2019 outlook: Record year’s momentum expected to continue; 2020 ‘is a question mark’

Dec. 31, 2018

Based on backlog alone, the first half of 2019 appears relatively easy to forecast in the Sioux Falls business community.

“It’s a steamroller. It’s just incredible,” said Tom Kelley, president and CEO of Gage Brothers Concrete Products, as he began operations in the company’s new northeast Sioux Falls headquarters.

“We have the largest backlog in the history of our company right now – some really, really nice projects with a bunch more coming.”

Journey Group also is predicting a strong 2019.

“I can say that because we have some backlog already going into 2019, and there’s quite a bit in Sioux Falls that feeds off 2018,” president and CEO Randy Knecht said. “And with the new high school project we were awarded, that certainly helps our situation a lot in 2020.”

Citywide, director of planning and development services Mike Cooper is wrapping up another record year of building activity – in excess of $750 million – while looking at almost $100 million in projects under review heading into next year.

“We probably have a larger number of projects under review for early in the year permitting than in the past,” he said.

“I think part of the challenge for this year has been a combination of weather and construction costs. A number of projects got pushed back from their original timeline. They’re just having trouble finding contractors because they’re all so busy.”

Development outlook

Lloyd Cos. will know in January if 2018 produced a second consecutive record year. Either way it will be close, CEO Chris Thorkelson said.

“But 2019 definitely could be a record year,” he continued. “We have a significant construction backlog.”

Lloyd’s projects include the mixed-use downtown Cascade, which will open its first building in the spring while constructing its second during the year; Fleet Farm’s new store in Sioux Falls and other markets; the Avera Addiction and Recovery Center; and multiple multifamily, affordable housing, office and retail projects.

“Sioux Falls is a great market to be in,” Thorkelson said. “I don’t see anything on the horizon that’s going to have a substantial impact to our economy. There are things out of our control that could happen, but we’re pretty isolated as a community, conservative, cautiously optimistic, and I think if we continue to make good decisions and investments, we’ll continue to be a stable environment for people to do business.”

Multiple major hotels will be under construction in the market this year, including Village on the River and Hotel Phillips downtown; Best Western’s Glo at Dawley Farm Village; and two hotels at Lake Lorraine – Aloft and Hyatt Place. Those two will take about 18 months to build. In the meantime, Van Buskirk Cos. is working on leasing up a new retail building next to Hobby Lobby.

“We have some interest from national retailers,” Steve Van Buskirk said. “We’re reconnecting with them again now that the reports from our anchors are getting out into the general retail industry. They’re doing very, very well and beating projections. Hopefully, we get enough leased we can put another building up.”

Other major projects under construction or planned include Citibank’s new southwest Sioux Falls office headquarters, $45 million in expansion and improvements at Smithfield, Encompass Health’s new in-patient rehabilitation hospital, Dillard’s at The Empire Mall and Nordica’s new location at Foundation Park.

“When you look at the diversity of projects still to be permitted or in review for next year, it’s across the board – retail, office, manufacturing, education, health care,” Cooper said. “And I think we could see another announcement at Foundation Park next year.”

The lead project in that development, warehouse and distribution center Win Chill, also continues to expand. It recently opened a second phase.

“It’s full,” said Norm Drake, CEO of Legacy Development, a co-owner in the project. “We’re just looking at what the opportunity is going to be going forward in 2019 and 2020 for the next expansion out there. Win Chill continues to be a huge priority for us.”

In general, the coming year “looks like a fairly strong year again in terms of projects we see on the horizon,” he added. “I wouldn’t say it’s stronger than 2018, but it’s comparable to 2018.”

The area along 85th Street also continues to attract interest. More retail development is planned at the Walmart corner of 85th and Minnesota Avenue, and 85th and Western Avenue also is generating more interest.

“We’re seeing a flurry of activity on the office side,” said Joel Dykstra, CEO of RMB Associates, which is developing the Three Fountains development at 85th and Western. “We’re talking to more people about our building on 85th Street than in the last six months, so that’s exciting.”

He’s also working on retail development at 57th Street and Sycamore Avenue. Plains Commerce Bank plans to start construction of a branch there in the spring.

“So that’s going to spark that area, as well as the success of The Barrel House, which is good to see,” Dykstra said. “We’re actively marketing it and looking for tenants and hoping we can get something done in 2019.”

Housing market

The Sioux Falls housing market ended November with a 2.9-month supply of homes on the market – 22 percent lower than a year ago – and indicative of the persistently low inventory that the market experienced throughout 2018.

While sellers have been hard to come by, buyers increasingly are too, said Tony Ratchford, head of Keller Williams Realty Sioux Falls.

“You have one-fourth or one-third of the buyers right now in some price ranges as we did six months ago,” he said.

“Prices go up, interest rates go up, you have higher health care costs, and you have a negative election, and it’s been hard on the market. They (buyers) can’t see the job giving them any more money. It’s becoming clear now they might not get a whole bunch of raises, and their health care went up. It’s easier to buy new carpet and paint the house.”

There seems to be more demand for new construction from certain demographics, he said.

“The town home market really kicked in. People are still buying single-family houses, but more of them aren’t going to be first-time buyers. Your first-time is on-slab, town home style,” Ratchford said. “What we’re also seeing, which is remarkable to me in South Dakota, is the retirees. They want to downsize money and house and maintenance, so they’re looking at new construction. But the price is so high they look at it and they might be getting $350,000 to $400,000 for their home, and to get what they want in new construction, it’s the same.”

Residential lot sales citywide were stronger in 2018 than in 2017 at Van Buskirk Cos., “which was kind of amazing because it was a full battle to get anything done building roads in the rain,” Van Buskirk said. “And contractors were all pushed back, but we had a good year, and I don’t really anticipate anything slowing down on the housing side of things. We still have a lot of people moving to the community.”

Activity in Harrisburg “was amazing,” he added. “We sold 17 lots there, and the idea of a move-up market in Harrisburg is particularly exciting. Nobody really thought you could build a $400,000 or $450,000 house in Harrisburg in an appropriate neighborhood, so it’s fun to see that big vision come about.”

A recent conversation with an area home builder led Kathy Thorson, community banking president at MetaBank, to also believe new construction will have a strong year.

“It was the middle of December, and his phone was still ringing, and people are wanting to talk about residential construction, building a home in 2019,” she said.

Legacy Development, which has focused on commercial and multifamily building in recent years, also is considering residential building in the coming year.

“We’re looking at some single-family housing projects,” Drake said. “Some interesting ones – not just greenfield but we’ve got an interesting one in the middle of town. The challenging part is still affordability – whether it’s in housing or commercial markets.”

The consensus among developers and lenders seems to be that the multifamily market is due for a slowdown in construction.

“From everything I see, we could see a pause on construction of new apartment units or at least a reduction in building permits,” said Dykstra, whose company is coming off building the 328-unit Graystone Heights apartment project in southeast Sioux Falls.

“It was down from ’17, and I expect it to be down again, which isn’t a bad thing from an absorption standpoint.”

Both multifamily and hospitality could be sectors to slow in 2019, Thorson agreed.

“I think you’ll definitely see those industries slow given their huge growth in recent years,” she said. “Overall, I think Sioux Falls will slow down just a little. I don’t expect another record, but there are great projects in the works that will keep us on track. As I talk to clients and people in the industry, 2020 is more of a question mark because of politics and economics. But Sioux Falls will do fine in 2019.”

Conservative growth, spending

At Lewis Drug, which opened three Sioux Falls stores in 2018, customers are spending. That includes farmers, traditionally a good barometer for the consumer’s mind-set as they’re “the first people to tighten up,” CEO Mark Griffin said.

“Everybody is feeling pretty good about the economy,” he said. “The farmers are basically happy, and the population is happy, and they’re spending money. And that’s good for everybody.”

Lewis is seeing customers buy both what they need and what they want, he added. While opening multiple stores in the same year is challenging, the retailer has positioned itself both on the growing west side and downtown as the population increases.

“Overall, we’re pleased,” Griffin said. “There’s plenty of retail in Sioux Falls and the surrounding area, but the fact it’s growing relatively quick, controlled growth is positive. I think we can absorb it.”

The positive cycle of job growth and population growth continues to be a major driver for the local economy, agreed Dave Rozenboom, president of First Premier Bank.

“While there are always a few clouds of uncertainty on the horizon, most signs point to another strong year of growth and expansion throughout the city,” he said.

“The greatest limiting factor for continued economic growth is having enough workers to fill open positions. While our business customers are generally doing well, we often hear that they could be doing even better if they could find more qualified employees.”

The Sioux Falls unemployment rate was 2.2 percent in October, according to the most recent report from the South Dakota Department of Labor and Regulation.

That, coupled with a labor participation rate that runs 12 percent higher than the national average, means “our available labor pool is stretched about as thin as it can be,” Rozenboom said.

“We are fortunate that our population growth has been exceeding historical trends over the past few years. It’s apparent that our quality-of-life investments and other initiatives have helped make Sioux Falls a place where people want to be, and it’s important that continue into the future.”

Ken Karels, president and CEO of Great Western Bank, agreed workforce availability is the biggest hurdle to even more robust growth in Sioux Falls.

“The economy in Sioux Falls is very, very strong,” he said. “I don’t see signs of a slowdown or signs of overheating on it. There’s always a little bit that happens, but it’s very balanced from a credit standpoint, and there’s very disciplined credit underwriting going on. For Sioux Falls, it’s a bright future, and it will continue to grow as it has in the past.”

Jodi’s Journal: A tale of two economies

2019 outlook: Record year’s momentum expected to continue; 2020 ‘is a question mark’

It’s time for our annual look at the Sioux Falls market as a new year begins. Here’s a snapshot of projects, plans and attitudes from business leaders headed into 2019.

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