Feb. 19, 2024

It seemed like an easy enough request: A business recently was looking for 8,000 to 16,000 square feet of office space downtown.

The company’s broker, Kristen Zueger of Lloyd Cos., thought there would be multiple options.

“I thought ‘no problem,’ until I went online to look,” she said. “If we’re at 8,000, I can find it. But when you get to 16,000 contiguous, it’s not going to be easy.”

Downtown Sioux Falls appears to be countering the national office market, with development projects filling and existing buildings finding new tenants as others shift to new space.

Nationally, the U.S. ended 2023 with a record high 19.6 percent office vacancy, according to Moody’s Analytics data reported by The Wall Street Journal — the highest rate recorded since Moody’s began tracking office leasing in 1979 and up nearly a percentage point from 2022. The previous record, 19.3 percent, occurred in 1986 and 1991.

In Sioux Falls, though, while new projects like Cherapa Place and The Steel District have added significantly to the downtown office inventory, they’re also filling up. The Steel District is about 80 percent leased for office, and Cherapa has a handful of suites available, along with some space in its original building.

“That downtown location isn’t as easy to find today,” Zueger said. “It just feels like the options are becoming slim.”

Her client, which came into the market through an acquisition, has determined that its existing Sioux Falls space has outlived its usefulness. The hope is to find a space downtown with amenities such as shared conference space.

“It’s the corporate office coming into town, saying ‘I love how viable your downtown is, I love how it looks, and I think that’s the heartbeat of the city. Let’s go there and see what’s available,'” Zueger said.

Increasingly, though, there’s less available — because tenants like Midco also are seeing the value in downtown office space.

The business moved its corporate office in northwest Sioux Falls to the Lumber Exchange building at 10th and Reid streets early this year.

“We are settling into our new space and enjoying being downtown,” president Tom McAdaragh said. “I’ve seen a few team members bundle up to enjoy a walk on the path along the Big Sioux over lunch. The Cookie Jar (which also is located in the building) is a terrific spot for a quick lunch or a sweet treat. And we’re already appreciating being part of the vitality of downtown Sioux Falls.”

Midco uses a hybrid workplace plan for staff not working in the field or remotely in customer support roles. That means many employees now are required to be in the office at least three days a week, which McAdaragh calls “a big shift” as daily routines changed during the pandemic and one that the company is approaching with “patience and understanding.”

Still, “we know how important face-to-face interaction is,” he said. “I am noticing that the team members coming into the new downtown location already are enjoying reconnecting and feeling reenergized, getting to have in-person communication and collaboration with each other again.”

Midco also soon will have a new neighbor in Builder Finance Inc., which is a niche financial services company that largely funds builders constructing spec homes and investors acquiring rental homes.

“Our most important asset is our people,” vice president Korey Kraayenbrink said. “Great office space is part of the equation of attracting and retaining great people. Our specific building is high-end with a lot of amenities. Its downtown location brings energy, walkability and views.”

The company is leaving its 15-desk office in southwest Sioux Falls for downtown and is actively hiring for several positions. It’s also heavily invested in proprietary IT to further automate its processes.

The growth “is driven by repeat clients — after working with us once, they want to do more with us — and by continuing to get new clients in the door,” Kraayenbrink said. “We are hiring people in school, recent graduates and people with work experience in real estate and/or exceptional sales skills. Roles include underwriters, originators and more specialized roles for people with loan closing and title experience.”

During the pandemic, the company had a period of nearly full remote work, but “we have a great team, and our staff enjoy the office,” he said. “We found that with the collaborative nature of our operations, being in the office just works better. People more quickly turn around and bounce ideas off their neighbor than they would if they had to pick up the phone and do the same.”

The Sioux Falls team comes into the office five days a week, and employees based elsewhere visit the Sioux Falls office throughout the year. The plan is to move into the Lumber Exchange later in March.

Between Midco and Builder Finance, they filled spaces in Lumber Exchange that used to be occupied by Lloyd Cos., which moved to The Steel District, and that were used temporarily by C&B Operations, which also is moving to the new Steel District development along the west bank of the Big Sioux River north of Sixth Street.

“I’ve had people call to ask to lease space, and I’m having to tell them we don’t have it,” said Raquel Blount of Lloyd Cos., who listed the building’s space. “We had a lot of interest in that building. It’s a very convenient, easy location, and it gets a lot of visibility.”

Like other popular downtown buildings, “we keep refreshing it,” Blount said. “And we’re going to do it again. We’re looking to refresh the common areas.”

A refresh also likely will be coming to River Centre at 10th Street and River Road, where three floors temporarily are occupied by C&B Operations while its Steel District space is completed.

Altogether, there’s nearly 40,000 square feet available across four floors, which was vacated when Eide Bailly LLP moved to The Bancorp Building at Cherapa Place on the east bank of the river south of Sixth Street.

“I feel like (the floors) will lease individually or maybe one or two floors subdivided into smaller suites,” Zueger said. “The ownership entity has been really good and looking at what it would take to get them leased, and if it does take subdividing, they’re open to that. The other benefit, just like Lumber Exchange, is access.”

The overall “office market is just unique right now,” Blount added. “We have more larger spaces on the market than in the past outside of downtown, but we have very little space available in the downtown and then certainly for Class A space.”

The Plaza, which is at Ninth Street and Phillips Avenue, has seen some tenant shifts in recent years and has space available on multiple levels, with Experity going to more remote work and recent shifts from Central Payments.

Hausmann Construction recently leased a former Central Payments space on the first floor.

“Hausmann wanted to be in the heart of downtown and fully immerse themselves in our community,” said Isaac Jorgensen of Bender Commercial Real Estate Services, who represented the tenant. “Being street level right along Phillips Avenue was the perfect spot for them to do just that. They are going to be an outstanding addition to our downtown, Sioux Falls and the surrounding communities.”

The Nebraska-based firm was founded by Joey Hausmann in 2003 and has grown to a 400-person team that manages construction regionally in education, health care, commercial and housing markets.

The office in downtown Sioux Falls opened earlier this year with 25 team members, plus additional openings.

“Our growth into the Sioux Falls market is based on work that we have in the area and the desire to be part of the South Dakota construction scene,” vice president Steve Thiele said.

The company recently worked on K-12 projects for the Vermillion and Brookings school districts and a new sports complex at Dakota State University, and it has upcoming work at SDSU.

“The location couldn’t be better for us as our employees really enjoy the vibrant downtown Sioux Falls scene,” Thiele said. “We are excited to be a part of the mix of the downtown businesses there. The new office has a great conference room space along Philips as well as a large collaboration area that is pivotal to our team’s operations and culture.”

The plan is to hold an open house at the downtown office this spring.