Real Estate Trends 2016

With Support from:

Presented by:

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This publication was made possible in part by volunteer assis-tance from students from the Real Estate Club at Indiana Uni-versity’s Kelley School of Business, Benecki Center for Real

Estate Studies, especially:

Trent Martin

Matthew McCoy

Troy Shiley

Courtney Sporleder

The student team was coordinated by the following volunteer ULI members:

Victor Bongard; Kelley School of Business, Indiana University

Matthew Nolley; Bingham Greenebaum Doll

Many thanks also to everyone who participated in the online survey and interviews.

Special thanks to:

Real Estate Trends Event Sponsors (listed on front cover)

ULI Indiana 2015 Sponsors

(listed on back cover)

About the cover:

The cover art is a “word cloud” produced using the write-in comments from the survey question,” What real estate trend

are you following most closely?”

Project Format

© Urban Land Institute 2015

Acknowledgments

This year’s local and regional research results are presented in three parts:

1. This document summarizes the results of the survey which was conducted of ULI Indiana members and other Indiana real estate experts.

2. A Regional Insert has been provided which compares the results of some survey questions between Central Indiana, Central Ohio, and Northeast Ohio.

3. As always, the survey results have been illuminated by a series of interviews with local experts. This year the inter-view summaries are provided electronically on the ULI Indi-ana website, Indiana.uli.org. A preview is provided on page 3.

The Carmel Arts & Design District is an infill location in a hot suburban submarket, that capitalizes on the desire for walkable places.

Interview Preview

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On capital availability:

Indiana is a beneficiary of investors moving away from cap rates. Increases in investments in the Midwest have driven up val-ues; cap rates have gone down. This is beneficial for the Midwest and provides better return to the investors.

Certainly there, a lot of parallels between Indianapolis and other markets, but there does seem to be an abundance of capital in Indiana in relation to other similar cities.

I think we will see a continued trend of sophisticated capital being interested in secondary/tertiary markets. The result will be significant quality development in our cities.

On the office and industrial sectors:

Office performance depends on the asset type. We have a high vacancy rate in the Central Indiana office district. I think it’s be-cause of the office space we have and the type of products we have. We have office towers and people are looking for more unique properties. I have seen that the unique properties have a lot less vacancy. On the industrial side it’s not really the case. We are blessed with the geography and topography that makes it easy. It’s a matter of having the right access.

I think industrial will continue to be successful. As people shift to more online shopping there will be a demand for industrial space. Products are going from warehouses directly to consumers homes and not stopping at retailers. So following consumer demands I feel that industrial will be extremely successful for a while.

On efficiency, infill, redevelopment and urban vs. suburban locations:

I think that commercial businesses are getting more out of their existing infrastructure. The businesses coming out of the reces-sion remain very disciplined about their overhead and corporate footprint. Growth in the commercial space has been disciplined and restrained overall. Developers are looking for more unique and niche opportunities such as unique building spaces for com-mercial development.

Recently, I have seen a lot of smaller office building with open layouts to attract younger tenants. It’s really trendy.

The problem is that people that usually take 10,000 sq. ft. of space now want 6,000 sqft of space because they rely on technolo-gy more. Plus people are sharing offices. Tenants are getting smaller and smaller. People are being more efficient. Retail is not expanding because more things are being bought online. The retail market is going to shrink. Before places would fill in but now the demand is going away.

In my opinion more millennials are wanting to live in the city because its easier to get around without vehicles. You see more millennials willing to pay more to have the ability to walk and bike.

It is a good bet to infill, if you identify really good submarkets with high demand.

For more interview data visit Indiana.uli.org.

Most Important Trends

How do we compare to others? See our regional insert

What is the most important trend in each of the following categories? Mixed use is the most important trend in development by far (82%), begging the question if it is still a trend or in fact, the “new normal.”

Healthy/green is a more important trend in design (39%) than in development (36%). Design is also being impacted by space efficiency (50%), seen in shrinking office cubicles and retail foot-prints. This has the effect of being more energy efficient/“green” as well as more efficient financially.

Public leadership is having the greatest impact on our market through tax cred-its and similar incentive programs (37%)(as opposed to land availability-26% or zoning reform-30%).

This is also noted as the top trend in development Finance—creative financ-ing packages including tax credits, EB-5 and other tools (54%). Coming in sec-ond was tighter financing regulations, at 34%.

When it comes to demographics, more respondents say that wage growth is important in our market (49%) than household formation (36%) - this goes against conventional wisdom, since household growth is thought to lead to retail and other growth. Also, only four percent (4%) say that immigration is an important trend—it is not commonly known that immigration accounts for Marion County’s net population growth.

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The IND Solar Farm took second place in the Real Estate Development category of the Monumental Awards this year. It touches on many trends including green development, space efficiency (of airport land), tax credits and creative financing.

See the “Other” trends written-in by our respondents! Don’t miss the other “word cloud” on our cover, which answers the question,” What real estate trend are you following most closely?”

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In evaluating the prospects for different submarket locations, ULI considers the data in two different ways:

First, we look at the percentage of respondents who said that prospects for the submarket were Excellent or Good (combined). The chart below is organized this way. Looking at the data this way results in the top market being Carmel, fol-lowed by Downtown Indianapolis. Everyone who responded said that prospects in these two markets were at least Fair.

The Top 15 submarkets are listed below.

We also look at just the percent of respondents who said that the prospects for each location were Excellent (represented by the dark green bar in the chart below). Looking at the data this way, the top submarket is Downtown Indianapolis, with 61% saying prospects there are Excellent. Second would be Fish-ers (50%), then Carmel (49%).

Looking at the data this way shows that there are some strong opinions about various submarkets—both positive and nega-tive. Consider Zionsville — it comes in third when combining Excellent and Good responses, and yet there are still 3% who would consider it Abysmal!

For this reason, rankings below are shown by the total percent of Excellent and Good ratings.

Top 15 Submarkets Rated Excellent or Good

* Including Mass Ave, Fountain Square, Near North and IUPUI

Respondents play favorites with submarket locations

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How do we compare to others? See our regional insert

Economic growth still top need; Public Transportation now second, as Parking moves last

The chart below isolates the needs that respondents identified as a High priority or Moderate-High priority for land use and de-velopment in Central Indiana. The top need, this year and last, is More Economic Growth, rat-ing 91% each year. (However, there were fewer this year who said it was a High priority, and more who said it was Moderate-High—a probable measure of our economic success in 2015.) Better Public Transportation moved up to the second spot, and at the same time More Parking Downtown moved to last. Sev-enty percent (70%) of respondents now say Better Public Trans-portation is a High or Moderate-High priority for land use and development (35% each), compared to 55% in 2014.

Please rate the importance of these potential needs for land use and development in Central Indiana.

Moving from second to third in order, but with a higher rating, is More Workforce for Construction and Skilled Trades (69%, com-pared to 64% in 2014). And, 39% consider it a High priority. The need for Better Building and Zoning Regulations also moved up from 27% in 2014 and is now a High or Moderate-High priori-ty for 56% of our respondents. Finally, Greater Availability of Sites for Development moved up to become a High or Mod-High priority for 38% of respondents. The only need that went down was More Downtown Parking (27%, compared to 36% in 2014), and only five percent (5%) consider it a High priority.

All sectors now in recovery or growth phase

Retail

Office

Multifamily

Residential — For Sale

Over 60% of respondents believe the office sector in general is in a recovery/growth period. Over 1/3 believe that medical office is in a growth period, while almost 20% say that medical has peaked. Just over 20% say that downtown office is still bot-tomed out.

Industrial is generally believed to be in a recovery/growth period, except for bulk industrial space. For that sub-sector, over 50% believe that it is in a growth period, while over 30% believe it is at its peak.

Multifamily in general, and luxury apartments in particular, are believed by over 40% of respondents to be at their peak. Thirty percent also believe student housing has peaked, while 60% say its still growing. Tax credit apartments are also growing. There is no consensus on moderate apartments.

Over 50% of respondents believe retail in general is in a recov-ery/growth period, while almost 30% say it is in a growth period. Neighborhood/community shopping centers are leading the per-formance, with regional malls and power centers lagging behind.

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Most activity related to single family lot development and construction show the sector to be in recovery or growth modes. Senior housing and townhome/condo construction are leading the way. Over 60% of respondents say that townhome/condo construction is growing, and over 50% say that senior housing is growing.

Industrial

Buy, Sell or Hold? Learn more in our regional insert

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Are we overbuilding multifamily?

Respondents were asked to evaluate three statements that can be made about multifamily development.

Almost 70% agree that Development is in line with demographic trends and market demands. Only 10% disagree, and no one strongly disagreed.

Respondents were mixed on whether there has been too much focus on high-end rental units, but most didn’t feel strongly one way or the other. One re-spondent said: “Nearly nothing that's been built is high-end, in the national per-spective. It IS priced highly, since vacan-cy is low, especially downtown, but quali-ty of design, materials, and amenities are very weak compared to other cities.”

Respondents also had mixed opinions on whether much of the new rental product is too small to continue to be competitive in the market as millennials age. Half disa-gree or strongly disagree, one-third agree or strongly agree, and 17% were neutral.

In recent years, there has been a significant amount of multifamily rental development. Please note the extent to which you agree or disagree with the following statements.

Ironworks took first place in the Real Estate Development category of the Monumental Awards this year. It is a mixed-use development with luxury apartments, located on the North Side.

Axis took first place in the Real Estate Development category of the Monumental Awards this year. It is a mixed-use development in Downtown Indianapolis, notable for bringing a full service Marsh grocery into downtown.

Profits up for fourth consecutive year; Homebuilders and Brokers have high expectations

How would you expect to rate the business prospects for each of the following for Central Indiana in 2016 compared to other markets?

Please characterize the expected profitability of your real estate related business for the year.

It is one of the first questions we ask each year, and for the past four years it has only increased. About 84% of re-spondents expect their profits this year to be good or excellent — 42% in each category. The remaining 16% expect their profits to be fair.

Respondents were also asked to rate prospects for various types of real estate businesses. In general, Central Indiana real estate businesses are expected to rate about the same as other markets. Respondents were somewhat more opti-mistic about the prospects for home-builders/residential developers, with over 40% expecting them to do somewhat or much better than in other markets. Also, over 30% expect brokers to do some-what or much better in Central Indiana than elsewhere.

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How do we compare to others? Learn more in our regional insert

Job, income and wage growth more important than interest rates

How do you expect inflation and interest rates will change over the next 3 years?

Please rate the importance of the following economic and financial issues for real estate investment and development in 2016.

Job growth is the number one issue for real estate investment and development in 2016, with 83% saying it was of great or considerable importance. Similarly, 73% said that income and wage growth were of great or considerable im-portance.

Slightly more people said that interest rates were of great importance than in-come and wage growth (19% vs. 17%), but, overall, interest rate concerns ranked third in importance for 2016.

This correlates with expectations about interest rates. Over the next three years, 88% of respondents think interest rates will increase only moderately, while 12% think they will remain stable.

Want more about interest rates and capital? See our regional insert

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Thank you to all of our 2015 Sponsors

Sustaining Sponsors

Breakfast Series Sponsors ULI Indiana thanks MIBOR

for their generous support of the Central Indiana Council

of Elected Officials

Silver Sponsors: