More luxury apartments drive up Downtown Indianapolis vacancy rate, but rents remain steep

Mason Thomas, 23, has grown tired of commuting from Avon to his job in Downtown Indianapolis. So he's trading in the affordability of the suburbs for the convenience and night life of the urban core. 

"I guess what it really came down to is — I'm not happy where I am in Avon," said Thomas, who works at Young & Laramore creative agency.  "I know they say money can't buy happiness, but it can buy a nicer location and closer to my work."

Renters such as Thomas reflect the high demand for Downtown living, a trend driven by amenities such as walkable streets, contemporary restaurants and bustling nightlife.

Not surprisingly, the market has responded. So much so that Downtown's apartment development has grown at a faster pace than demand.

Apartment vacancies in the past three years have risen nearly 50%, driven up by the addition of new apartments on market. A glut of large luxury developments are expected to add more than twice as much new inventory in 2019 than last year.

Analysts expect the current roughly 6.9% vacancy rate — according to CBRE data — to fall in coming years, but right now the market has far more apartments than it can quickly fill. 

"If you put too many units into the market, and we don't have a significant waiting list for those units, over time they will be absorbed," said Sherry Seiwert, president of Downtown Indy Inc, the nonprofit charged with developing, managing and marketing downtown Indianapolis. "But, we don't have that pent up demand like we did five years ago."

In the pipeline 

As many as 1,300 new apartments are projected to be delivered Downtown this year, according to Downtown Indy Inc. The majority are clustered of three large developments, said Hannah Ott, Cushman & Wakefield executive managing director.

One is Penrose on Mass, a $45 million, 236-unit mixed-use development along Mass Ave. opened by J.C. Hart. Buckingham is completing CityWay 2.0, a $135 million, 402-unit expansion of the City Way mixed-use development near Bankers Life Fieldhouse. The second phase includes a 13-story tower expected to open this fall and new apartments along Delaware and Virginia streets. TWG Development is finishing the second phase of The Whit, a 334-units, nine-story building on North Pennsylvania Avenue, that will add 149 units to the 185 apartments already on the market. 

Those properties — they can typically start around $1,100 a month for a one-bedroom and can soar upwards of $4,900 a month — account for more than half of the new units on the market in 2019. 

The average occupancy rate in Downtown has been decreasing since 2016, when nearly 96% of units were leased, and has steadily fallen since, according to data provided by CBRE and Downtown Indy Inc. Downtown's current occupancy rate is slightly above 93%. 

That said, analysts contend people are still moving Downtown, and apartments are leasing quickly. Job growth, particularly in the tech sector, is keeping demand high.

“I think the Central Business District is under-supplied, looking out over the mid-to-long-term, considering absorbable levels of supply and good employment gains,” said Steve LaMotte Jr., executive vice president and co-lead of Central Midwest Multifamily at CBRE Indianapolis. 

With so many units available at one time, it’ll take some time to lease all of them. Occupancy is expected to climb toward 95% — where Ott says it’s been historically — next year. 

High-end living

Luxury rules Downtown. 

From a hot tub and private balconies and patios at Penrose to the outdoor saltwater pool at CityWay 2.0 and the virtual doorman and rooftop sundeck at The Whit, many of the area's apartments tilt toward the upscale.

“These new properties that are coming in 2019, because they are brand new and high-end, they’re going to have the highest rents," Ott said. "So they're going to be over what we're seeing in the market right now."

That’s good for apartment owners, but not so much for renters, she said. The vacancy rate isn't at a level where tenants should expect much, if any, break on rent. 

Still, it's not uncommon for apartment owners to offer rent concessions in their initial leasing period to have good leasing momentum, Ott added. Rental deals can range from $500 off the first month's rent or one month free with a 13- or 14-month lease. 

"We are seeing some concessions on the newest product," Ott said, "but not anything that's a-typical." 

Ott predicts steady rent growth, noting the market is favorable for older properties that will see their rents rise as new, higher-end inventory becomes available. 

Finding an apartment within budget was important to Morgan Polizzi, 24. Like Thomas, she's grown tired of the commute from her apartment near the Fashion Mall at Keystone to her job in Lockerbie Square. 

Polizzi and her roommate settled on a two-bedroom, two-bathroom unit at The Waverly Apartments for $1,750. Garage parking, an added expense at some Downtown apartments, is included in the rent, but the pair have agreed to split $65 for an extra parking spot. Their lease starts in August. 

“I fill up my gas tank maybe one or two times a week. I drive, like, an hour a day — 30 minutes back and forth — for work currently, where I live,” she said. “So, just taking away that gas expense is kind of a way that I'm looking it. ‘OK, I'm paying more rent, but I'm not paying as much on gas, so definitely, it's worth it.’”

After searching apartment listing websites and pricing units along Mass Ave., Thomas found a new home at the Harding Street Lofts on the edge of Downtown. He signed a lease for an apartment that meets his $1,400-a-month budget, which he'll split the rent with a roommate.

Thomas can bike to work, is closer to his yoga studio, attend more events in Downtown and hang out with nearby friends. 

“It's beautiful,” Thomas said, who'll move in July. “It has high ceilings, stainless-steel appliances, marble counter tops, all in my budget, which is so awesome to have what I want inside my apartment, the location is good and within my price range.”

Government help

Downtown has added some 4,800 apartment units from 2015 through 2018, bringing the area's cumulative number of multifamily units to about 8,700, according to CBRE and Downtown Indy data. "We've really transformed the Downtown footprint with residential living," Seiwert said.  

The area's residential boom began in 2000 with the construction of Firehouse Square, one of its first condo developments, according to Downtown Indy Inc. But Brad Vogelsmeier, director of development at Milhaus, developer of Downtown complexes Artistry, Circa and 747, said Indianapolis' overall housing market was under supplied prior to the Great Recession of 2008.

"For the past few years, I think we've seen a lot of supply come online to kind of catch up from where we were previously," Vogelsmeier said. "I think what we're kind of seeing now is a leveling out, or a correction, from that previous period."

Vogelsmeier calls the correction a natural slowdown, attributing it to limited land availability with fewer surface lots available for redevelopment and a longer lending process.

Still, he's optimistic demand for Downtown living will continue as long as job growth continues trending upward and renters favor walkable, mixed-use urban areas. 

The city's willingness to help subsidize residential construction, via tax increment financing, helped spur development Downtown. But Vogelsmeier said the city has become selective, in recent years, about the type of projects it participates in and now uses a developer-backed TIF to protect the city from potential financial shortfalls in projects.

Thomas Cook, chief of staff for Mayor Joe Hogsett, said the administration never had a blanket policy of incentivizing Downtown housing, but rather has focused on assisting projects where the use of public-private partnerships makes the most sense. He pointed to Keystone's revamp of the former AT&T building at the corner of Ohio and Illinois streets and the planned Block 20 development near the Athenæum in the Mass Ave. Arts District as examples. 

"We had public-private participation in that because this was a vacant office building with no parking garage," he said. "Nothing was going to be happening there, and a developer came to us with a proposal in order to help them sort of solve the parking issue."

Too much of a good thing

Both CBRE and Cushman & Wakefield expect developers to deliver fewer new apartments in 2020, projecting between 667 and 825 units. 

There are simply fewer planned, Ott added, citing fewer buildable sites and rising construction costs related to the integration of parking garages. Much of what's expected next year also will be high-end, leaving Seiwert and others to ponder Downtown's affordability. 

Indianapolis' urban core is affordable compared to downtowns in other large metropolitan areas, but residents living there pay the highest rents in the city. The average monthly rent is $1,198, or $1.48 per square foot, according to Cushman & Wakefield. 

Downtown Indy Inc. held its annual State of Downtown INDY event in April, where David T. Downey, president and CEO of the International Downtown Association, remarked that Indianapolis is poised to start thinking about how to produce more affordable housing Downtown. 

The Indianapolis Housing Authority provides senior housing at Richard G. Lugar Tower, senior and disabled housing at the John J. Barton Tower, and mixed-income housing at Millikan on Mass. Seiwert, however, said the issue needs to be studied.

“I think we just need to be mindful of how much more market-rate housing we should build, from an absorption standpoint,” Seiwert said, adding there are still several surface lots that can be redeveloped. “I think we need to make sure the market can absorb the units under development right now.”

Call IndyStar reporter Alexandria Burris at 317-617-2690. Follow her on Twitter: @allyburris.