While the INDY 500 might have put Indianapolis on the map, its high-gear economy is what is driving this Midwestern city, situated at the Crossroads of America, toward recognition as a World Class City.

After two decades of decline, Indianapolis has pulled its central business district out of the doldrums, with strong determination and $4.3 billion in investments. Today, the city's rejuvenated central district is a growing metropolis that is home to a life sciences research community, known as BioCrossroads, with nearly 900 companies and 62,000 employees. Hotel and convention center facilities attract 800,000 conventioneers annually and a developing residential community is expected to grow to 40,000 residents by 2020.

All this activity is driving retail investment.

Favored properties, at least for now, include grocery-anchored, net-leased and neighborhood centers anchored by smaller, good-credit retailers, such as Blockbuster or Starbucks, says Mark Pearlstein, president of The Linder Co., a locally-based retail broker and development firm. He notes that a power center's value is relative to the credit strength of its tenants.

Grocery-anchored neighborhood centers are getting the highest prices, says Rick Sutton, senior director of retail services for CB Richard Ellis' Indianapolis office. “Grocery-anchored properties can be sold for a fortune, but they don't change hands often,” he says. “When one does go to market, it's a bit of a feeding frenzy.”

That may change though when three Wal-Mart neighborhood grocery stores open later this year and competition heats up.

A property type that is commanding surprisingly high rents is out-lot space, which Scott Courtney, a retail broker in Grubb & Ellis' Indianapolis office, says is bringing $25 to $30 per square foot. He notes that high demand has developers, who had originally only built 8,000 square feet to 10,000 square feet in front of anchors, paying up to $1 million for restaurants to tear down so they can rebuild.

This type of space, Courtney notes, is being gobbled up by banks and retailers, such as Starbucks, Otoba and Chipotle.

International Flavor

Once so boring it was known as Indiana-no-place, the city now has lively retail, cultural and entertainment districts. The city's position globally will be enhanced when the Indianapolis International Airport's Midfield Terminal opens in 2008. The new terminal, expected to cost almost $1 billion, will combine all present passenger services under one roof. That includes international arrivals, which now are in another building.

Representing the most diversified and vibrant economy in the Hoosier State, Indianapolis' groundswell of growth and prosperity has emanated out from the center, touching communities in all seven of the region's surrounding counties. At the same time, other Indiana cities have watched their primarily manufacturing-based economies erode under the stress of tremendous job losses and declining personal income. Overall, Indiana has lost about 120,000 jobs in three years, and the Hoosiers average income has been rolling downhill for about a decade, now trailing the national average by about $2,400 annually, according to the U.S. Bureau of Economic Analysis.

Indianapolis' comparably rosy economy, which had a 4.6 percent unemployment rate in January 2004 — well below the 5.6 percent rate nationally — is a magnet for out-of-town Hoosiers seeking economic stability, says David Martin, senior advisor for Sperry Van Ness in Indianapolis. “As a state, population is decreasing, but there's also a shift of population within the state to Indy,” he says, noting that the Indianapolis metropolitan area gains 20,000 to 25,000 new residents annually. Furthermore, “there's a shift of population from the city to all peripheral counties,” Martin adds, “which is driving an explosion of growth in suburban markets.”

The city's downtown workforce of 100,000 is responsible for the vibrant retail market in the Regional Center, as the central business district is now known. Simon Property Group's 800,000-square-foot Circle Centre Mall is located there, as well as shops, galleries and 80 restaurants at the revitalized Central Canal Project and on Massachusetts Avenue.

And now the Regional Center's growing residential community is getting a boost with development of the $140 million Market Square mixed-use project on the former site of Market Square Arena, notes Pearlstein, whose firm is charged with leasing the project's retail component. This project, which is slated for completion in 2007, consists of 22-story twin towers and two seven-story buildings, with 400 condominium units and 75,000 square feet of shop space for neighborhood-oriented retail services and restaurants, according to Terry Sweeney, vice president of real estate development for Indianapolis Downtown Inc. The Market Square Arena, which was closed in 1999 and demolished in 2001, was home to the Indiana Pacers and served as a venue for concerts and circuses.

Circling the Center

The city's prosperity has spawned tremendous growth in suburban markets. The region's hottest areas are the Hamilton County cities of Carmel, Fishers, Noblesville and Westfield directly north of Indianapolis, and to the west in the Hendricks County cities of Avon, Plainsfield, and Brownsburg near the airport. But the once sleepy towns of Zionsville and Fayette and the Eagle Village area in Boone County northwest of Indianapolis, and Johnson County's cities of Greenwood and Franklin due south are seeing a flurry of new housing starts and retailers are following the rooftops. “Where there once was green space is now being developed (residential), and that's where the retailers want to be,” says Sutton, of CB Richard Ellis.

The area's first two new lifestyle centers, Clay Terrace in affluent Carmel and Metropolis in Plainfield, are creating excitement. Opening in October, Clay Terrace is a $100 million mixed-use project with 500,000 square feet of street-level retail space and 70,000 square feet of Class A offices overhead. “Lifestyle centers are trendy here,” says Pearlstein, noting that Clay Terrace, which commands rents of about $40 per square foot, is bringing in several new national upscale retailers, including Organized Living, Anthropology, and Z Gallerie.

Located on about 70 acres, the project features a Main Street component, with upscale specialty shops and restaurants situated around a Village Green that will offer art exhibits, outdoor concerts and a picnic area. Anchored by Dick's Sporting Goods, Circuit City, Designer Shoe Warehouse and Wild Oats, Clay Terrance, which will open in October 2004, is a joint venture of Simon and locally based developer Laud Property Group Inc. Eric Mallory, Laud senior vice president and director of retail development, says the office component will enhance the center's foot traffic on weekdays and provided an opportunity to plan parking requirements around the cyclical needs of office workers and shoppers.

Premier Properties Inc.'s, Metropolis project is a little further off, slated to open in the spring of 2005. This 850,000-square-foot lifestyle center is the second phase of a retail complex known as Marketplace, which will have a total of 2.5 million square feet when completed. Although the new center is a year away, JC Penney last fall opened a new one-story, 95,000-square-foot freestanding store on the site, which Courtney points out is one of three new prototype stores created to compete head-to-head with Kohl's.

Last year, the region's developers brought 1.6 million square feet of new retail space to market, and completions will increase by 55 percent in 2004, according to a report from Marcus & Millichap. Some of the larger projects to be delivered in 2004, include locally based Kite Development Co.'s Trader's Pointe in the northwest corner of Indianapolis, about 10 miles south of Zionsville and Cool Creek Commons in Westfield.

Trader's Pointe is a 57-acre mixed-use project, with 360,000 square feet of retail space, and another 155,000 square feet of office space or a hotel planned in the future, notes Gregg Poetz, vice president of leasing for Kite. Opening in October, this power center, anchored by Galyan's, Marsh's SuperMarkets, Bed Bath & Beyond and a 12-screen Kerasotes Theatres complex, will feature 60,000 square feet of village specialty shops and eateries. Several restaurants also have signed up for ground leases, including Chili's, Macaroni Grill and LongHorn Steakhouse.

Cool Creek Commons is a 130,000-square-foot center anchored by Stein Mart, Cardinal Fitness and Fresh Market — another newcomer to the region. The project, which also will open in October 2004, includes nearly 50,000 square feet of specialty shops and several restaurants and a bank on out-lots.

Another large retail project set to break ground this year is locally based Skinner & Broadbent Development Co.'s 300,000-square-foot Hazel Dell Crossing in Noblesville, another fast-growing affluent community just north of Carmel. This project is part of the new Nobel West, Hazel Dell Crossing master-planned community.

Over the past couple of years, the Indianapolis retail market softened slightly, with vacancy rising to 11.9 percent in 2003, according to Marcus & Millichap, which predicts that the vacancy rate will drop to 11.6 percent in 2004, and the average rent will rise, from $13.14 per square foot to $13.21. The highest vacancy (12.8 percent) and lowest average rent ($10 per square foot) were concentrated in the southeast submarket, while the lowest vacancy (9 percent) and highest average rent ($15.23) were in the northern markets.

But Indianapolis' overall resilience rests with the region's historically conservative business philosophy, according to Courtney. “People here tend to be kind of conservative, so there's not a lot of space built on spec,” he says. “Supply pretty much keeps up with demand, but doesn't exceed it,” which is why property prices have remained solid or increased substantially in recent years. Martin says properties are going for 94 percent to 98 percent of asking price, because of 2 percent to 3 percent spreads between the 6 percent cost of money and 8 percent to 9 percent cap rates.

Weak Links

The weakest links in the region's retail market currently involve two aging Simon malls in older neighborhoods undergoing demographic changes, and fierce competition between grocers. That competition is expected to worsen when Wal-Mart's neighborhood grocery stores enter the marketplace later this year.

Three are under construction. “This is really going to hurt older groceries with limited services, when these guys come in,” says Courtney, noting that Wal-Mart plans to build up 10 grocery stores throughout the region. As grocer competition heats up, some analysts predict food prices may fall as much as 15 percent.

In anticipation of increasing competition, grocers are jockeying for position now to gain market share. The two most aggressive grocers, Kroger and Marsh's, are introducing new 60,000- to 65,000-square-foot prototypes that are 20,000 square feet smaller than their typical stores.

But grocers aren't the only retailers repositioning, says Sutton. He notes that Target, JC Penney and other big boxes are following population movement to new locations, and secondary retailers such as Big Lots are backfilling the spaces they exit.

Real estate experts predict retail will grow in step with the with population, which will continue to move peripherally further from the center and into relatively untapped areas — east of the city, for example. But no one expects more space to come online than can be readily absorbed.

Market Profile/Indianapolis

DEMOGRAPHIC OVERVIEW

  • Total Population: 1.655 million sq. ft.
  • Unemployment Rate: 4.6%
  • Job Growth Forecast 2004: 0.9%
  • Median Household Income: $45,548
  • Median Home Price: $119,000
  • Retail Sales Growth Forecast 2004: 4%

Source: Economy.com

RETAIL OVERVIEW

  • Retail Vacancy: 11.6%

  • Average Asking Rent: $13.31

  • Cap Rates For Institutional Quality Properties: 7.5%-8%

  • Retail Completions 2004: 11.6 million sq. ft. (+55%)

Source: Marcus & Millichap

  • In 2003, retail vacancies were concentrated in the southern suburbs.

  • Plainfield and Avon were the strongest performing neighborhoods in 2003.

  • Average price per square foot of retail properties traded in 2003: $71.04

  • Retail Rent Increase Forecast 2004: 0.5%

Source: Marcus & Millichap

  • High demand has developers, who originally only built 8,000 or 10,000 square feet in front of anchors, paying up to $1 million for restaurants to tear down so they can rebuild.

  • Indianapolis' two most aggressive grocers, Kroger and Marsh's, are introducing smaller prototypes to prepare for battle with Wal-Mart, which plans to build 10 of its neighborhood markets in the area.