Low Office Prices Draw
Buyers in Indianapolis

Down-to-earth prices in the Indianapolis region's office market stand out to value shoppers weary of sticker shock in bigger cities.

Indianapolis, with a population of about 784,000 in a region of about 1.8 million people, touts attractions other than low prices. Its big-league sports give it cachet with some investors. Construction is under way on a new stadium for the National Football League's Colts. There's a new initiative to redevelop a 350-acre industrial area near the Indianapolis Motor Speedway. And the high-end Conrad Indianapolis hotel opened downtown in March.

The Indiana state capital region also is a national distribution hub and boasts a comparatively diversified economy that has helped cushion the blow from losses in its manufacturing sector. It is home to such large employers as drug maker Eli Lilly & Co. and Simon Property Group Inc., a large owner of retail malls that recently moved into a new headquarters in downtown Indianapolis.

"Midwest markets are just becoming more attractive," says Andy Banister, first vice president of investment properties with CB Richard Ellis in Indianapolis.

But low prices remain a big draw. Though office prices have climbed a bit to an average of $117 a square foot this year through the third quarter on transactions valued at $5 million or more, that is still $100 per square foot cheaper than the national average -- and a veritable steal compared with the $600 and above often paid in such sizzling markets as midtown Manhattan, according to Real Capital Analytics, a New York-based research firm.

Some say the low prices aren't something to brag about, but rather a reflection of the economy's weak underbelly as it is still working to offset long-term manufacturing losses. After several years of relatively steady job growth, the Indianapolis area's employment level has ticked down on a year-to-year basis in July, August and September, falling 0.07% in September from the year-earlier month compared with positive job growth of 1.3% nationally, according to the Bureau of Labor Statistics.

Philip Powell, professor of business economics in the Kelley School of Business at Indiana University, says the Indianapolis area will need to bolster education levels in its work force to attract more innovative companies and higher-paying jobs that will ultimately boost property values. "We're like the discount store of real estate," Mr. Powell says. "Labor and real estate will remain cheap and that's because we're not at the forefront of economic innovation."

Still, the area's mix of low prices and steady albeit unremarkable prospects for rent growth has brought an influx of East and West Coast buyers. Among them: Hertz Investment Group, based in Santa Monica, Calif., which earlier this year paid just over $40 million for two downtown Indianapolis office buildings and is looking for more. Hertz also owns properties in New Orleans and St. Louis. Judah Hertz, the company's president, says he likes the fact that many Midwestern properties are profitable based on existing rents, rather than on predictions of future higher rents that are driving prices in some hotter markets.

The surge in Indianapolis-area office sales more than doubled the dollar volume of office transactions of $5 million or more to $512.3 million last year from $224.9 million in 2004, according Real Capital Analytics. Through the third quarter of this year, an estimated $391.3 million in office buildings sold in the region.

The investment activity comes as average rents in the office-leasing market are beginning to rise, with demand in the suburban submarket of Carmel particularly strong, according to Property & Portfolio Research Inc., a Boston-based real-estate research firm. At the same time, metro-wide third-quarter average rents were below the average for the 54 major markets surveyed by PPR and, though they are expected to rise over the next five years, it will be at a below-average annual pace.

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