Jan. 1, 2024

Over 40 years in banking, Dana Dykhouse has looked at plenty of balance sheets.

So it says something entering the new year that the president of First Premier Bank has “never seen the collective balance sheet of South Dakota look better.”

As he reviews loans going through the bank’s loan committee, representing a cross-section of “manufacturers, retailers, farmers, across the board, I’ve never seen their balance sheets in healthier condition,” he said.

“If there is a slowing coming, our businesses collectively are in very good financial condition to survive it.”

As 2024 begins, there are some signs that slowing growth has become the trend in recent months. City sales tax revenue, while still up year over year, isn’t keeping pace with inflation. Building activity expectedly will end the year behind the record pace set in 2022.

Still, it’s hard to scoff at a billion-dollar building year.

“We still had a very strong building year despite interest rates being where they’re at and continued supply chain issues,” Mayor Paul TenHaken said.

The city is planning for a softer sales tax year and will have to figure out “how do we keep up with population growth when our primary revenue source we’re expecting to be in a place it’s probably not been the last few years,” he continued.

Of course, sales tax revenue is related directly to business activity, which the mayor said he saw lag as 2023 progressed.

“My read on the year is that Q1 through 3, things were pretty good, and Q4 was very slow,” he said. “Not concerningly, but there are tiny warning lights going off that we may be in for a little bit of an economic downturn in Sioux Falls.”

At The First National Bank in Sioux Falls, president and CEO Chris Ekstrum likely spoke for many when he said: “The interest rate environment is first and foremost on my mind because that directly impacts our business, but it also impacts the housing market and large construction projects. What I’m seeing is a lot of large contractors, the contracts are starting to tail off six, eight, nine months from now.”

Building-activity outlook

A look at the city’s highest-valued building projects of 2023 reveals fewer than 20 valued at more than $10 million. The top 10 projects of the year include four apartment developments, two medical-related projects – part of Sanford Health’s Virtual Care Center and part of a new warehouse for Avera Health and Owens & Minor – the new headquarters for Maguire, a new elementary school in northwest Sioux Falls, an addition to Xcel Energy and the first building for the new USD Discovery District.

“Given all the headwinds, it was actually surprising to do as well as we did and really interesting to look at because it was really interesting stuff,” said Jeff Eckhoff, the city’s director of planning and development services.

“The conversations we’re having (now) are similar to 2023. The difference is people obviously aren’t as far along with some of their plans and getting things put together. Depending on interest rates, it will probably be a very similar year.”

Large projects include the state of South Dakota’s new One Stop office building at Dawley Farm Village, potential health care-related building activity and potential movement on a city-owned parcel on East Eight Street downtown where Iowa developer Christianson Properties has proposed a multiuse development.

“I would say cautious optimism, just watching the economy, but signs are good,” Eckhoff said.

At the Sioux Falls Development Foundation, president Bob Mundt took a similar perspective.

“One of the challenges people are looking at is what do the books look like 10 to 18 months from now,” he said. “They’re following up on a lot of stuff they’ve had on the books for months, and I think people are a little hesitant now to get into some of the projects they wanted to based on the economy. But I still think it’s going to be a pretty good business year.”

Some of the signature developments of recent years also are winding down their ramp-ups. Lake Lorraine, which added The Blu apartments, national retailer Five Below and several fast-casual restaurants in 2023, has some additional deals in the works, and then “we’re getting down to the end of it on the lake,” said Steve Van Buskirk of co-developer Van Buskirk Cos.

“We feel like we have eight land parcels depending on where the lot lines land … so we’re starting to get a little more limited as far as what we’re getting out here, and hopefully as all ties up, we’ll have a good strong finish in the next couple years.”

Downtown, both Cherapa Place and The Steel District largely will wrap up construction this year. By midyear, much of Cherapa Place is expected to be done, developer Jeff Scherschligt of Pendar Properties said.

“Ultimately, we feel very good about the office and condo sales. They’ve been good,” he said. “It just goes to show we’re running against the trends, but at the same time I think there’s still cautiousness to watch what the economy does and what interest rates do.”

The office space at Cherapa Place is nearly full, and deals are in the works for the first-floor retail space in its two apartment buildings, he said.

Elsewhere downtown at The Steel District, 2024 will bring a year of continued construction as the Canopy by Hilton takes shape toward opening in late summer or early fall.

Its office tower also is leasing up, with three restaurants expected to open there at varying points this year. The apartments wrapped around the development’s parking ramp are slated to open starting this spring and summer, along with several retail businesses, including a museum store for the Washington Pavilion. By the end of the year, the adjacent Jacobson Plaza and River Greenway developments also should be substantially complete.

“It’s been great; the weather has been perfect for us to continue to do work,” said Chris Thorkelson, CEO of Steel District developer Lloyd Cos., which also is building Jacobson Plaza and the River Greenway section adjacent to the development.

“I’m just so excited to get it open to the public. The whole area is going to be open to the public eye, and the view is going to be the coolest thing ever.”

In terms of overall business activity, “it’s by far our largest year,” Thorkelson said. “I don’t think there’s a year that compares to it.”

Multifamily surge not over

The years of record apartment growth might be in the rearview mirror, but there are signs the sector still has more to give. The largest project of 2023, the One2, will bring 175 apartments to the south area of downtown, one of several multifamily projects still moving ahead for Lloyd Cos.

Its apartments in development or construction span from southeast Sioux Falls to the northwest Sanford Sports Complex, additional phases in the northwest and southwest, as well as Dawley Farm Village.

“And we are also looking to do more, and we’ve got some things in the works we’ll pull the trigger on in 2024,” Thorkelson said.

Cresten Properties, which also has added hundreds of new units in recent years, is planning a major multiphase apartment project in the northeast, CEO Kevin Tupy said.

“Myself and my peers I’ve talked to all believe there will be less (multifamily) development,” he said.

“People are perceiving a lot of development going on because all of it was financed with lower rates, but what new projects have been started? We, as others in the industry, are looking at starting new projects. Are we going to start four? No. But are we looking at one or two? Absolutely. Are the returns going to be what they were? No. But do we feel there’s going to be appreciation? Yes, but it’s on the long game.”

Multiple factors, including projected steady population growth and higher barriers to homeownership, contribute to his outlook, Tupy said.

“The trend is for people to buy later, so rent longer in their life, as well as getting married and having children later,” he said, adding that the current rate environment also is sifting out developers without as much capacity to do business.

“Anybody could do it with rates in the threes and fours (percentage points), but now it takes professional developers who are capitalized to continue to move forward.”

One indication of the strength of the market likely will come downtown, where hundreds of units will start to become available this year. Cherapa Place plans to open its two apartment buildings in May and July, Scherschligt said.

“It’s always a cycle,” he said. “We overbuild apartments a little bit (with) demand and low interest rates, so it has to absorb, but I think Sioux Falls will absorb it more quickly than most places because of our growth.”

He also counts himself among downtown’s latest residents. And now, looking over the city from a condominium, he continues to see the possibilities.

“I think there’s a little more sanity. To a certain degree, we were moving too fast,” he said. “I think we have to be realistic, but we ought to be very happy that in a sense we’re finding this soft landing. I think things are finding an equilibrium. A place like Sioux Falls has more strength than other places, and I just think the future is still very bright.”