MARKET SNAPSHOT: Apartment Boom Underway in Indianapolis, Vacancy on the Rise

By Adriana Pop, Associate Editor

Indianapolis continues to witness an exceptional inventory increase of multifamily housing units this year, amid moderate employment growth and rising home sales.

According to research data from Marcus & Millichap, apartment construction in the city is booming, especially in the downtown area. Deliveries are expected to reach a 14-year high for Indianapolis in 2014, outpacing rental demand and pushing up vacancy.

A strong demand for apartments in downtown Indianapolis has led to the redevelopment of many iconic properties, including the former Bank One Operations Center, which Milhaus Development is converting into 258 apartments and up to 68,000 square feet of commercial space. The company is also repurposing the former Mitchell & Scott industrial site downtown into a 235-unit rental complex, while Flaherty & Collins is redeveloping the former site of the Market Square Arena into a 300-unit luxury apartment high-rise with 43,600 square feet of retail space.

This year alone, developers are expected to complete 3,900 apartments in Indianapolis, an increase from last year’s 2,600 completed rentals. The downtown submarket will account for more than half of the new units, the Marcus & Millichap forecast report shows.

Local companies will continue to create a sizeable number of new jobs this year, expanding employment by 2.4 percent with the addition of an estimated 22,300 workers. This is up from a 2.2 percent increase last year. Job gains are expected to generate significant renter demand, but not enough to counterbalance the surge in rental construction.

Moreover, homes in Indianapolis will continue to remain within the reach of many residents. An expected increase of the borrowing cost could also motivate more renters to become homeowners before interest rates escalate further.

As developers remain active and these factors will continue to drive high competition for tenants, Indianapolis is expected to reach an 8.9 percent apartment vacancy rate by the end of 2014, the highest in the nation.

Rents on the other hand will increase by 2.8 percent this year to an average of $761 per month, after climbing 3.6 percent in 2013.

As for multifamily investment opportunities, a high demand for apartment assets in the Indianapolis metro area will attract more institutional and REIT investors. Buyers will likely opt for Noblesville or Westfield properties with stable cash flows, or target Class B/C inventory.

Charts courtesy of Marcus & Millichap Real Estate Investment Services.