Aug. 7, 2023

Record multifamily construction years are starting to make a dent in the market’s occupancy, and more could be coming.

According to the South Dakota Multi-Housing Association’s semiannual report, the Sioux Falls market had an overall vacancy rate of 5.6 percent in July, based on 15,571 units reporting.

That compares with a 3.7 percent multifamily vacancy rate in July 2022, according to a survey then of nearly 18,000 apartment units. In January, the rate was 4.2 percent, with 18,548 units reporting.

“We continue to be in a tight rental market,” the report said. “The building permit numbers for multifamily units, though not as high as last year, are still at record levels. And some of the newly constructed units are now in lease-up mode.”

Participation in the survey was down some, which could be attributed to property managers busily trying to lease units in what has become a more competitive market, the report said.

“Leasing activity has really picked up,” said Denise Hanzlik, the association’s executive director. “Gone are the days of leasing to everyone that walked in your door. Now, you need to hone your skills and stand apart from your competition.”

Conventional properties experienced an increase in vacancies — from 3.96 percent in January to 5.25 percent in July.

HUD properties saw a decrease in vacancy from 1.4 percent in January to .93 percent in July. There were 214 units reported in July, with only two vacant.

“The application process continues to be a lengthy process for the residents as well as the managers/owners,” the report said, adding no new HUD units are being constructed at this time.

Tax credit properties saw an increase in vacancy from 6.06 percent in January to 7.54 percent in July. There were 2,598 total units reported, with 196 vacant. Tax credit properties, with the application requirements and qualifying process, continue to carry a higher vacancy rate than HUD and market-rate property, the report said.

The deadline for the first round of applications has passed for $200 million in housing infrastructure funds being administered by the state of South Dakota.

“Though South Dakota Housing has not released a list of awarded projects, we look forward to many housing projects utilizing these funds,” the report said.

There are more new apartments leasing up now and not necessarily included in the most recent survey. Permits also have been issued for 1,175 multifamily units so far this year, down from a high of 2,400 for the same time last year but on par with 1,181 in 2021.

“With the number of new units that have not even hit the market yet — they are still in construction — we are going to continue to see the vacancies increase in 2023,” Hanzlik said. “However, with all the traffic the properties are seeing, I think the increases will be minimal.”

Rents are increasing with new construction, too, according to the survey. An average new one-bedroom apartment ranges from from $1,000 to $1,400 a month in Sioux Falls, while a new two-bedroom ranges from $1,182 to $1,680.

Here’s a look at the average conventional rents for all properties in the survey by ZIP code: