With an unemployment rate of 2.6%, Indianapolis continues to ride the prosperity train that has rolled for five years. Fears of oversupply in some markets have convinced real estate developers to start tapping the brakes, but nobody is ready to come to a stop.

"While development has occurred in all segments, I think there is some caution on the horizon in that some of the submarkets are potentially becoming overbuilt," says Philo Lange, managing director in the Indianapolis office of Trammell Crow Co., Dallas. Nevertheless, most pundits believe 2000 will be a good year in Indianapolis, and new products are sprouting up all over the region. But in this conservative market, no one expects 1998's lightning to strike twice.

The continuing influx of potential new customers is one reason for the building boom. George Tikijian, senior vice president of CB Richard Ellis in Indianapolis, says the Metropolitan Statistical Area grows about .5% or 7,500 new residents per year. Job growth is also strong. According to the Indiana Department of Workforce Development, the number of jobs in the Indianapolis MSA grew by 32,000 from 1995 to 1997, while unemployment increased only slightly, indicating that the market has room for absorption. "That's been driving demand pretty well," says Tikijian.

Office market races forward Suburban office vacancies are on the decline, while several new spec buildings are under construction, according to CB Richard Ellis. The regions north and northeast of downtown have traditionally boasted strong office activity, and numerous office parks there are erecting buildings this year. The new Intech park, on the west side of the city, offers alternatives to the older parks, according to Fred Terzo, principal at Terzo & Bologna Inc. in Indianapolis. Intech, which could contain as much as 2 million sq. ft. of office space, plans to build its first building later this year.

Meanwhile, downtown office vacancy rates are also down to 13.1% in first-quarter 1999 from 16.6% in the same period in 1998, according to CB Richard Ellis research. Although no buildings are currently on the horizon, Emmis Broadcasting finished its 125,000 sq. ft. headquarters in fourth-quarter 1998. Furthermore, two major projects - an Anthem operations center and the NCAA headquarters - are scheduled to open in 2000.

New suburban office GLA is setting a pace for increased rental rates, according to Drew Augustin, president of Olympia Partners Ltd. of Indianapolis. "Older buildings are escalating their rents just underneath the new construction pricing," he says. Downtown Class-A vacancy and rental rates are also improving. Class-B and Class-C buildings are losing tenants to newer properties, and Augustin says he is surprised at the lack of renovation efforts.

More than a dozen buildings are planned or under construction in office parks outside the city. According to Augustin, the hottest spots are the North Meridian Corridor, Keystone at the Crossing and Fishers. Both spec and build-to-suit projects have also done well. The new Intech park is reportedly close to signing leases that will spur construction.

Indy industrial in demand Nearly 2 million sq. ft. of industrial space was under construction in first-quarter 1999, but most brokers believe the supply won't outstrip the monstrous demand Indianapolis has seen in recent years. Some submarkets have experienced a softening in vacancy rates because of new construction, but overall occupancy is 93.7%, according to CB Richard Ellis research. Builders are now exercising more caution.

The Indianapolis market absorbed about 10 million sq. ft. of industrial space in 1998, says Jay Archer, general manager of Duke Realty Investments' Indiana Industrial Business Unit. "Demand continues to be very, very good," he continues. "There was more speculative development than we've seen in many years."

"Spec development continues, but it's more managed," says Archer. A 400,000-sq. ft. building in Duke's Park Fletcher had 252,000 sq. ft. preleased in mid-June. The building was scheduled to come online in late June or early July. "There was a concern that without a lot of demand during the first part of the year, the demand might get out of balance in a couple of submarkets," Archer adds. "But that hasn't happened."

The northwest and southwest/airport regions have traditionally paced the Indianapolis industrial market, says Archer, but builders have moved toward the north market and other outlying areas - particularly Lebanon to the northeast and Plainfield to the southwest. Lange credits incentives with drawing large industrial GLA tenants to Lebanon and Plainfield.

Move to retail comes online As population growth on the fringes of the Indianapolis metropolitan area open up new retail markets, the city itself also enjoys plenty of retail action, Lange says. "We didn't have this kind of opportunity in the 1980s," he says.

Strategic in-fill centers - both new construction and remodels - are dotting the city, while downtown continues to attract new restaurants and stores, according to Thomas English, sales associate for CB Richard Ellis' Retail Property Group. The company anticipates between 800,000 and 1 million sq. ft. of new retail space will come online in 1999, putting the pressure on the owners of older buildings. "There are a lot of tenants moving out of second generation space into some new products," says Lange.

Multifamily on the fasttrack Rising interest rates will probably slow the pace of new multifamily development, but the next 12 months will still see loads of action, says Tikijian. "Expect moderate rent increases as the supply gets absorbed, with higher increases after that," he says. "Plus, we'll start to see an increase in the demographics of apartment dwellers as the echo boom generation graduates from high school and college and needs apartments."

Much of the new construction is taking place north, northwest and northeast of the city, but builders are also looking to the south and west, despite that those regions have not fared as well. Vacancy rates approach 10% in some of the city's south and southeastern suburbs.

Downtown is also active, with several developers planning to refurbish old buildings for apartments, according to CB Richard Ellis research.

Hotel developers pace Indy With downtown occupancies in the mid-70s, full-service hoteliers are keeping an eye on Indianapolis, says Scott Steilen, Midwest practice director for E&Y Kenneth Leventhal in Chicago. "They've been able to drive rate growth at a level that significantly exceeds inflation, making it very attractive to new development or conversion activities," he adds.

The convention center plans to expand by several hundred thousand feet, and White Lodging, based in Merrillville, plans to build a 600-room Marriott hotel downtown, Steilen said. The Westin Hotel also plans to add several hundred more rooms to compete for convention business.

Suburban interstate interchanges are still attracting limited-service properties, but that development has slowed lately, Lange says. Steilen added that Indianapolis, like most secondary cities, has room in the suburban market for a few more limited-service properties. "The question is, how much is enough?" says Steilen.

Looking ahead All of this development has not gone unnoticed. The powerful Indianapolis market, says Lange, has been attracting national attention from investors for the past two years. That attention brought investment capital to the region, but such gifts come with a price. "[Indianapolis] was underserved by a lot of the real estate development," says Lange. "But it doesn't take long to overserve it, either."

Cautious optimism seems to be prevailing among Indianapolis' real estate community, because there would not have been oversupply if strong demand did not spur the building in the first place. Most developers find that brisk pace exciting.