Aug. 20, 2020

The COVID-19 pandemic appears to have accelerated manufacturing and logistics growth in the U.S. and has created a surprising demand for office investment properties in Sioux Falls.

Those are among the findings of the midyear market outlook released this week from Bender Commercial Real Estate Services.

“Industry is shifting significantly with how it’s operating,” said Bender principal Rob Fagnan, who covers the industrial market. “We’re starting to see a lot of reshoring of manufacturing back to the U.S. because a lot of manufacturers have realized COVID screwed up the supply chain and they can’t afford to be waiting on nuts and bolts to be delivered from China to finish the assembly of their product.”

He’s working with a manufacturer looking to bring an operation from China to South Dakota that would occupy about 100,000 square feet of space and was attracted by the state’s business climate.

“So it’s a pretty big user for Sioux Falls,” Fagnan said, adding the state and city’s marketing push into the Twin Cities also is “causing a bit of a stir” and generating interest.

“There’s a lot of people and a lot of organizations and companies following up,” he said. “I’m currently working with a food manufacturer out of Minnesota who’s looking to expand their operation here in Sioux Falls.”

Through the first half of the year, the Sioux Falls market added 420,000 square feet of new industrial buildings, with an expansion of Nordica Warehouses at Foundation Park accounting for about half of it. Boyer Trucks also added a 50,000-square-foot building in the Myrl and Roy’s Development Park along Benson Road.

The vacancy rate in the sector increased from 3.55 percent to 4.58 percent from the end of 2019, the result of some new construction and some removal of storage facilities. The majority of what’s available is warehouse space.

Investing in office space

In the office sector, the bulk of activity came from investment purchases.

The former Capital One building at 2200 E. Benson Road changed hands for $30.3 million and is leased by Sanford Health through 2027, and the Courthouse Square building downtown, which includes Dakota News Now, was sold to new investors for $21.6 million.

“With these large transactions, 2020 office sales volume is already in record territory,” said Bender principal Nick Gustafson.

“Overall interest rates are at a record low, and investors are taking an optimistic wait-and-see approach over the last six months while pouncing on solid opportunities.”

Overall office vacancy increased to 11.2 percent midyear from 9.87 percent at the end of 2019. There have been four new office buildings this year, all on the east or southeast sides of Sioux Falls.

“Short term, there will be a plethora of unused office space, which will force companies to make additional difficult decisions about subdividing their space, subleasing or selling their building,” Bender principal Reggie Kuipers said.

“As companies try to free up some cash flow to offset long-term lease arrangements, I predict the Sioux Falls market will see more sublease office options at value price points than any other time in recent history.”

Retail shows slight vacancy drop

The retail sector so far hasn’t shown significant commercial real estate effects as a result of the COVID-19 upheaval it has experienced – though that could be coming.

Vacancy in Sioux Falls dropped to 12.5 percent midyear from 17.1 percent at the end of 2019.

That’s thanks in part to noteworthy deals including Vern Eide Motorcars’ purchase of the former east-side Shopko and Runnings’ purchase of the former east-side Kmart.

“Although we do expect to see a slight increase in vacancy by year end, the impact of what COVID-19 will do to many retailers is still to be seen,” said broker Rob Kurtenbach, who put the retail report together.