Bender midyear report shows some sectors at record occupancy
Sept. 9, 2021
It’s a record year in the making, and there’s likely more building activity ahead.
That’s the conclusion of a midyear update from Bender Commercial Real Estate Services, which takes a comprehensive look at the market every February and updates conditions halfway through the year.
“Sioux Falls continues to be a strong environment for construction,” founder and principal Michael Bender said in the report.
The big winner in construction so far this year is the apartment market, the Bender report found. Three of the top seven building permits for the first half of the year were apartment-related, and the sector in total made up 23 percent of the overall construction value for permits. It totaled $114 million, compared with $27.5 million for the same time in 2020.
There also has been strong demand for investment in multifamily properties.
“It’s not clear yet if we will break last year’s record of nearly $130 million in sales transactions,” the Bender report said. “It’s certainly possible as local investors continue to make long-term bets on Sioux Falls’ growth trajectory while actively competing against out-of-state buyers seeking business-friendly growing communities like Sioux Falls.”
Office market
The Sioux Falls office market “has weathered the COVID environment incredibly well,” the Bender report said.
Over the past 18 months, overall office vacancy increased by less than 3 percent — to an estimated 12.6 percent midyear — despite adding nearly 370,000 square feet of inventory, or 4.5 percent more available space. Class A office space is at less than 5 percent vacancy citywide.
That’s fueling additional construction, including large downtown office projects at Cherapa Place and The Steel District.
“The downtown skyline will be transformed in the next 24 months,” Bender president Reggie Kuipers said.
The Bender report predicts vacancy in Class B and C properties will increase slightly over the next year or two as leases expire.
“In 2020, some companies pivoted very quickly, had flexible lease terms or expiring leases, and were able to give space up very quickly. Nearly everyone went to a home office in some capacity over the last 18 months, and executives for all organizations have made difficult decisions on how to approach their future office space needs,” the report said.
“In 2021, many of these organizations are figuring out future space needs and assessing what and how much space to give back to a landlord. Many larger organizations will implement a hybrid work environment as the new status quo. We anticipate a continuous flux of organizations giving space up as they make these difficult decisions and implement their post-COVID work strategies.”
Here are some sector trends:
- Small, stand-alone office concepts will continue to be in high demand.
- Owner-occupied office buildings.
- Creative areas for company gatherings and team meetings.
- Growing rents because of demand, low vacancy and construction costs.
Retail market
While the pandemic accelerated online retail, national retailers “are still convinced having a bricks-and-mortar presence is critical to their overall business success,” the Bender report said.
“Locally, we are seeing a surge of new construction retail sites.”
Those include The Crossroads, which is the former Gage Brothers site on West 12th Street, Empire Place on West 41st Street and the future Steel District.
The overall vacancy rate has remained steady halfway through the year. The market finished 2020 at a 13.3 percent vacancy rate and hit the halfway point of 2021 at 13.7 percent. The report projects vacancy will decrease to finish out the year.
“The COVID-19 pandemic became the great accelerator as retailers were forced to be extremely agile or risk getting left behind,” said Bender commercial broker Rob Kurtenbach, who reported on the retail market.
Industrial market
The industrial market saw accelerated demand for industrial space, adding a record 3.8 million square feet to the overall market.
“The effects of multiple state shutdowns have forced many companies to look at states and cities that are ‘open for business.’ Like it or not, South Dakota and Sioux Falls meet the criteria,” said Rob Fagnan, Bender’s executive vice president and managing director who specializes in the industrial market.
“Many companies have already begun the process of moving their business and families to the region. With many projects already underway, many more will break ground and/or be announced in the year ahead. The next several years should be an enjoyable and prosperous time for the Sioux Falls industrial market.”
The industrial vacancy rate has dropped to 1.6 percent midyear from 4.1 percent in 2020, driven by the market absorbing space faster than new space is built or existing buildings come to market.
That’s the lowest vacancy in 25 years, even as new construction has surpassed 3.8 million square feet. That’s comprised mainly of Amazon, FedEx and Win Chill.
Investment market
The overall investment market “has been robust all year,” said Nick Gustafson, Bender’s executive vice president and managing director who is an investment specialist.
“The average commercial real estate broker has a much longer buyer list than inventory to match. In fact, the bid-ask price gap between buyers and sellers on quality assets has narrowed to almost zero. Large quality assets are routinely trading off market.”
The “unprecedented investor demand for multifamily and the strong new-project build numbers are a direct result of the strong increase in population Sioux Falls is experiencing in 2021,” he said.
Investment office sales are not prevalent because investors are waiting to see what the return to the office will look like. Retail transactions are strong but not expected to top last year’s record, the report said.
“We have noted that several multitenant strip malls on the market for sale have been purchased by occupants or future occupants, illustrating the low cost of capital in 2021.”
