Economy: Fed Raises Rates As Treasury Yields Climb
The Federal Reserve raised the federal funds rate by 25 basis points (bps) in September to a target range of 3.75%-4.00%, its first increase since 2023, citing persistent inflation. The 10-Year Treasury yield climbed above 5.0%, its highest level in nearly two decades, raising borrowing costs for commercial real estate. The unemployment rate in the Indianapolis MSA fell to 3.0%, down 30 bps year-over-year (YOY) and well below the national average of 4.2%.
Demand: Absorption Over 3.0 Msf For Fifth Straight Quarter
Large-block users continued to power the Indianapolis industrial market in Q3 2026. The market recorded 3.8 million square feet (msf) of overall net absorption, its fifth consecutive quarter above 3.0 msf, pushing the year-to-date (YTD) total to 11.9 msf, up 48.1% YOY. New leasing volume held steady at 4.9 msf across 60 leases with the mix tilted heavily toward big-box leases. The 13 deals over 100,000 square feet (sf) accounted for 83.5% of all new leasing, led by Keller Logistics Group's 806,000-sf commitment in the East submarket. The Southwest captured the largest share of new leasing at 45.6%, while the East led net absorption at 1.8 msf. Warehouse/distribution users accounted for 96.5% of activity, and YTD leasing of 14.0 msf is ahead of last year's 12.7 msf.
Sustained demand continued to tighten the market. Overall vacancy fell 80 bps quarter-over-quarter (QOQ) to 5.2%, its lowest level since Q3 2022, and the market absorbed 13.5 msf of vacant space over the past year. Vacancy in the East submarket declined 290 bps QOQ to 7.1%, while the South, though still the market's highest at 9.4%, has compressed 780 bps YOY. The tightening is broad-based rather than confined to the market's strongest submarkets. The West, Northeast and Northwest submarkets remain the tightest, ranging from 3.1% to 3.5%. Much of the progress has come from big-box product, with Modern Bulk's share of vacant space decreasing from 73.9% to 63.7% over the past year. Sublease space also shrank, down to 1.4 msf from 2.7 msf a year ago.
Supply: Development Pipeline Climbs To 8.9 Msf
Construction completions totaled 1.3 msf across seven projects in Q3 2026, bringing the YTD total to 2.6 msf. Build-to-suit (BTS) projects accounted for four of the quarter's deliveries, led by the 400,000-sf Bastian Solutions facility in the Northeast submarket, along with the 77,000-sf BTS expansion for INCOG BioPharma in the same submarket. The remaining three buildings were speculative deliveries totaling 568,000 sf, led by two projects in the Northwest submarket: 65 Commerce Park Building 7 (286,000 sf) and Park 65 Building 1 (202,000 sf). The third building totaled 80,000 sf. All three speculative buildings delivered fully vacant. Medium Distribution and Manufacturing properties led new supply, with the balance consisting of Modern Bulk and Transport product.
The construction pipeline expanded for the fourth consecutive quarter, increasing 38.0% QOQ from 6.5 msf to 8.9 msf, more than triple the 2.5 msf underway one year ago. The market currently has 24 projects underway, consisting of nine BTS projects and 15 speculative projects. BTS development totaled 4.1 msf, or 46.0% of the pipeline, while speculative construction totaled 4.8 msf (54.0%), up 800.5% from 0.5 msf one year ago. Developers broke ground on 2.0 msf of new projects in Q3 2026, compared with no new starts in Q3 2025. Eight of the nine submarkets have projects underway, with Downtown the only exception. The Southwest, West, Northwest and South submarkets account for 8.0 msf, or 89.1% of the total pipeline. The largest projects underway include HarperCollins' 1.6 msf BTS facility in Brownsburg and the 1.2 msf speculative building at I-65 Park South Logistics Center in Whiteland. Speculative development is concentrated in the South and Southwest submarkets, which account for 64.1% of speculative space under construction, and 75.4% of it is Modern Bulk product. Only 12.2% of that speculative space is preleased. Overall, Modern Bulk represents 78.2% of all construction.
Pricing: Rents Post Largest Quarterly Gain Since 2022
Average overall net asking rents increased $0.29 per square foot (psf) QOQ to $6.60 psf, the largest quarterly gain since Q4 2022, and up 10.2% YOY from $5.99 psf. Rent growth was broad-based, with seven of the market's nine submarkets recording increases. The North and West submarkets posted the strongest gains, with asking rents rising $1.38 psf and $0.71 psf, respectively. The Northeast was the only submarket to record a decline, falling $0.43 psf. Part of the market-wide increase in asking rents reflected a shift in the mix of available space, as lower-priced Modern Bulk space continued to be leased, leaving a higher-priced pool of remaining availability. At the property-type level, Transport and Traditional Bulk led rent growth, rising $6.14 psf and $0.23 psf, respectively. Asking rents increased across six of the seven product types, with Office Showroom the only exception.
