MARKET SNAPSHOT: Indianapolis Fundamentals Remain Strong; Investors Seek All Asset Classes

Indianapolis—Indianapolis is doing well, from an economic standpoint. Both the city and the state of Indiana have balanced budgets, points out George Tikijian III, CCIM, senior managing director of Tikijian Associates, who asserts that the state is performing better than most others in the Midwest.

The employment situation has had its ups and downs, as the city has had a number of job announcements without any significant job reductions, adds Tikijian. But the new jobs have come in smaller increments, between 50 and 150 as opposed to the couple of thousand that used to be seen.

The Indianapolis-Carmel unemployment rate was 8.3 percent as of August, according to the Bureau of Labor Statistics. This is up slightly—30 bps—from the month prior, but it remains down from the 2010 annual rate of 9.2 percent.

As far as the apartment market, Tikijian reports that vacancies are down year-over-year, from 9.2 percent last year to 8.6 percent this year. “We are projecting another decline to 8.4 percent,” he tells MHN, adding that the reason it won’t drop even further is because of a tick up in new construction.

The city is expecting 1,800 units to be delivered in 2011, with between 2,300 and 3,000 units slated for delivery in 2012.

Meanwhile, rents grew 1.3 percent this year, compared to -0.4 percent last year, according to Tikijian. “Concession burn-off happened last year,” he says. “This year we saw real rent increase. … Concessions are down to just poorly performing properties or specific properties that have certain unit styles [owners] want to lease up quickly.”

The strongest submarket is downtown Indianapolis, which has a vacancy rate of just 5.6 percent and whose rents grew 2.2 percent.  The East side, meanwhile, remains the weakest submarket. Vacancy here is 14.5 percent.

The investment market has seen significant activity, though Tikijian notes that Indianapolis has always been a city with a high turnover of properties. This year, he tells MHN, all classes have traded hands. A-/B+ properties are between $55,000 and $70,000 per unit, while the more distressed properties have traded between $3,000 and $20,000 a door. Cap rates for performing Class A and B properties are averaging just under 7 percent.

As for the future, the city’s focus on life sciences remains a bright spot, says Tikijian. Additionally, he points out, Indianapolis appears to be well-positioned to capture jobs that are expected to be brought back to the U.S., particularly manufacturing jobs.

In addition to being “the second-biggest manufacturing state,” he adds that the low cost of doing business and the low taxes will help to bring new business. And, he adds, Illinois recently raised its state tax rate a lot so Indiana is looking to capture some movement, as its state income corporate income tax is just 3.4 percent.

On the flip side, the amount of new construction could potentially slow things down, as could a pick up in the single-family home market, since the cost is relatively low.