Bender midyear market report finds conditions similar to 2007
By Jodi Schwan
The Sioux Falls retail real estate market is looking a lot like 2007, with increased construction and vacancy rates, according to a midyear outlook from Bender Commercial Real Estate Services.
The report also found decreasing vacancy in the office market and positive activity in the industrial market.
Retail beginning ‘hyper-supply’
More new retail centers being built combined with some stores and restaurants closing has led to an increased vacancy rate of 9 percent from 5.8 percent six months ago and slower rental rate growth.
“The last time we were here was 2007,” said Reggie Kuipers, a partner at Bender, in the midyear report. “If the fundamentals hold true, we should experience an economic correction in the next few years in the retail sector.”
The exception is Lake Lorraine, which has attracted a slew of development in the past year and appears well-positioned for more, Kuipers said, “as the retails simply prefer the infill sites as opposed to new development.”
He also said Dawley Farm Village remains an attractive options for retailers, and 85th and Minnesota should see more activity, although Hardee’s recently pulled out of a plan to build a location there.
Kuipers also predicts at least one department store closure at The Empire Mall in the next year.
“Vacancy will continue to increase,” he said. “A slight economic correction would spur several more vacancies across the retail sector.”
Office improves
Office space filled up a bit in the first six months of the year, with the vacancy rate at 7.7 percent compared with 8.2 percent at the end of 2016.
In the downtown area, vacancy dropped from 6.8 percent to 5.7 percent even after the first floor of the Argus Leader Media building was put on the market for lease.
Lease rates downtown remained steady, according to Andi Anderson, a partner at Bender.
Seven new office buildings were constructed outside downtown, and two converted from owner to tenant-occupied.
“The conversions brought with it new vacant space; however, this segment still had a slight decrease in its vacancy rate from 8.9 percent to 8.5 percent,” Anderson said.
Industrial growth
The vacancy in industrial space has increased, which in this sector is a positive sign for business growth. For years, there has been virtually no available space. At midyear, vacancy was 2.7 percent, up from 1.6 percent at the beginning of the year.
“2017 is off to a great start,” Bender partner Rob Fagnan said. “The total number of new (industrial) building permits issued by midyear is up to 38, five of which are additions. This is more than double the number of permits for the entire year of 2016. ”
It adds significant square footage to the market, he said, including four buildings being built on speculation, which is the most the market has seen in a decade.
“A similar trend is taking place in the Tea market, with six new spec buildings being added in the market,” Fagnan said. “As supply continues to increase, watch for new construction projects to slow by year’s end.”
Investment market: Demand outstripping supply
Demand for investment property in Sioux Falls has pushed asset prices higher than the previous market peak in 2007, said Nick Gustafson, a partner at Bender.
“Very few investments appear on the open market at market prices,” he said. “Many properties are sold quickly off-market after being listed, and sellers are often approached by able and willing buyers unsolicited.”
Despite the conditions, investment property owners sense the market is at inflection point, he said.
“I predict over the next year we will see an increasing number of investment property transactions as property owners look to take profits at a perceived market peak,” Gustafson said. “Investors remain bullish but are becoming wary of overpaying for assets.”
He expects volume to increase substantially in the next 12 to 18 months while pricing remains relatively stables.
“Local investors continue to be well-capitalized and are taking advantage of historically low interest rates. However, this is a general sense that asset pricing is nearing a top, and this is fueling a greater sense of price sensitivity.”
