Bender midyear market report finds Sioux Falls as ‘little engine that could’
Aug. 17, 2023
Sioux Falls will finish 2023 with its second-best building year and 3 percent population growth, according to a midyear market update.
The report from Bender Commercial Real Estate Services found a steady deal flow across multiple sectors, along with some market corrections more in line with historical averages.
“Sioux Falls continues to be the little engine that could,” Bender partner Reggie Kuipers said in the report.
“Overall, the demand for traditional investment transactions — driven by interest rates — and bulk raw land development — driven by single-family residential — have softened. However, the owner-occupied and end users have continued to invest in commercial real estate.”
Business owners have shifted from working to keep up with demand within their businesses to focusing on the investments they need to continue to grow, he said.
“A byproduct of the business owners working on their business is reinvestment into their facilities to accommodate growth and employee retention,” Kuipers said. “Their balance sheets are strong, and they are choosing to reinvest cash into their core business.”
Continued economic uncertainty also is driving investors to commercial real estate, he added.
“It may not be perfect, but it seems like the safest option. In times of uncertainty, investors flock to safety. The U.S. commercial real estate market is in a good spot. Tertiary markets like Sioux Falls are in a great spot.”
Office market
Sioux Falls appears to be continuing to avoid the surge of office vacancy experienced elsewhere across the country. While vacancy sits at 14.2 percent midyear — up 5 percentage points from the same time in 2022 — there has been a 6 percent increase in new tenant-occupied inventory.
“The Sioux Falls office market added as much tenant-occupied inventory in the last 12 months as it had in the prior 36 months,” Bender partner Alex Soundy said. “That being said, we are still absorbing much of that new inventory. Watch for the overall vacancy rate to settle around 10 percent over the next 12 months.”
Demand continues to be strong for downtown office space, he added, while also predicting that call center vacancy would continue to increase.
Retail market
The city’s retail market had an 8.2 percent vacancy to start the year, which has dropped to 6.6 percent, according to Bender partner Rob Kurtenbach.
At the midway point of the year, new retail construction totaled $31.3 million, compared with $20.8 million at the same time last year.
“Much of this increase is driven by the numerous convenience stores currently being built throughout the city,” Kurtenbach said.
“There are no signs of slowing down the retail sector in our market. Look for the demand of retail to remain strong throughout 2023.”
Industrial market
Vacancy in the industrial market has edged up slightly to 2.78 percent midyear from 2.56 percent at the end of 2022, along with the addition of new inventory. The market has absorbed 65 percent of the amount of space it did in all of 2022 through the first half of the year, “proving there’s still some elevated demand for space throughout the market,” Bender partner Rob Fagnan said.
“Most of the available space in the market is ‘for lease,’ with very few ‘for sale’ options throughout the market. In turn, many owner-users have either had to add on to their existing buildings or find land to build new, which has resulted in 644,875 square feet being added to the market in 2023.”
While 2022 was the best year for the industrial market on record, this year will end strong, Fagnan predicted.
“Demand for industrial space continues throughout the market for both leasing and sales as companies continue to move to and grow/expand within the Sioux Falls area,” he said. “Liquidity still exists in the market and, even though the market has been faced with some inflationary headwinds, business will go on as usual.”
Land market
Through the first half of 2023, 350 acres of unimproved land have been purchased in the Sioux Falls metro area, more on par with historical averages instead of the previous two big years, Bender partner Bradyn Neises said.
“A majority of the purchased acres in the first half of the of the year are for future commercial use. Commercial developers have confidence in the long-term outlook of the Sioux Falls metro area and continue to invest in prominent locations,” he said.
Residential land purchases have had a slower start to the year; however, Neises predicts that as home inventory continues to fall and the metro area grows, homeownership will have to come from new construction.
“That is why I predict there will continue to be activity from developers purchasing land, although not at the pace we have seen in the past couple of years,” he said. “I expect to see two to three more sales, and I would keep an eye on the surrounding communities for a few of those purchases.”
Sales of improved land throughout the market have continued to show demand, he said. Retail land sales have led the way, driven by convenience store purchases, while office land sales have been steady, and industrial and multifamily land sales have slowed down.
Investment market
Investment transactions are down midyear in volume in Sioux Falls, driven by interest rate challenges and investors opting to collect interest off of high-yielding money market accounts while waiting to see what the Federal Reserve will do over the next 18 months.
“However, we expect these numbers to pick up with deals we currently have under contract and pending. Investors can expect year-end 2023 transactions to end at 2018/2019 levels,” Bender partner Nick Gustafson said.
“Despite high interest rates, there is quite a bit of capital waiting on the sidelines here in Sioux Falls for the right deal. More than several owners are considering selling assets in hope of reallocating capital to account for a higher interest rate environment for the foreseeable future.”
