Bender midyear report finds movement in office, retail, industrial markets as space tightens
Aug. 8, 2022
According to the firm’s president, if you didn’t know any better and walked the halls of Bender Commercial Real Estate Services, you wouldn’t suspect the economy was on any kind of shaky ground.
“There would be no indication of the recession we’re supposedly in,” said Reggie Kuipers, who leads the Sioux Falls-based firm.
“It seems like everybody is just willing this ‘recession’ into existence, and we haven’t sensed it here yet. I do think we will see some effects fourth quarter maybe into next year a little bit, but for the most part, we’re pretty blessed to be in this economy and in this market.”
Bender does an annual deep dive into occupancy within multiple sectors of the commercial real estate market but also updates it midyear.
That report, released today, finds the Sioux Falls economy “may slow some in the next 12-24 months, but the pipeline for deal flow and new projects remains robust. We expect another strong finish in 2022.”
Office market
Sioux Falls has arrived at its “post-COVID office market,” Bender’s Alex Soundy said.
“By that, I mean that we have likely seen the direction that most organizations have shifted as it pertains to their office needs as a result of the pandemic. At this point, companies have either brought their employees back to the office, kept them working remote or have adjusted to a hybrid model — part time at the office, part time remote,” he said.
Overall office vacancy has dropped below pre-COVID levels. At the end of 2019, it was at 9.87 percent; by mid-2022, it was down to 9 percent, and that’s despite adding 465,000 square feet of space in the market in the past three years. By comparison, the national office vacancy rate is 15.2 percent.
The Class A, or high-end market, in Sioux Falls is even tighter, with 3.56 percent vacancy. The downtown market is even tighter at 2 percent. That doesn’t count new space coming into the market with The Steel District and Cherapa Place.
“Both of these projects are positioned extremely well and have received a lot of interest from both local and national tenants,” Soundy said.
If the market does enter a recessionary period, it will be interesting to watch how many businesses return people to the office if they’re not hitting earnings, Kuipers said.
“Productivity for the most part has still been there, but there’s a concern about creativity,” he said. “I think the status quo will work until it doesn’t, and if you’re not hitting earnings and then you need creative people to come together, you do that across the table from each other. You don’t do that over Zoom.”
Retail market
More retailers have come into the market this year, leaving Sioux Falls with a 7.7 percent midyear vacancy, compared with 12.5 percent at the end of 2021.
“The demand for expansion into Sioux Falls remains high. We expect to have additional announcements from national/regional retailers moving into our market before year end,” Bender’s Rob Kurtenbach said. “Foot traffic is expected to rise in 2022 as pandemic-related restrictions soften. Retailers are looking to sign longer-term lease deals.”
Industrial market
Somehow, the industrial market got even tighter through the first six months of the year. These properties total just under 30 million square feet, including manufacturing, warehouse, distribution and transportation.
Calling it “unrelenting demand for space,” the Bender report found vacancy dropped from 1.43 percent in 2021 to 1.11 percent by mid-2022.
“This is the lowest vacancy the industrial market has ever experienced, which in turn has created an onslaught of new construction throughout the market – to the tune of 665,820 square feet, most of which is speculative construction ranging from 10,000 to 200,000 square feet,” Bender’s Rob Fagnan said. Asking rental rates for Class A space are up 6.25 percent year over year.
“Many markets across the country are seeing double-digit rental growth to keep up with the ever-increasing material, labor and borrowing costs,” he said. “Due to the lack of available product in the market, demand for space will continue to inflate the price per square foot occupiers pay in both the leasing and sales markets.”
While 2021 was a record-breaking year for new construction and absorption, 2022 is starting out more measured, he added.
“With a looming national recession, industrial vacancy rate lenders have maintained their underwriting standards by not allowing leverage to get crazy or for loan structuring to be too loose,” he said. “For Sioux Falls, there’s plenty of liquidity in the market to help offset any roadblocks in this inflationary environment. As e-commerce continues to grow and the reshoring of manufacturing – through advancements in automation – throughout the country, Sioux Falls will be a direct beneficiary of this trend.”
Land market
Improved land sales throughout the market have continued to show demand, the Bender report found, especially for industrial land as demand has outpaced supply.
“The Sioux Falls Development Foundation has raised their pricing again for their land sites, and the remaining industrial landowners are following suit,” Bender’s Bradyn Neises said. “Office land sales are not creating headlines but are steady with historical trends. Retail land sales are strong along major arterials, particularly along Veterans Parkway and future South Veterans Parkway. I foresee the South Veterans Parkway corridor continuing to show high demand, with the first phase of construction getting started in 2023.”
In unimproved land, after an unprecedented year in 2021 with over 2,000 acres sold, there is continued demand in the Sioux Falls metro area.
“At the beginning of the year, I predicted that we could see another 1,000 acres purchased in 2022, and the market is on pace to reach that number. Developers continue to position themselves to control land for future development,” Neises said. “As southern Sioux Falls runs out of developable land that has city infrastructure, developers are purchasing land in northwest and northeast Sioux Falls. Developers are also looking at the surrounding communities of Tea and Harrisburg to capture some of the development demand that is south of Sioux Falls.”
Investment market
The dust hasn’t settled on rising interest rates and resulting market capitalization rates, the Bender report said, while adding that locally, demand remains brisk and inventories shallow for investment properties.
“Local attitudes remain bullish on both the buy side and sell side,” Bender’s Nick Gustafson said. “Developers continue to build aggressively in Sioux Falls, perhaps most strikingly in the new multifamily-unit construction area. I predict more than 3,000 new multifamily-unit building permits will be pulled by year end. Look for year-end transaction volume to be strong but under the records set in 2021.”
