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Real
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The local residential housing prices increased less than 3% in 2003 on average, or very near the CPI increase. Vanderburgh County has many more small, older homes but as long as one compares similar age and quality homes, the prices of homes in Vanderburgh and Warrick Counties are very similar. In Vanderburgh County, 92% of new homes in 2003 were built outside the city limits versus 70% in 1997. Most new subdivisions are in the near north and northeastern parts of the county. Ohio Township continues to see the lion’s share of development in Warrick County. According to the latest “Survey of Buying Power”, the total retail sales in both the city of Evansville and the Evansville Metropolitan area are substantially above Indianapolis and Ft. Wayne, indicating that we draw from a large geographical area. EAST
The old Kmart “box store” on the Lloyd at Burkhardt is still vacant but several developers have expressed interest. The old Kmart in Newburgh was converted to a “strip center” and is now leasing with Mexican, Chinese, and German restaurants, and several small retail shops being the first tenants. More recently, an Ace Hardware store opened. Washington Square is still struggling with a high vacancy rate but recently, St. Mary’s agreed to occupy 17,000 SF. The old Target space on Green River Road is 50% leased, with Big Lots occupying half of the building. Lawndale is fairly stable and the stores seem to be doing well. There is little vacancy with a few new tenants. Farther north on Green River Road at Lynch Road, Schnucks supermarket is now open with several new adjacent shops and outlots, including a hair and nail salon and Premier Video. NORTH The north side Target off First Avenue was totally revamped and seems to be thriving, along with the other stores in that center. New tenants include Fujiyama Japanese Steakhouse, Kipplee’s and CVS with a Starbuck’s coming soon. However, the former Shopko building on First Avenue and most of the stores in Plaza West are vacant. Town Center North and South have undergone major remodeling with several new tenants. WEST On the west side, Wal-Mart will be relocating to the south side of the Expressway. There are several vacancies in the newer strip centers south of the Lloyd indicating an “overbuild” of the newer centers. The older Schnucks Center is 100% occupied. University Center, north of the Lloyd Expressway, has few vacancies; however, when Wal-Mart relocates, this will leave a large, vacant space. Rumors have floated of various stores interested in that space, but nothing has been announced. Kohl’s and others are interested in the northeast corner of the Lloyd and Rosenberger and Northside Chevy plans to build at the southeast corner. This area will be impacted by the proposed removal of stoplights on the West Lloyd Expressway now under design. According to our January 2004 survey, the retail vacancy rate was highest on the north side at 26%. The west side had a vacancy of 15% and the east side, 12.5%. Overall, the Evansville retail market is becoming overbuilt, with older centers suffering the highest vacancies due to the newer centers being more desirable even with much higher rents.
INDUSTRIAL DEVELOPMENT, CYCLES OF SUPPLY Much has been written in the past few years on the cycles of real estate value. The now familiar lazy S shaped graphs spanning periods of recession, recovery, expansion and contraction provide a basis to plot the cycle in a particular market. As always, when the supply shortens, the market responds and there has been a wave of industrial lot development with a new crop of platted subdivisions. Supply is dispersed mainly over the north and east sides of Vanderburgh County with the far east side near I-64 having the greatest development. This area has over 200 lots developed in the past several years but with less than 60% of the lots sold. North along Highway 41, lots have been slow to sell with very limited activity. Two of the more visible developments are the Baseline and Castle Creek Industrial Parks. These similar parks have a total of 32 lots with five lots sold between 2000 and 2002 and none in 2003. However, the Daylight Industrial Park to the northeast was platted and developed in 2001-2002 and by 2003 had already sold three of its twelve lots. In Warrick County, the supply has been concentrated in four small parks with most lots averaging 0.75 acre to 3.00 acres. From 1999 to 2003, the four parks averaged 9.8 acres sold per year in total with the high of 19.04 acres in 2000 and the low of 6.12 acres in 2002. There is a supply of 19.33 acres in 33 individual developed lots for sale. In addition to the private sector development, local governments have been active in industrial development. Warrick County officially broke ground on its North Warrick Industrial Park (NWIP) at Hwy 57 and I-64. By the spring of 2005, this new 234 acre park should have 13 lots averaging 10-20 acres in size for sale. This is a shift in focus from the original Warrick County Industrial Park (WCIP) which has a much broader range of lot sizes. There remains approximately 45 acres of bulk land in the WCIP available for development. With the new Wal-Mart across Highway 62 from WCIP, the front lots will probably eventually be improved with commercial buildings. Vanderburgh Industrial Park on Highway 57 has a total of 204 developed acres in 18 lots ranging in size from 4.75 acres to 23.6 acres. Four lots have sold, two of the smallest and two of the largest, totaling 48.2 acres, with no sales in 2003. Fourteen lots, containing 156.2 acres, remain available. At the national level, surveys indicate a moderate decline in internal rates of return (IRR) and overall capitalization rates (OAR) for the First Quarter 2004 per the Korpacz Real Estate Investor Survey. The recent economic downturn increased national vacancy rates to over 11%. This, in turn, slowed building construction with a 35% decline from 2001 - 2003. Evansville and the Tri-State area avoided the most negative effects of this downturn. Locally, vacancy is moderate overall with the lowest vacancy rates in modern pre-engineered steel industrial buildings under 10,000 SF and moderate to high vacancy rates for larger old less functional manufacturing plants, especially those above 100,000 SF. Land values continue the slow rise that began in the 1988 with the best land bringing around $3,000/acre for farming purposes. Increased yields created through improved chemical applications, farming techniques, USDA subsidies, larger machinery, better drainage and tiling have increased income per acre slightly over the past few years. However, in the past 12 months, corn and soybean prices have increased substantially which has pushed up land prices. The capitalization rate on tillable farm land has been just above the rate of inflation. Demand for pasture land remains weak and demand for timber land is moderate with good prices for veneer hardwoods. The trend in the apartment market recently has been for increasing vacancy, from 5% to 10 % a year ago, to 15% to 25% today in some sub-markets. The primary reason is that many tenants are becoming home buyers. This is made possible through the low interest rates found in today’s market. The following calculations demonstrate this point. Rental: A typical, 25 year old, 2 bedroom, 1 bath, 1,000 SF apartment rents for around $585 per month plus utilities. Purchase: An existing, mid-life, 2 bedroom, 1 bath, 1,000 SF house can be purchased for $85,000. With a 20% down payment, the mortgage is $68,000. Using typical mortgage terms of 5.5% for a 30 year loan, the monthly payments are $385. To this must be added taxes, insurance and maintenance of ±$200/month for a total cost to buy of $585 per month plus utilities which is the same monetary cost as renting. If interest rates move up say 200 basis points to 7.5%, the cost to buy this same house would be ±$100/month more, making it less affordable. The purchase, of course, requires a $17,000 down payment in this illustration, which is not always available. However, properties can be purchased with a minimal down payment, though it does increase the amount borrowed and, therefore, the monthly mortgage payment. This soft market has curtailed new apartment construction. However, the demographics point toward good long term prospects for apartments. The echo boomers, a prime rental target market, should increase occupancy levels over the next decade. If no news is good news, the lodging segment of the real estate market is just fine. After a period of rarely before seen foreclosures and reflagging or changing franchise affiliation, there has been little to note concerning the hotel/motel market in the last year. This would seem to indicate that the market is slowly and laboriously rebuilding. After several years of declining demand, occupancy ticked up slightly in the past year. According to Smith Travel Research, nationwide occupancy rates for 2003 achieved their forecasted level of 59.2%. This modest upward trend is expected to continue in 2004 with projected occupancy for all lodging types rising to 60.8%.
The hotel/motel investor segment remains cautious. The 2004 Korpacz Real Estate Investor Survey reported that overall capitalization rates for the economy and limited service segment increased slightly in the 1st quarter from a year ago but are down from the 4th quarter, 2003. Discount rates remain in the 12% to 16% range, though the average has declined from 14.0% in the 1st quarter 2003 to 13.6% for 2004. Locally, slow absorption of excess supply should continue as demand is boosted by increasing convention business at the Centre, plus growth of special events such as soccer tournaments at the recently completed municipal soccer park, as well as increasing business travel as the economy picks up. After three years of success, the Vanderburgh County Geographical Information System (GIS) Department continues to make improvements, providing high-tech services to the public and private sectors. With a high speed internet connection, anyone can access this innovative system for Vanderburgh County at no cost at www.evansvillegis.com or www.evpl.org. These sites provide a variety of information on 77,700 parcels such as tax codes, zoning, topographical land features, sales history, township identification, voting districts, subdivision lines, parcel lines, drainage networks, aerial photos, property data, and assessed valuations. Also, Warrick County has recently put tax data on line but aerial mapping is not yet available. The Warrick County data includes assessments, legal descriptions, ownership and taxes and is found at www.warrickcounty.gov.
The big news of 2004 is that I-69 Route 3C has been adopted by the federal and state governments. Design is underway on the six segments that will connect Evansville, Petersburg, Washington, Crane Naval Depot (a high tech government research center), Bloomington, Martinsville and Indianapolis. We project acquisition could begin on various individual segments as early as 2007 with initial construction in 2009. Some segments with more complex engineering problems will take longer. This direct route (3C), while requiring more land for right-of-way, will create greater economic benefits for the underserved rural counties of southwest Indiana, prevent thousands of injuries and deaths over the next 25 years, save travel time and expense, enhance the entire state’s economy, as well as, make the greater Evansville area a more accessible location for industry and enlarge our market area.
(Click on image for enlargement) The Central Business District is now facing a 17% vacancy rate in office space. Class A space is approximately 5% vacant but Class B is 25% and Class C is 40% vacant. By 2005, substantial additional Class A office space will be added with the new Old National Bank and Vectren buildings. Their existing facilities will be vacated leaving over 150,000 SF of added vacant space. As a new layer of Class A+ space is added on top of the Evansville downtown office market, most of the existing buildings are pushed down a half grade or more. Some existing buildings will remain Class A+ based upon their ability to achieve the highest rents in the mid to high teens or more. However, with the high vacancy rate and the need to fill empty space, there will probably be a reduction in rental levels for some office buildings creating an attractive environment for tenants to relocate downtown. The suburban market is similar in occupancy with a 16% vacancy rate overall. Class A space is over 25% vacant with Class B at 15% and Class C at 16%. These vacancy rates, which are above the optimum of 5% to 10%, should keep new supply to a minimum. There will continue to be small one- and two-tenant buildings constructed on the far east side but there is not expected to be any large multi-tenant buildings constructed for the foreseeable future. Nationally, the office market is not fairing much better with an estimated overall vacancy rate of approximately 17% at the end of 2003. Downsizing, increased use of cubicle space which requires fewer square feet per employee, the dot.com bust and some overbuilding through the 1990's have all contributed to the oversupply of office space. While the worst may be over, it will take several years to recover to optimum levels. CENTRAL BUSINESS DISTRICT UPDATE
The old River House is being converted into offices, housing, the City Grille restaurant, and an art gallery. The city is considering housing proposals for the old Kenny Kent property. The City Council has agreed to pursue a study of one and two-way street patterns downtown in an effort to improve the vehicular accessibility and convenience of the downtown. This is to include improved signage as well.
The new Old National Bank corporate headquarters, new Vectren corporate headquarters, proposed enlargement of the American General Corporate headquarters along with the other national corporation headquarters including RSC, Card Management and Integra Bank, as well as the largest concentration of professional service corporations in the tri-state area, are strong evidence that downtown remains an excellent office location. David Matthews Associates is a full service real estate appraisal and counseling firm founded in 1980. The company specializes in the analysis and valuation of residential, commercial, industrial, and office properties in Indiana, Kentucky, and Illinois. A substantial number of the major properties in the Tri-State have been purchased, sold, or developed with the assistance of valuation, feasibility, and counseling services of David Matthews Associates. For additional information or to make an appointment, please contact us.
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Matthews Real Market Update David Matthews Associates Copyright, 2004 all rights reserved
COMPANY POLICIES Our company policy is that we do not divulge any confidential information concerning personal finances which we may receive in the performance of our assignment. Our policies go beyond this and keep confidential the results of all appraisals and counseling assignments and, when requested, the fact that we are even completing an assignment for a specific client or for a specific property. As members of the Appraisal Institute, all of our appraisal staff subscribe to the highest ethical standards in the industry. These go above and beyond the state requirements of the Uniform Standards of Professional Appraisal Practice (USPAP). Each staff member is encouraged to become involved in professional organizations and our community. Some of our achievements in recent years include past or current presidents of Young Evansville Professionals (YEP), Girl Scouts Property Committee, Evansville Chapter of the Appraisal Institute (AI), Hoosier State Chapter of AI, AI Regional Representative, AI Education Trust, Evansville Chamber Transportation and Governmental Affairs Committees, Old Court House Advisory Committee, EUTS Advisory Committee, etc. |
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On
the east side, the Pavilion continues to grow. Factory Card Party Outlet
and Sofas and Cinemas recently opened. Babies R Us, Pier I, Bombay,
Nextel and Bonefish Grill are recent additions to the center. The popular
Biaggi’s Restaurant was added as an out-building and its business is
flourishing. Chick-Fil-A is building a new diner-style restaurant in Cross
Pointe.
Nationally,
the demand for neighborhood centers with grocery anchors has jumped
substantially over the past year pushing down overall capitalization rates
by approximately 100 basis points which increased values by as much as 10%.
However, there is investment risk if interest rates increase substantially
in the next three to five years without accompanying higher rents, when many
balloon loans come due. 
Equally important, if not more so, revenue
per available room (REVPAR) also
increased in 2003 with economy class lodging at $25.29 and mid priced at
$42.44. These numbers are also expected to rise in 2004 by 3.2% and 2.4%
respectively. 
BUILDING BRIDGES TOWARD BETTER
TRANSPORTATION
Locally,
many street and road projects are underway and although the construction may
be a hassle now, the improvements in access will be worth it. Aside from
the projects that are currently in the construction phase, there are several
others in the planning stages that should begin construction in the near
future.
The closest thing
Evansville has to “Paris in the springtime”, is downtown around noon, with
large flowering trees, sidewalk cafés, a narrow, one-way brick and
cobblestone main street with clusters of people, shady parks, interesting
architecture, antique shops and a variety of ethnic restaurants including
Greek, Italian, Chinese, Korean, Indian and Mexican. It is spectacular and
surprising to those who haven’t been downtown in a while. A lot of positive
changes have taken place along Main Street and in the central business
district that may lead to increased demand for retail and office space,
which is needed to fill the increased supply of vacant retail shops and
office buildings.
In 2003, vehicular traffic
one-way toward the river returned to the Main Street walkway. With traffic
comes customers, as some downtown business owners have discovered. New
businesses along Main Street include the Pressbox Deli, an internet café
known as Wired and Piece of Cake, a delightful bakery that relocated from N.
Main Street. Although first floor retail and office space along the
walkway is still 24% vacant (based on number of units, not square footage),
this leaves a lot of options for new businesses.
A joint public and private
effort known as “Digital Downtown” will be an incentive for businesses to
start or move their offices to the downtown. Introduced by Ken Robinson of
Vision 2000 (renamed Vision-e), this improvement will bring an affordable,
high-speed, electronic data and communications loop to the central business
district. This, plus WI-FI hotspots, video conferencing, incubator space
and an internet hotel are also proposed and would make downtown the smartest
neighborhood of buildings for a 100 mile radius.