Indianapolis is already home to the Indy 500, but with the city now poised to host the Super Bowl in 2012, it is determined to use the opportunity to distinguish itself from other Midwest cities.

Indianapolis is already separating itself from the pack by rebounding from the recession ahead of its peers. Unemployment in the state dropped to 8.8 percent in February, the first time below 9 percent since late 2008. In fact, Indiana's unemployment rate is the lowest in the Midwest, below that of Illinois, Ohio, and Michigan.

Indiana's state capital has a metro population of 1.77 million, which is forecast to grow 6.4 percent by 2015, to 1.89 million. What's more, the area will see job growth of 1.7 percent next year, 2.8 percent in 2013, and 2.6 percent in 2014, according to market research firm Reis.

In addition to government, education, and private-sector businesses, the Indianapolis area is home to five Fortune 500 headquarters: Wellpoint, Eli Lilly, Cummins, NiSource, and Conseco. What's more, the city's five largest employers are Eli Lilly, Indiana University Health Partners, St. Vincent Hospitals, IUPUI University, and FedEx.

As a result of the improving jobs outlook, the metro is also expected to outpace its Midwest brethren in terms of rent growth. All these numbers point to one thing: Come the 2012 Super Bowl, Indianapolis will be ready to achieve stand-out growth—at least in multifamily.

Fundamentally Sound

Across the board, Indianapolis multifamily market fundamentals continue to strengthen. The market hit a low point in the first quarter of 2009 when the metrowide physical occupancy rate fell to 89 percent and average per-unit monthly concessions exceeded $80—or more than 1.1 months of free rent—resulting in economic occupancy in the mid–80 percent range.

But 2010 was a comeback year, as 3,198 units were absorbed, which pushed the metro area's vacancy rate down by more than 200 basis points. The newer-vintage properties, constructed in the 1990s and later, are averaging the highest occupancy rates, at 94.9 percent. And as owners plunge into the spring rental season, a trickle-down effect should occur, with physical occupancy rates averaging 94 percent in most submarkets and concessions continuing to diminish.

Indianapolis is projected to realize effective rent growth of 4.1 percent during 2011, well above the Midwest average, according to Reis. Current effective rents average about $850 in the metro and are expected to reach $884 by year's end. Conversations with owners in the area, however, suggest that this may be conservative, and rental rates could experience a greater increase this year as increased demand is met with a lack of new product. In addition, owners report continued reductions in economic loss as a result of diminished concessions.

Northern Development

New construction will be minimal in 2011 and 2012 throughout the metro area, with the exception of the city's northeast corridor. Units delivered to the Indianapolis market in 2010 totaled 1,424, with 2,531 additional units planned and in the pipeline, according to Reis.

Approximately half of the new construction currently in the lease-up phase and scheduled to break ground is located on the north and northeast sides of the city, in the communities of Fishers, Noblesville, and Carmel.

Properties completed but still in the initial lease-up phase include the 402-unit Prairie Lakes; The District at Saxony, with 269 units; the 280-unit Autumn Breeze; and Legacy Towns & Flats, with 287 units. Properties planned or currently under construction on the north and northeast sides include the 220-unit Bella Vista; the 238-unit Union Street Flats; 200 units at 116th Centre; and 202 units in the arts district of downtown Carmel.

Though the substantial amount of new product may limit rent growth in the submarket in 2011 and 2012, occupancy rates should remain in the mid–90 percent range as properties benefit from job growth in the area.

Currently, the highest occupancy and rent growth is being reported in the downtown submarket, where J.C. Hart is currently under construction on 48 additional units to The Waverly, and Trinitas Ventures is on schedule to deliver 253 student housing units near the IUPUI University campus for the fall 2011 school year.

Investment Trends

Though REITs and sovereign funds continue to focus attention in first-tier investment markets such as New York City and Washington, D.C., the larger private capital and smaller institutional investors pursuing stable long-term returns are increasingly placing Indianapolis near the top of their list.

The investment philosophy is driven by a belief that returns realized in the first several years of a seven- to 10-year hold period would exceed those achievable in more sought-after markets, where cap-rate compression reduces the probability of achieving necessary internal rates of return over the life of the investment.

Notable recent transactions in Indianapolis include the sale of Washington Quarters Apartments, a 256-unit property constructed in 1999 and located in the western suburb of Avon. Thiemann Properties purchased the asset at less than $70,000 per unit with a cap rate of 7.13 percent on projected year-one operations. Though the property boasted a 97 percent occupancy rate, rents were well below market rates, which offered an impressive opportunity for increased returns.

Another recent closing was the Grand Reserve at Geist, on the city's far northeast side. The 146-unit property had an average unit size of 1,100 square feet and sold in late 2010 for $89,726 per unit with a projected cap rate of 7.73 percent in year one.

Total sales volume of multifamily in the Indianapolis metro area was $450 million to $550 million annually in 2006 and 2007 but dropped to less than $100 million in 2010. This trend has already begun to reverse as more owners decide to take advantage of the low cap-rate environment resulting in several properties recently coming to market.

Other macroeconomic trends should bolster the local acquisition market. Singlefamily home values are projected to decrease an additional 4.3 percent in 2011, according to the S&P/Case/Shiller Composite, which will result in continued pressure on the Federal Reserve to keep interest rates low. This continued instability would further delay new construction in the single-family sector, thus increasing the demand for rental housing.

The combination of low interest rates, higher demand, and more properties on the market should provide new investors with an opportunity to expand into Indianapolis and allow existing investors to increase the size of their portfolios at attractive returns.

The Indy multifamily market is well positioned to outpace investments in comparable cities. High occupancy rates, rent growth, and an expanding employment base will deliver impressive returns combined with relative stability. As for the Super Bowl, there's no doubt Indianapolis will be well prepared to host all the fans for our country's largest national sporting event. The unknown is which players will be making the trip.