Feb. 20, 2018

Big-box retailer closures led to a more than 10 percent increase in vacancy in the Sioux Falls retail market.

The vacancy rate at the end of 2017 was 16.7 percent, according to the annual market outlook presented by Bender Commercial Real Estate Services.

One year ago, it was 5.8 percent.

“That’s a huge jump,” said Reggie Kuipers, a partner at Bender.

Two former Kmart stores and the former Hobby Lobby on West 41st Street contributed significantly, he said. Subtract them and vacancy is closer to 10 percent, “which is still healthy but higher than we’ve had in the past.”

Vacancy also grew at major intersections along West 57st Street after years with barely any space available.

“In the last five years, there’s hardly been any vacancy in southern Sioux Falls,” Kuipers said. “We’re starting to see turnovers in those malls, and it’s an interesting trend to watch going forward.”

Restaurant closures also contributed to increased vacancy. Here’s a snapshot of closures in the past year.

“Some of these have been rebranded, or a new concept has opened in their place, but many remain vacant,” Kuipers said.

In the office sector, downtown maintained solid occupancy despite adding new space in the Uptown area and at Washington Square. The former Great Western building space was absorbed by the new Hotel Phillips, opening late this year.

The year ended with a flat 6.8 percent downtown vacancy.

“We have a couple new really exciting projects on the horizon for the downtown sector,” said Andi Anderson, a partner at Bender, showing office development on 10th Street east of Phillips Avenue and at the future Cherapa 2.

The overall office vacancy rate increased to 10.4 percent compared with 8.2 percent at the end of 2016. That was driven by inventory at the current Citibank campus.

New construction in office continues to be clustered in south Sioux Falls, and a “trend of tenants really wanting to own and control their own properties will continue,” Anderson predicted. “Construction is going to increase.”

After years of little to no vacancy in the industrial market, a record construction year in 2017 added supply.

“We saw it (vacancy) spike up to 3.7 percent, which is really the norm in our market,” Bender partner Rob Fagnan said.

The industrial market ended with a 1.65-year supply of space – the highest since the recession.

“If we continue to see vacancy increase and absorption is decreasing, we’re going to shift from being in a seller or landlord’s market to a tenant and buyer’s market, so we’ll keep an eye on that throughout the remainder of the year and in 2019,” Fagnan said.

Housing markets

After years of significant apartment construction, Sioux Falls vacancy rates reached 11 percent in January.

“Given our high level of vacancy and our high level of construction, this puts 2017 firmly in hyper-supply,” Bender partner Nick Gustafson said. “If developers exercise discipline and caution in 2018, we’ll probably see this asset remain in hyper-supply or in a mature market cycle.”

Land sales last year were primarily for commercial or mixed-use development, Bender reported. The firm predicts single-family housing construction will be similar to last year, which added about 800 houses to the city.

“I think you’re going to see single-family lots get even tighter, and pricing is going to spike up,” Kuipers said.

Big-picture planning

Big picture, employment growth in the Sioux Falls market is something to watch, founder Michael Bender said.

Employment grew by about 1 percent last year, below the national average of 1.5 percent.

“Job growth I think is going to be challenged. It’s not a demand issue. It’s a supply issue,” Bender said. “Unfortunately, I think that’s going to hold us back a little bit this year, I believe, and possibly the years to come.”

He predicts the market will add 1,500 to 2,000 jobs this year.

From a development standpoint, though, history shows the city has consistently planned for and grown its residential and commercial activity in a way that should position it well, Bender concluded.

“We’re in good hands. As we go into this year, 2018 and beyond, we may see a maturing cycle and a dip or two, but long term we’re in great shape.”

Here’s a look at the overall projections for the coming year.