Bender market outlook: ‘It’s going to be a pivotal year’

Feb. 21, 2019

By Rob Swenson, for SiouxFalls.Business

This will be a pivotal year for the economy of the Sioux Falls area, said Michael Bender, founder and one of six principals at Bender Commercial Real Estate Services. The question is whether a current slowdown will intensify or give way to continued growth.

“I really think 2019 will be the year of the savvy risk manager,” Bender said.

Sioux Falls remains the engine that drives South Dakota’ economy, but in terms of factors such as job growth, the local economy has slowed noticeably, he said. Labor shortages are among the contributing factors.

Bender was among four presenters Thursday at his firm’s 22nd annual Sioux Falls Market Outlook 2019, which was held at the Washington Pavilion.

Capital is getting tighter, and that is making development deals more difficult to complete, Bender said. “It’s going to be a pivotal year.”

Approximately 2,000  jobs were created in the Sioux Falls area in 2018, which translates to an increase of 1.3 percent. For the first time in years, the city growth rate in jobs was surpassed by both the statewide and national rates.

There are some positive signs in the market, too, though. For example, 2018 was a record-high year for commercial and residential construction. In terms of the value of building permits issued by the city, Sioux Falls outpaces regional peers such as Fargo; Rochester, Minn.; and Lincoln, Neb.

“Triple H” factors largely define trends for much of the current and future growth of the city. The H factors start with a horseshoe-shaped growth perimeter around Sioux Falls. Much of the city’s growth is taking place on the eastern, southern and western edges of the city.

Major factors expected to be big issues in the city’s future growth include two more H’s: the growth of Harrisburg to the southeast and the construction of a new high school in northwest Sioux Falls, said Reggie Kuipers, who talked about land and retail markets.

2018 was the year of the “knockout punch” for the retail sector in Sioux Falls, Kuipers said. Several big-box retailers closed or announced they would be closing. Among them were Sears, Shopko and Younkers.

“We feel most of the damage has been done,” Kuipers said. In fact, some turnover like that is healthy, he said, because it presents opportunities for updated uses of well-located space.

The success of online retailers – Amazon, in particular – is changing the way many traditional retailers across the United States operate. Increasingly, retailers strive to create entertaining experiences for customers, Kuipers said. A 45-foot-tall Ferris wheel at the Scheels sporting goods store in Sioux Falls is an example.

The vacancy rate for retail space along 41st Street, which probably remains the city’s best-known retail corridor, has been running at 18.5 percent. In comparison, the vacancy rate is 12.2 percent in the growing Lake Lorraine area on the city’s west side and 22.4 percent in the emerging commercial area of eastern Sioux Falls. But expect a major business announcement in the Dawley Farm Village area in the future, Kuipers said.

Some interesting national forces are shaping opportunities in Sioux Falls’ industrial market, which was discussed by Rob Fagnon.

Electronic logging systems, along with the popularity of online shopping, are changing the transportation industry. By regulation, drivers may drive only 11 hours in a 24-hour period. In some cases, trucks can’t reach their destination in 11 hours. That is prompting the development of regional warehouse and distribution centers, which can serve as relay points to change drivers or trucks to finish longer hauls.

The trend is evident along North Cliff Avenue, where warehouse and office buildings are being developed west of Love’s Travel Stop. The 120,000-square-foot complex is being built on speculation by 4 Suns LLLP of Fargo.

Another factor shaping the transportation industry is a national shortage of 50,000 drivers, Fagnon said. “Watch for driverless trucks to make their debut in the near future,” he said.

Although dozens of small shop spaces for contractors are available in Sioux Falls, Fagnon predicts that 2019 will be a great construction year for larger industrial projects.

Nick Gustafson pointed out that national forces also were a factor in the local property-investment market in 2018. Tzadik, a real estate and property management company from Florida, made a big entrance into the Sioux Falls market. Its portfolio of acquisitions includes 579 local apartment units valued at almost $42 million.

Good property-investment opportunities continue to exist in Sioux Falls, but topping 2018 will be difficult, he said, especially with the vacancy rate in apartments running at 9.8 percent.

Overall, the multifamily real estate cycle is expected to remain in the recessionary stage.

There is also a surplus of office space in Sioux Falls, Bender said. Rental rates generally are flat. However, additional Class A (high-class) space is needed in the downtown area, he said. Whoever steps forward to fill the downtown need will benefit, he said.

To watch a replay of the presentation, click here.

Bender market outlook: ‘It’s going to be a pivotal year’

Will a current slowdown intensify or give way to continued growth for the Sioux Falls economy? Experts at Bender Commercial weighed in today during the firm’s annual market outlook.

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