Sioux Falls 2018 market outlook: Potential for another big year

Here’s a symbol for business activity heading toward 2018: One of the largest projects built in 2017 already is planning to expand.

Win Chill LLC’s $40 million warehouse and distribution center is the first business to locate at Foundation Park.

It’s a 205,000-square-foot facility – and based on demand, that’s not big enough.

“We’re out of space already, and it hasn’t even opened,” developer Norm Drake said. “We’ll start construction on an addition as soon as frost comes off the ground.”

The investor group owns enough land to accommodate at least an 800,000-square-foot facility, he said.

Response from businesses needing the space to store product before it’s shipped out has been “overwhelming,” he added. “It’s just increased demand, especially from foreign markets, that’s driving it.”

Demand for everything from housing to hotel space, retail to medical services, is driving activity for the Sioux Falls economy entering the new year.

The city is coming off another record year – building permits exceeded $720 million – and “in general, I’m hearing more from developers about projects for the coming year than I have in previous years,” said Mike Cooper, the city’s director of planning and building services.

“Both commercial and residential, it’s a higher level than it’s been in the past.”

Downtown in particular is positioned for a big year, he added.

“Downtown could have a record year with all the anticipated projects that have either been approved or could be forthcoming: The Cascade, the Levitt, Hotel Phillips. We’re hoping to get a rail yard redevelopment project underway next year as well as the mixed-use parking ramp.”

Retail landscape

The city’s most recent financial report, through the end of October, showed sales tax barely up 1 percent following a year of small but steady declines in growth.

On the ground, though, the retail sector is showing some signs of expansion ahead.

Lewis Drug marked 75 years in 2017, and 2018 will bring additional milestones.

The Sioux Falls-based retailer will add a downtown store in the spring and one at 41st Street and Ellis Road in the summer. That follows a store move in late 2017 as the Minnesota Avenue location transitioned to a new building a few blocks north.

“Things are on a roll right now,” CEO Mark Griffin said. “We’re pleased. And I think a lot of that has to do with the success of the economy and stock market, and people feeling better about spending money.”

Health and beauty is a strong category, as is pet supplies, he said. Millennials have even embraced greeting cards, he continued.

“I’m encouraged. I think the economy has legs and spending has legs and certainly Sioux Falls has legs,” Griffin said. “The predicted Amazon effect is less than expected. You’re seeing brick-and-mortar still dominant in shopping.”

Online sales have created their own form of economic growth, Drake added, as businesses seek more warehouse space.

“I think a lot of that has to do with the increase in consumer demand for products and the way consumers buy products today,” he said. “Not every fulfillment center comes out of an Amazon warehouse, but people selling to Amazon have warehousing needs, too.”

Lake Lorraine, where multiple national retailers opened in 2017, will continue to see development in the coming year, co-developer Steve Van Buskirk said.

“Two hotels will start if everyone stays on track, Total Card is under construction, and we’re buiding a 38,000-square-foot building between Hobby Lobby and Total Card adjacent to the hotel on spec,” he said.

“We’re anticipating a number of local and national retailers to fill the next phase, which will be pedestrian-friendly with seating areas where people can mingle outdoors in a relaxing atmosphere. That’s our next big push.”

There is increased retail vacancy year-over-year from 41st Street to the south, where retail centers along 57th Street have available space and new building from 69th to 85th streets has created more inventory.

Growing neighborhoods such as the area near 57th Street and Sycamore Avenue likely will start to attract more commercial development, predicted Michael Bender of Bender Commercial Real Estate Services.

The Barrel House opened in 2017.

“I think you’re going to see more services like the Barrel House,” he said. “That area now is going to see the infill of professional services and retail over the next couple years.”

Commercial activity also is picking up outside Sioux Falls. In Harrisburg, Fareway opened in 2017, Ace Hardware is coming in early spring, and boutiques and entertainment businesses are opening.

“The stunning thing down there is commercial,” said Van Buskirk, whose company helped land the Fareway deal and is developing retail and residential projects nearby. “I get continued interest on those other corners around the Fareway store. The Fareway effect is real, and it’s going to change the face of services for that community. I think it’s really going to help.”

Manufacturing, office markets

Declines in all its core markets – especially agriculture – meant Raven Industries reduced its staff a few years ago from about 1,200 to about 900.

It’s now back up to 1,160, which doesn’t include temporary workers and interns, “so we’re over where we were in employment before we started to make reductions,” CEO Dan Rykhus said.

Raven Industries in downtown Sioux Falls.

In its most recent fiscal year, the company grew earnings 40 percent. In the past 12 months, earnings are up 95 percent.

“All through the process, the one area we said we would preserve was research and development in ATD (the applied technology division), and the reason we did that was we knew new-product development would be what pulled us through the ag market, and it’s paid off great for us.”

Raven’s new products have helped it gain market share, and the industry’s continued sluggishness has meant increased consolidation. That presents opportunity for Raven to grow, “and we’re on the hunt for acquisitions to support our ATD strategy,” Rykhus said.

Raven expects the energy market, which drives business for the company’s engineered films division, to be relatively stable, CFO Steven Brazones said.

An acquisition in Texas will allow the company to take its film products into a basin where it hasn’t “typically sold, which represents market share we can gain even if the market is stable next year,” he said.

Other manufacturers also appear to be in expansion mode.

Thanks to Foundation Park, the Sioux Falls Development Foundation has “more proposals out right now than in years past,” vice president Dean Dziedzic said.

A conceptual plan for Foundation Park in northwest Sioux Falls.

“The difference this year is we have the full package to offer prospects as far as parcel sizes, from 4 acres up to 100-acre sites and … rail sites from 5 acres up to 45 acres, and that’s not something we’ve had in the past.”

Interest is coming from the transportation and logistics industries as well as food-related businesses, he said.

“It’s a combination of local and out of market. What we’re seeing as a trend is mid- to larger-size parcels, so anywhere from 10- to 20-acre parcels, and historically we haven’t done many of those, so it’s pretty rare.”

His visits with existing businesses lead him to believe new federal tax policy might encourage more expansion.

“Eighty percent of the time (businesses say) if we can get any type of tax reform in place, we think it’s going to be extremely beneficial, so we’ll believe it when we see it.”

Historically, the years following a significant new tax law “are pretty robust,” Bender said.

“I suspect this won’t be any different despite the fact we’ve had an eight-year cycle you would think would come to an end pretty soon. I think we’ll get a bump for a couple more years.”

In the office market, the trend is toward “doing more with less,” Bender said.

That likely will be reflected when Citibank announces detailed plans for its new Sioux Falls headquarters, which is scheduled to be built this year.

“Citibank is a perfect example,” Bender said. “They’re able to do more with less space, so you’re seeing that contraction of space, and I don’t think you’ll see a lot of speculative development in office.”

Housing outlook

The city issued permits for more than 700 single-family homes in 2017 – more than either of the previous two years. The real estate market has reported about a three-month supply of homes throughout the year. For homes priced at less than $300,000, the supply is even tighter.

“I think single-family is going to be strong going into next year,” Cooper said. “The challenge will be availability of lots at the right price point.”

There’s demand for new housing on both the east and west sides, said Van Buskirk, whose Hazeltine residential development in northwest Sioux Falls doubled sales from 2016.

“So that turned a corner,” he said. “The northwest is coming into its own, and the Walmart effect is real.”

The inventory in south Sioux Falls “is about down to nothing,” he continued. “It’s really lean out there, but southeast and east continues to pick up. Willow Ridge and Canterbury Heights had good years. Everything just continues to be steady.”

The multifamily market might be due for a drop in new construction, though.

Graystone Heights is adding hundreds of units in southeast Sioux Falls.

The city issued permits for more than 1,100 units in 2017, behind 2016 but ahead of 2015.

“We could probably see a decline in the permit numbers from the last few years because there’s a large inventory that hasn’t been occupied yet,” Cooper said.

This will be the third consecutive season Bender will pass on building an apartment project, though.

“I have two sites that are ready to go. The first year it was construction prices that prohibited me from doing a deal. Now, I’d say it’s also a combination of occupancy, which is soft,” he said. “There still appears to be demand, but I think it’s now a supply-driven market, and we oversupplied it.”

Top 10 spots to watch in 2018

Sioux Falls 2018 market outlook: Potential for another big year

Here’s a symbol for business activity heading toward 2018: One of the largest projects built in 2017 already is planning to expand.

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