INDIANAPOLIS—In the past several years, this city and the surrounding region have built up a record as one of the hottest industrial markets in the US, with a robust demand and an active cadre of developers. However, the vacancy rate has remained steady at 7.1% in the past year, according to a new report from CBRE. But this is still significantly below the national average, and experts say the current level of vacancy is not a mystery. 

“It's obviously the result of all the new speculative buildings,” Mark Writt, senior vice president of CBRE, tells GlobeSt.com. “It's always a tricky thing to know whether prospective tenants will still be in the market when your building is ready, or will they have taken space in existing buildings.”

Still, like other experts that have spoken to GlobeSt.com, Writt is confident that the demand is there to fill up the new speculative projects. In fact, he says that the firm has seen a pick-up in activity in the first few weeks of the second quarter. For example, NorthPoint Development's new 741,000 square-foot spec in northwest suburban Lebanon will probably be ready by June and has attracted its share of interest, including tours with four different groups, he says.

Furthermore, Writt believes one of the reasons some of the larger specs have remained vacant is that the owners have decided to patiently wait until they can secure tenants that can occupy entire buildings.       

And there are already signs that they will eventually get what they want. In March, for example, Transpacific Development Co. executed a lease with Ozburn-Hessey Logistics for all 450,000 square feet of distribution space at 2450 Stanley Rd. in suburban Plainfield. The lease was the largest in the first quarter and one of the largest distribution transactions in the Midwest so far this year, according to CBRE. TDC acquired 2450 Stanley Rd. in September 2013 from an affiliate of VanTrust Real Estate, LLC, which built it on a speculative basis.

“We expect to see several of the other spec buildings that were developed in that time frame leased within the next few months,” Thomas Irish, president of Torrance, CA-based TDC, told GlobeSt.com. “Having all of that new, quality distribution space ready for immediate occupancy has attracted sizable users looking for space in the Midwest.” 

And even though some of these buildings did not find full tenants right away, the region is still experiencing one of its strongest periods of net occupancy gains, CBRE reports. Net absorption for the first quarter was a "very impressive" 2.3 million square feet, partially driven by the delivery of ULTA Beauty's 670,000 square-foot build-to-suit project in suburban Greenwood.

The build-to-suits have been the key to bolstering net absorption gains, according to CBRE. In the past four quarters, developers delivered 7.4 million square feet of new warehouse space, the majority of it build-to-suit.

But CBRE also reports that "market confidence and demand is ramping up speculative construction to near pre-recession levels. 44% of the new space this quarter was available at the time of completion and a full 91% of the 2.5 million square feet currently under construction is available for lease at this time."

Writt says that it's hard to describe Indianapolis as either a landlord's or a tenant's market. “It's a bit of both.”

When it comes to modern bulk buildings, a number of the top developers in the US, including Duke, IDI-Gazeley, Opus and several others, work in the region, and “we're lucky that the tenants have choices and are not controlled by one or two landlords.” But smaller tenants that occupy mid-sized buildings have fewer options and fewer owners with whom they can sign deals. “I think the landlords have a better position there.”        

Still, in a similar first quarter report, DTZ concludes that “despite aggressive development, prices and rents are still pushing upwards, and the latest trends suggest that pattern will continue into 2015. If economic growth maintains its current path, 2015 could be another solid year for the Central Indiana industrial market.”