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Midwest muddles through the recession

What follows is a compilation of area reviews examining four of the Midwest's most prominent and important commercial real estate markets. H. Lee Murphy profiles Chicago, and Beth Mattson-Teig covers Detroit, St. Louis and Indianapolis.


Early on the morning of Sept. 11, representatives of Donald Trump walked into the offices of Skidmore, Owings & Merrill LLP, Chicago's premier architectural firm, to begin planning for the world's tallest building, to be located on a site that Trump had acquired in Chicago's River North neighborhood. Charles Reiss, Trump's vice president for development, was prepared to ask for a 120-story tower with the aim of regaining the title that the Sears Tower lost five years ago to a building in Malaysia.

Within an hour of the meeting's start the World Trade Center towers were under attack, and as they collapsed, so did the audacious plans for Trump Tower Chicago. A glum entourage returned to New York, and Trump in short order confirmed what they had expected. “Now is not the time,” he told Reiss, according to a report in the Chicago Sun-Times, whose parent company is a joint-venture partner in the project.

And so Chicago will settle for something less. In early December, Trump announced plans for a 78-story, 2.3 million sq. ft. office and luxury condominium complex. If it opens as planned by 2005, it merely would stand as the fourth tallest building in the city. Mayor Richard M. Daley already has endorsed the preliminary design by Adrian Smith of Skidmore, although Blair Kamin, the Chicago Tribune's influential architecture critic, denounced its glass-sheathed, notch-step silhouette as mediocre, calling it “a bloated blob of a skyscraper.” Development, it seems, hardly ever comes without controversy in Chicago.

The Trump team may well be in no hurry to break ground on its tower, for the Chicago office market is suffering from a glut of vacant space. Of course, the faltering economy has slowed the pace of real estate transactions in the Windy City and the Midwest as a whole. But Chicago has a powerfully diverse corporate base and has fared better than many cities during the downturn, and new construction in the office, industrial, retail and apartment sectors continues to sprout.

Office: New construction, rising vacancies

In 2001, the overall downtown Chicago office vacancy rate climbed 4% to 12.7%, a number that was exacerbated by 4.1 million sq. ft. of sublease space available at the end of 2001, according to New York-based Cushman & Wakefield.

Looking more closely at the downtown numbers, the Class-A sector saw its vacancy rate climb nearly seven percentage points last year to finish at 11.7%. Meanwhile, the Class-B vacancy rate stood at 12.3% in fourth-quarter 2001, up from 9.2% a year earlier, and the Class-C vacancy rate had edged up to a worrisome 16.1%, compared with 15.3% a year earlier.

New construction also has depressed the downtown market. Two speculative office buildings — the 1.2 million sq. ft. UBS Tower developed by locally based John Buck Co. and the 406,000 sq. ft. high-rise at 550 W. Jackson developed by locally based Mark Goodman & Associates — opened during the year with solid pre-leasing. Three more big buildings, spanning nearly 1.7 million sq. ft. altogether, are scheduled to open in 2002, followed by more than 2 million sq. ft. planned for delivery in 2003 in the Loop.

Kent Ilhardt, a Cushman & Wakefield executive director, figures the new construction will add at least another percentage point to vacancy rates. “Landlords have to either wait out this cycle or reduce their rents,” he says. Most of them, in fact, have boosted their construction allowances — money given to a tenant to defray the cost of getting space ready for occupancy. Whereas an average allowance for a large-space user was between $20 per sq. ft. and $30 per sq. ft. 18 months ago, many tenants are now getting closer to $45 per sq. ft.

Office vacancies also are climbing outside Chicago's CBD. The area's suburban office vacancy rate, which stood at 10.1% at the end of 2000, had climbed to 14.5% a year later, according to Los Angeles-based CB Richard Ellis. The figure does not include 6.3 million sq. ft. of sublease space in the suburban market.

In 2001, there was a net absorption of only 31,900 sq. ft. of suburban office space, compared with an absorption of 3.7 million sq. ft. in 2000 and a five-year average of 2.4 million sq. ft. from 1995 to 1999. New construction proceeded at a vigorous pace. Some 43 new office buildings spanning 4.5 million sq. ft. were delivered to the market last year, up from 3.8 million sq. ft. in 2000.

However, hope may be on the way in the suburbs. “The new construction cycle has peaked, which is a positive indicator and first step toward balancing market fundamentals,” says Jack Durburg, a CB Richard Ellis managing director, noting that just 1.8 million sq. ft. of new suburban office construction is slated for delivery this year.

Not surprisingly, free rents have cropped up in suburban office lease deals for the first time since the mid-1990s. “We're seeing 11-year deals where one year is free,” Stratton says. “Or, we're seeing landlords agree to a delayed start of six months or longer for a tenant who has overlapping rent somewhere else. As for subleases, we're seeing discounts of 20% to 50% off face rates available to some tenants.”

Retail: Big arrivals on the way?

Chicago's confidence has been shaken recently by an unprecedented exodus of retailers. In the past year alone such names as Montgomery Ward, Crown Books, Trak Auto, Ames Departments Store and Frank's Nursery, among others, have shuttered metro area branches, mostly under the protection of bankruptcy proceedings. Industry observers say they can't recall another time when so much retail space has been handed back to landlords.

Predictably, the Chicago shopping center vacancy rate increased last year, coming in at 10.3% in fourth-quarter 2001, up from 8.2% a year earlier, according to CB Richard Ellis. Most observers agree that the market faces substantial tumult in the months ahead as landlords work through big-box vacancies that plague many shopping centers.

“Competition in retailing is becoming much more intense,” says Michael George, a principal with Mid-America Real Estate Corp. in Oakbrook Terrace. “Good merchants are surviving while the soft economy has made conditions that much more difficult for the weak merchants.”

Ironically, there is no shortage of new merchants looking to jump into the Chicago market. Just days before Christmas, Harrods, the London department store giant, confirmed that it is considering erecting its first U.S. branch on Chicago's Block 37, a 2.5-acre vacant block in the north Loop that has been the target location of numerous failed development plans over the years.

Also, Fry's Electronics Inc. is seeking big sites of 100,000 sq. ft. and more in the metro area. Lowe's Cos., after tabling plans a year ago to venture into Chicago, now has decided it wants to be in the market after all and is scouting locations. So is Kroger Corp., the grocery giant that left Chicago in the mid-1970s but now wants back in. Smaller retailers such as Factory 2-U Stores Inc. and Harbor Freight Tools USA Inc. are seeking spaces of 15,000 sq. ft. and less.

Developers have been cheered by the prospect of new retail arrivals. Tucker Development Corp., based in Highland Park, is at work on a 200,000 sq. ft. shopping center in far west Yorkville and is considering the launch of another 450,000 sq. ft. of stores in south suburban Country Club Hills. “It's true that there is a lot of surplus real estate on the market as older retailers like Montgomery Ward have gone out of business,” says Richard Tucker, president of the firm. “But for a lot of large-format retailers, this surplus space won't fit their needs. They will be looking for new construction.”

Industrial: Large projects in vogue

For the most part, it seems fairly quiet on the Chicago industrial front. Elise Couston, a principal at Chicago-based Paine/Wetzel Oncor International Inc., reports that the industrial market was nearly comatose until August 2001. “Our phones started to ring in August and clients were telling me that their business was picking up,” Couston says. “Then came Sept. 11 and the market came to a screeching halt. Everybody put projects on hold.”

Well, not quite everybody. In the fall, Kellogg Co. struck a deal with San Francisco-based Catellus Development Corp. for a 1.05 million sq. ft. warehouse/distribution center to be erected at Catellus' International Centre South business park in suburban Minooka. The $27 million facility, set on a 60-acre site, is slated for opening in late summer.

Redevelopment also is in vogue. Rosemont, Ill.-based Opus North Corp. agreed to acquire the former Zenith Electronics Corp. television manufacturing plant in Melrose Park, a sprawling 900,000 sq. ft. complex, with a plan to demolish it and replace it with a state-of-the-art 450,000 sq. ft. warehouse. Delivery is possible by this summer.

Low interest rates are affecting clients' decision making, says Phillip Wegele, a senior vice president in industrial brokerage at Dallas-based Trammell Crow Co. “With interest rates so low, companies that in past years would have been tenants now want to be owners. Therefore I expect build-to-suit activity to pick up,” Wegele says. Even though logistics companies have pulled back on demand for distribution space, he also says that “big-box industrial is getting even bigger. The Kellogg deal is a reflection of that. Everybody is intent on achieving scale in distribution and warehousing.”

Columbus, Ohio-based Pizzuti Cos. is one developer making no small plans. Michael Chivini, senior vice president in the company's Oakbrook Terrace regional headquarters, reports that he has recently received requests for proposals ranging from 250,000 sq. ft. to 1 million sq. ft. from three large tenants. The company recently completed a 440,000 sq. ft. spec building at its Pinnacle Business Center, which is now 100% occupied, and has broken ground on another 420,000 sq. ft. spec building due to deliver in June.

Apartments: New construction plunges on

Residential construction is surging ahead, particularly in suburbs with commuter train stations. “Chicago is one of the most undersupplied rental housing markets anywhere,” says Thomas Moran, chairman and owner of Chicago-based Moran & Co. In some years, metro Chicago has added 80,000 new jobs and only 3,000 new rental units, he adds. “That's a ratio of 20 or 30 to 1, which by national standards is outrageous. In Dallas, the ratio is closer to 3 to 1 or 4 to 1.”

In downtown Chicago, the apartment occupancy rate slipped from 97% to 95% in 2001, estimates Greg Smith, president of Chicago-based Equity Residential Property Trust's central division. “We may see occupancies in many submarkets, including downtown, slip a little more,” Smith says. He foresees more job losses in the metro area and predicts that “the first quarter of 2002 may be the most difficult for the local rental market. We aren't likely to see a gradual uptick occur until the third quarter.”

In new construction news, Moran & Co. has broken ground on a 300-unit apartment complex in Naperville and a 280-unit complex in Oswego, both due to deliver late this year. Also, a partnership of Equity Residential and Dallas-based Lincoln Property Co. plans to build a 400-unit rental complex in west suburban Lombard on five acres of what was once a cemetery.


The auto industry is applying the brakes to Detroit's office and industrial markets. Home of the “Big Three” automakers — General Motors Corp., Ford Motor Co. and DaimlerChrysler — the Motor City watched the companies grapple with slumping car sales for much of 2001, and experienced a nasty spike in its unemployment figures as a result.

Detroit posted one of the nation's highest unemployment rates in December 2001 at 5.2%, compared with 3% in the same period last year. Rising unemployment and the slumping economy have significantly slowed commercial real estate leasing and development. “There is more product on the market than we have seen in a long time,” says John Ozog, managing partner in the Southfield, Mich., office of Dallas-based Staubach Co.

Office vacancies have been on the rise since second-quarter 2000, climbing from near 8% to 12.9% as of third-quarter 2001, according to a market report by the Southfield, Mich., office of Northbrook, Ill.-based Grubb & Ellis. Industrial vacancies, which stood at 4.4% in first-quarter 2001, had jumped to 7.6% in third-quarter 2001.

The Detroit economy has become more diversified in recent years thanks to a growing bio-tech sector. However, the region still is heavily dependent on the auto industry. Although 0% financing incentives helped boost auto sales in fourth-quarter 2001 — including record sales in October — analysts fear that the free financing may have cannibalized 2002 sales. “There is a lot of caution with people waiting to see what happens in the automotive sector,” says Matthew Fenster, executive director of Paragon Corporate Realty Services Inc. in Farmington Hills, Mich.

All is quiet on the office front

With area corporations in cost-cutting modes, the Detroit office market has been stagnant. “Corporate America in this part of the country is basically focused on how it can cut costs and reduce expenses,” says John Gordy, a senior vice president at Signature Associates in Southfield. “Even if a company's current facility is obsolete or not ideal, that's not going to override the corporate mandate to cut costs.”

The volume of office leases declined 25% in 2001 from the pace of 2000, according to Kevin Hegg, managing director of Cushman & Wakefield of Michigan Inc. “The market definitely has slowed, but you have to remind yourself that you're comparing it to one of the greatest real estate markets ever enjoyed,” he says.

Detroit's suburban office markets posted a vacancy rate of 10.5% in third-quarter 2001, while the CBD continues to struggle with a vacancy rate of 23.8%, according to Grubb & Ellis. Sublease space crept higher as companies continued to consolidate and downsize to cut costs. The amount of available sublease space in the third quarter reached 1.7 million sq. ft., approximately 1.4 million of which was located in the suburbs, according to Grubb & Ellis. Additional space is expected to come on line downtown in the upcoming year with further consolidation, including the merger of DTE Energy and MichCon.

Auburn Hills, home of DaimlerChrysler, has been one of the hardest hit office submarkets, with a 24.4% vacancy rate in third-quarter 2001, according to Grubb & Ellis. The suburb has been whalloped by the automaker's efforts to cut costs. “There was a lot of new space on the market and no demand to absorb it,” Fenster says.

New construction starts have diminished while the market tries to absorb existing space. Burton-Katzman Development in Detroit plans to build a 300,000 sq. ft. building at the northwest corner of Interstate 75 and Big Beaver Road in Troy.

The most notable downtown development is Campus Martius. The 2 million sq. ft. mixed-use development is located in the heart of the CBD. The cornerstone of the project will be a 1.7 million sq. ft. headquarters for Compuware Corp., which is scheduled for completion in mid-2003.

Industrial: Space available

Although industrial vacancy rates are on the rise, average rental rates for manufacturing and warehouse properties in metro Detroit actually increased in 2001 from $4.95 per sq. ft., triple-net, at the beginning of the year to $5.80 per sq. ft., triple-net, at the end of third quarter, according to Grubb & Ellis. However, landlords are becoming more aggressive in offering tenant improvement dollars and free rent to fill vacancies, note industry observers. Vacancy rates for manufacturing space are expected to increase throughout Southeast Michigan as automotive companies consolidate and reduce their space needs.

Construction activity slowed considerably in 2001, particularly on the build-to-suit side, which is fueled by the automotive industry. Several planned build-to-suit projects were put on hold at the end of 2001, and development of spec properties has almost dried up, Hegg of Cushman & Wakefield notes.

In new construction news, New York-based Ashley Capital is moving forward with its plans to develop a 157-acre new industrial park in the CBD. The company is expected to break ground in spring 2002.

Growth for retail sector

In the midst of an economic recession, Detroit's retail market continues to post one of the lowest vacancy rates in the country, with 4.8% at mid-year 2001, according to Encino, Calif.-based Marcus & Millichap Real Estate Investment Brokerage. The city of Detroit has one of the most under-served retail markets in the country, confirms Andy Farbman, an executive vice president with NAI Farbman in Southfield, Mich.

Retail construction completions were expected to surpass 5 million sq. ft. in 2001, according to Marcus & Millichap Co. “There is a ton of interest in the good sites,” Farbman says. “A year ago, retailers were looking for A and B sites, but now they are only looking for A sites.”

Chicago-based Great Lakes Real Estate Investment Trust has been busy with build-to-suit projects for Home Depot. Three Home Depots opened in the Detroit metro area in 2001, and four others are in the planning stage.

Meanwhile, Lowe's, Home Depot's biggest competitor, opened four stores in metro Detroit last year. Other retailers in various stages of project development across the region include Wal-Mart with four new stores, Kroger with three stores and Walgreens with three new locations.

The renovation of older, enclosed shopping centers is one of the biggest retail trends in the Detroit market. NAI Farbman recently began such work on Wonderland Mall, a 1 million sq. ft. property that lost Montgomery Ward and Service Merchandise as anchors. New York-based Lend Lease Real Estate Investments is the owner of the mall.

A significant addition to the city's retail menu includes 100,000 sq. ft. of retail and entertainment space being built in conjunction with Ford Field, the new home of the Detroit Lions that is set to open in 2002.

Multifamily still healthy

Metro Detroit's apartment sector is experiencing comparatively better times. Detroit's apartment vacancy rate — historically among the lowest in the country — was 3.2% at mid-year 2001, according to Marcus & Millichap. However, the apartment market has not escaped the impact of a slower economy.

“We saw a little bit of a slowdown starting this summer, and since Sept. 11 we have seen a further drop-off in traffic and occupancies due to the economic downturn,” says Jonathan Holtzman, CEO of Farmington Hills, Mich.-based Village Green Cos. The decline in new job creations translates into a reduction in rentals at apartment properties.

Village Green, which owns 12,000 units in metro Detroit, averaged an occupancy rate of more than 95% in summer 2001. But those occupancies dropped to the low 90s percentile in the fall, according to Holtzman. The spike in vacancies is likely to be a short-term phenomenon, he adds. “We believe that there will be continued slow traffic until job creation comes back with an improving economy.”

Overall, the supply-and-demand relationship in the Detroit apartment market is in good shape. Construction starts for 2001 were approximately 1,600, according to Marcus & Millichap, down from the 2,000 starts in 2000. Between 1,600 and 1,800 units are expected to break ground this year. “Basically, there is very, very little new construction taking place,” Holtzman says.

Only a few suburban developments were under way at year-end in West Bloomfield, Canton, Dearborn and Romulus. Village Green is nearing completion of its rehab on the 339-unit Village Park of Royal Oak, which will add a new clubhouse and pool. The company also is developing a 299-unit luxury community called Regents Park of Troy.

St. Louis

While St. Louis sports fans mourn the Rams' loss in this year's Super Bowl, the city's commercial real estate players are grappling with rising vacancies in the office and industrial sectors. Tenants have been slow to snap up a sizeable supply of new construction. In 2001, the metropolitan St. Louis commercial real estate market added more than 2.6 million sq. ft. of office space and approximately 5.6 million sq. ft. of industrial space, according to Colliers Turley Martin Tucker in St. Louis.

“The health of the St. Louis regional area is fair at best,” says Burt Follman, chairman and CEO of St. Louis-based Follman Properties-ONCOR International. “People are reluctant to move forward on deals. Rental rates in general have softened and concessions are emerging with several months of free rent.”

The St. Louis area recorded modest job losses in 2001 with 16,000 jobs lost in the 12-month period ending in October, according to the Missouri Economic Research and Information Center. The unemployment rate increased from 4.1% in fourth-quarter 2000 to 4.5% in fourth-quarter 2001.

Despite the rise in unemployment and the surplus of office and industrial space, members of the St. Louis commercial real estate community foresee a more positive future. “My gut tells me — and our people feel — that the economy is going to be on a positive upswing by the latter part of the second quarter,” Follman says.

Michael Towerman, president of TRiSTAR Business Communities in St. Louis, echoes those sentiments. “The lack of activity in 2001 was driven largely by uncertainty, not necessarily weak underpinnings of the economy,” Towerman says. “So we think we are close to the bottom, and activity will pick up in 2002.”

More empty office space

More new office space was completed in the St. Louis metropolitan area in 2001 than in any year except 1986, according to Colliers. Approximately 40% of the space added last year was build-to-suit properties, including projects for Edward Jones, MasterCard and Unigraphics. However, the new construction was countered by rising sublease space and modest absorption, according to statistics provided by the company. At the end of 2001, approximately 1 million sq. ft. of sublease space was available in the metro area. Also, the city absorbed 829,000 sq. ft. of office space last year compared with 1.7 million sq. ft. in both 1999 and 2000.

The new construction and availability of sublease space pushed the St. Louis office vacancy rate to an eight-year high of 12.3% at the end of 2001, up from 8.8% at the start of the year, according to Colliers. The West County/Chesterfield submarket has been hit hard by empty space.

The vacancy rate for Class-A office space in this submarket climbed from 12.5% in July to 15.1% at the end of 2001, according to Follman Properties-ONCOR International. That translates to 450,000 sq. ft. of direct vacancy and 188,000 sq. ft. of sublease space.

However, vacancies remain moderate compared with rates of about 25% during the recession of 1990 and 1991. Also, new office construction appears to be tapering off. Cushman & Wakefield of Missouri Inc. estimates that 1 million sq. ft. of office space was under construction at the end of 2001. “I think this market is very well-positioned to rebound with a lot of strength,” says Steve Kozarits, managing director at the Clayton, Mo., office of CB Richard Ellis.

In new construction news, locally based Legends Properties is developing a $33.3 million office, retail and multifamily complex in Eureka, Mo., just southwest of St. Louis, that will feature 148,000 sq. ft. of office space and a 176-unit apartment community.

Industrial vacancies rise as well

The inventory of industrial space grew by 5.6 million sq. ft. in 2001, which was the largest increase in more than a decade, according to Colliers. However, the construction was ill-timed as companies halted expansion activity and grappled with the recession. Consequently, the metro area's industrial vacancy rate climbed from 4% at the beginning of 2001 to 6.8% at year-end, according to Colliers.

The majority of St. Louis industrial development is occurring in the distribution sector, which added 4.4 million sq. ft. of space in 2001. The largest single addition was the 806,000 sq. ft. Procter & Gamble distribution facility, developed by TRiSTAR Business Communities, in the Gateway Commerce Center in Madison County, Ill.

However, bulk space also is experiencing significant vacancies. Absorption of bulk space fell to a negative 1.8 million sq. ft. in 2001, while the vacancy rate among bulk facilities jumped from 3.9% at the beginning of the year to 13.9% at year-end, according to Colliers.

Retailers want to be in St. Louis

The St. Louis retail market is in solid shape, as many big-name retailers continue to expand their presence in the area. Circuit City, Best Buy, Lowe's, TJ Maxx, Sam's Wholesale Club and Wal-Mart are all opening new stores. Ultimate Electronics has just entered St. Louis for the first time, and Costco recently opened its first store in St. Charles County.

“The retail sector is very healthy,” says Mike Staenberg, a principal at St. Louis-based THF Realty. THF owns more than 4 million sq. ft. in the St. Louis area, including the 860,000 sq. ft. Chesterfield Commons shopping center.

One of the challenges for retail development is finding available land. As a result, developers are targeting infill and redevelopment projects. St. Louis-based Desco Group is developing the 522,000 sq. ft. Kirkwood Commons in Kirkwood, Mo. The $56 million shopping center, slated for a spring 2002 completion, could revitalize one of the most economically depressed areas in metro St. Louis. The shopping center is slated for a spring 2002 completion.

Desco also plans to redevelop the Old Post Office District in downtown St. Louis. The company has partnered with locally based DFC Group Inc. to convert the 240,000 sq. ft. Old Post Office into a Class-A office, retail and educational center. However, the plans have yet to receive a green light due to historic preservation and government funding issues.

Multifamily winning streak

The city's apartment sector continues to perform strongly. “Broadly speaking, the St. Louis apartment market has been very, very good for the last five years,” says Ken Aston, president of St. Louis-based Apartment Investment Advisors LTD. Occupancies have remained above 95%, and limited new construction has helped to boost rents.

However, there has been some softening in the last six months in the West County market. “There are communities that have dipped into the low 90s percentile,” Aston says. Observers largely attribute the decline to the record low interest rates that have pushed some renters into houses. Industry members expect the decline to be short-lived, particularly in light of the fact that no new construction is planned for West St. Louis County.

The 400-unit Enclave at WingHaven in St. Charles County, developed by Houston-based Bomasada Group, was one of the major apartment projects to open in 2001. As for new construction, St. Louis-based MLP is building Turnberry Apartments, a 384-unit complex in St. Charles County that is scheduled for completion in mid-2002.


Like other major Midwestern markets, Indianapolis has not escaped the economic woes plaguing the rest of the nation, as office and industrial vacancies have ticked up slightly, and the hotel sector most definitely feels the effects of the Sept. 11 aftermath. But local professionals say the market's real estate fundamentals remain strong. A growing population and continued big-box retail and bulk warehouse expansion are among the region's strongest attributes.

“The Indianapolis economy has been surprisingly strong,” says Suzanne Vertesch, senior vice president of client services for the Indy Partnership, a non-profit economic development group serving the Indianapolis region, which is home to a variety of corporations, including Eli Lilly & Co. and Marsh Supermarkets. “We haven't seen the downturn that we might have expected due to the national recession.”

Two of the biggest real estate draws of Indianapolis are its central location and highway access, which make it an ideal spot for retail distributors and logistics firms. “We are within a day's drive of two-thirds of the U.S. population,” Vertesch says. The city's suburbs also have been aggressive in pursuing new business opportunities through incentives such as tax-increment financing (TIF) and tax abatement programs.

Industrial: Slight vacancy increase

Despite some softening in the 215 million sq. ft. Indianapolis industrial market, vacancy increases have been modest. The metro area's vacancy rate rose from 5.8% at the start of last year to 7% at the end of third-quarter 2001, according to Colliers Turley Martin Tucker in Indianapolis.

Bulk warehouse properties continue to thrive, with a net absorption of 1.2 million sq. ft. in the first three quarters of 2001, according to Colliers. Whirlpool and Belkins Components both leased warehouse space of more than 800,000 sq. ft. in the southwest region of the metro area.

However, other industrial product types did not fare as well in 2001, and net absorption in the industrial market as a whole fell dramatically in 2001. Approximately 220,000 sq. ft. was absorbed through the first three quarters of last year, compared with the 8.5 million sq. ft. absorbed in 2000, says J. Jeffrey Castell, principal and senior vice president/manager of industrial sales & leasing for Colliers. “That has been the result of a lot of contraction of space, which is being driven largely by economic conditions,” Castell says.

Jay Archer, a senior vice president in the Indiana industrial business unit of Indianapolis-based Duke Realty Corp., says 2002 could be a good year for industrial lease transactions. “We are positioned with pent-up demand, so there will be good activity to start out 2002,” he says.

Industry observers say that build-to-suit properties, which are often owned by the tenant, are in demand in the region. “We think that with interest rates where they are, clients that have traditionally leased space are saying now is the time to do a build-to-suit,” Archer says. Duke completed more than 10 build-to-suit projects in 2001, including a 531,463 sq. ft. build-to-suit for Tire Rack in South Bend, Ind.

Duke also has four multi-tenant industrial projects under way in the Indianapolis area. The company is building a 600,000 sq. ft. distribution facility at the Plainfield Business Park that will be available in May 2002. The site is expandable to accommodate a larger, 1.2 million sq. ft. facility or a separate 570,000 sq. ft. building.

Ready for recovery

Indianapolis office vacancies crept higher in 2001 as companies reined in expansion plans. The good news is that vacancies may have topped out. In 2000, the metro office vacancy rate jumped from 10% to 15%, according to Colliers. At the end of third-quarter 2001, the vacancy rate stood at 16.2%. In the downtown market, the vacancy rate climbed to 17%, and 370,000 sq. ft. of sublease space was available. “For all practical purposes we have seen a slowdown in large tenants looking for space compared with activity in 1999 and 2000,” says Jeffrey L. Henry, managing principal and manager of office sales and leasing at Colliers.

Approximately 400,000 sq. ft. in new construction was completed last year, compared with 800,000 sq. ft. in 1999 and 1.5 million sq. ft. in 2000. “I think we are getting close to the peak in vacancies due to the virtual stop in new construction,” Henry says.

Currently, there is only one major multi-tenant office building under construction in Indianapolis — Browning Investment's 60,000 sq. ft. Tech I and II, which is already significantly pre-leased.

Downtown Indianapolis has struggled to attract office tenants because of parking concerns and a desire by corporate tenants to locate closer to the suburbs where they live. “One of the bright points has been the tremendous increase in residential units that have either started or are planned for downtown,” Henry says. “In the long term, increasing the residential base will be very positive for the downtown office market.”

Big-box boom

The Indianapolis retail market has experienced record retail construction in the past few years. Nearly 4.3 million sq. ft. of new space was built in both 1999 and 2000, while another 4.5 million sq. ft. was slated to came on line in 2001, according to Marcus & Millichap. Big-box expansion is driving retail development activity, with 31 new big-box stores completed or under way in 2001.

“Indianapolis is about one year into a two-year cycle of big-box development,” says Donald R. Williams, principal of Colliers. The big-box development includes five Target, seven Home Depot and three Costco stores. Virtually all of the expansion is occurring outside of the beltway in outlying suburbs such as Avon and Greenwood, Williams adds.

As for other new construction, The Linder Cos. in Indianapolis plans to open Merchants' Pointe, a mixed-use project featuring 100,000 sq. ft. of retail space in Carmel, in early 2002. The project is across the street form the 350,000 sq. ft. Merchants' Square shopping center, whose tenants include Borders Books, Macaroni Grill and Longhorn Steakhouse, among others.

Multifamily hits a bump in the road

The Indianapolis apartment market took a step backward in fourth-quarter 2001 after posting four consecutive quarters of occupancy improvement. Occupancy rates dropped 3% to 4% in the fourth quarter across every submarket with the exception of downtown, according to John S. Sebree, a senior associate at the Indianapolis office of Marcus & Millichap. The city's apartment sector had been on an upswing after gradually absorbing an oversupply of space throughout much of 1999 and 2000.

“We had a decreased occupancy rate in the fourth quarter in large part because of the many people who bought new homes,” Sebree says. The low interest rates have sparked new home buying, and many of the newly constructed homes were delivered in the fourth quarter. In addition, the slower economy and higher unemployment numbers affected leasing activity, he adds. However, rents had increased approximately 4% during the first nine months of 2001, according to Marcus & Millichap.

H. Lee Murphy is a Geneva, Ill.-based writer.

Beth Mattson-Teig is a Minneapolis-based writer.

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