the expedited broad growth. Lower oil prices will reduce costs and boost consumer spending, which, in turn, will boost the need for warehousing and distribution.

Retail

-The Indiana retail market strengthened considerably in the first quarter with vacancy declining and leasing accelerating. A growing number of Hoosier cities are seeing their retail sectors strengthen. The Indiana market registered nearly a million square feet of net absorption in the first quarter of 2015.

-Although demand for retail space remains underwhelming compared to previous recoveries, with supply growth low, the amount of available retail space in Indiana is declining rapidly which, in turn, is supporting rental rate growth.

Households are flush with money saved from the decline in gas prices, and with companies hiring at the fastest pace in 15 years, both consumer spending and the overall economy should see a boost in the spring.

Multi-Family

-Indiana's multifamily market continued to grow in the first quarter with new units being absorbed across the state, thereby continuing a streak of more than five years of uninterrupted occupancy gains.

-Despite the delivery of new units, renting demand has been sufficient to hold vacancy steady at 6.0 percent, a full 150 bps below the long-term historical average of 7.5 percent.

-While multifamily demand is robust around the state, Central Indiana is recording its greatest boom on record with net occupancy gains 140 percent higher than the norm.

-On the development front, the Central Indiana pipeline remains full with nearly 4,000 units currently under construction, 3,263 which are expected to be delivered in 2015.

-Promising demographics and strong renting demand will help propel absorption of this new product.

Notable first-quarter deliveries included The Hamilton Luxury Apartment Homes, a 233-unit development owned and managed by the J.C. Hart Company, located in close proximity to Hamilton Town Center.

Outlook

-With so many uncertainties arising in the global economy, we remain alert to changes and development that could alter the momentum of the Indiana property markets.

-The unfolding of QE in the Eurozone and its battle against low inflation, the continued price shocks to the oil and commodities markets, and the stagnation and possible contraction of the Japanese economy persist as serious threats to global economic growth and stability.

-But the U.S. and Indiana have been plowing ahead despite these challenges for many months. We expect that to continue.

In fact, the Indiana property market had its strongest performance in 2014 despite many of these headwinds. And as the 2015 spring months arrive, we anticipate upward pressure on rental rates in a majority of metros as leasing activity accelerates around the country.

Source: DTZ, Jason Tolliver

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