Sioux Falls retail market in 2020: Uncertainty mixed with some signs of life

Aug. 10, 2020

At first, 2020 looked like it would bring the next wave of new national retail to Sioux Falls.

There was Dave & Buster’s under construction at Lake Lorraine.

Dillard’s continued to post its “coming soon” sign at The Empire Mall.

Long-awaited national restaurant chains prepared to start construction.

On March 11, Mayor Paul TenHaken even staged an announcement to welcome Chick-fil-A to Empire Place, a redevelopment in front of the mall along West 41st Street.

Coincidentally – or maybe fittingly – that also was the day South Dakota reported its first confirmed cases of COVID-19. And in the weeks and months that followed, the retail sector faced unprecedented change.

There were temporary store closures, massive shifts to e-commerce, uncertainty about who would continue to pay rent and deals in the works that were put on hold.

“When you step back, we have been in a volatile state for a number of years,” said Barrie Scardina, the New York-based executive director for retail for brokerage firm Cushman & Wakefield.

“There were 9,000 store closures last year. We have this wound, and we’re peeling off the Band-Aid slowly, and COVID was a massive accelerator.”

Sioux Falls, as in past years, has shown its resiliency in the retail sector amid bankruptcies nationwide this summer. It has not been immune, though.

Pier 1 is scheduled to close in September as part of a companywide going-out-of-business sale. Catherines also is closing as part of a companywide shutdown related to the bankruptcy of Ascena Retail Group.

Mall retailers Loft, Lane Bryant and Justice, also part of Ascena, escaped the closings in Sioux Falls.

“It’s certainly not an apocalypse. For some of these brands, it was maybe inevitable to force them into restructure. Even as companies go through bankruptcy restructuring, it’s awfully rare for Sioux Falls to lose a retailer because retailers in Sioux Falls are such strong performers,” said Ryan Tysdal of Van Buskirk Cos.

“There is a lot of disposable income in Sioux Falls, and we have such a wide geographic draw. It’s a feather in our cap when it comes to attracting new retailers or existing retailers adding locations.”

While representatives at The Empire Mall didn’t respond to an interview request, there have been other positive signs there in recent months, as most stores and restaurants have reopened following the mall’s shutdown in March.

Gap and Banana Republic have not yet reopened while they have in most other areas of the country. Parent company Gap Inc. did not respond to an email asking about a potential reopening.

The sign advertising Dillard’s coming at the entrance to the former Younker’s also is gone. When the retailer reported earnings at the beginning of 2020, it noted a couple of new store openings for the year but not Sioux Falls. In May’s earnings report, no new stores were mentioned, and the company noted it was cutting back capital spending.

“If you look at Macy’s and JCPenney, the two combined take up about 12 percent of all mall square footage, so that’s pretty significant,” Scardina said. “If you add Dillard’s, it’s about 15 percent, so we don’t want to see those department stores go away. But the reality is the department stores have lost billions of dollars over the last five years, and it really didn’t happen overnight.”

According to an article today from The Wall Street Journal, mall owner Simon Property Group and Amazon are in talks to fill some former JCPenney and Sears spaces with Amazon fulfillment centers. In Sioux Falls, the former Sears is being temporarily leased by the Federal Emergency Management Agency, which is using it to handle disaster assistance tied to flooding and severe weather last year.

Sioux Falls began the year with 17.5 percent retail vacancy citywide, according to a market outlook report from Bender Commercial Real Estate Services, up 2 percentage points from 2018.

“If I owned a strip mall with mom-and-pop tenants, I’d be really nervous right now,” Bender partner Reggie Kuipers said. “I think you’ll see some of them change hands.”

While retailers generally started off the year well and then were helped by Paycheck Protection Program loans in the spring, along with deferred rent from landlords, “you’re going to figure out who’s got a balance sheet by the end of the year,” he added. “I think there’s just a lot of uncertainty in retail right now.”

Pockets of potential

A bright spot for national retail expansion in the city came in the form of a building permit taken out in late July for Chipotle Mexican Grill – one of the Empire Place tenants that was expected to start construction in the spring. Assuming building stays on track, it could open yet this year.

The remainder of the project is drawing “very strong interest,” said Raquel Blount of Lloyd Cos., who handles the leasing for it. “We’re in conversations with several retailers. This type of project has a long process with nationals, so just trying to deal with their corporate travel limitations and things like that is taking longer.”

At Dawley Farm Village, which Blount also represents, there is interest from multiple retailers, including restaurants, she said.

“We have three deals we’re working on at Dawley right now,” she said. “The new road out there looks phenomenal, Casey’s has opened, and just getting that infrastructure and road in really helps people see how that will develop out.”

Her activity level is focused more on service-related business than traditional retail right now, she said.

“Dentists and eye clinics, where financing is so good right now,” Blount said. “And the biggest thing we’re busy with is people wanting to buy real estate. If people are paying rent right now, with the lending terms out there, we’re helping people buy property and save money on their payment because buying the building is less than what their rent was.”

Kuipers is seeing similar interest.

“I think you’ll see an opportunity for some of the professional services that will maybe come out of offices who want more splashy frontage – your financial advising firm or look at Neighborhood Dental, which has brought dentistry into the retail sector and followed the Aspen Dental model.”

National retailers such as Dollar Tree and Harbor Freight Tools continue to look for spaces, said Tysdal, who has done deals with both.

“As other retailers vacate, they’re moving in to snap up locations when the opportunity arises,” he said. “Smaller retail space also has started to pick up over the last 30 to 60 days in terms of leasing. In March and April, showings were virtually nonexistent, and they’ve started to come back. We’ve seen signs of life in recent weeks that’s at least promising that things are starting to get a little more back to normal.”

At Lake Lorraine, Dave & Buster’s has continued to say it’s committed to finishing its building outside and opening, and the new Hyatt Place hotel is nearing its opening.

Nationally, there are expansion opportunities in sectors that have weathered the pandemic well, including grocery, electronics and home furnishings, Scardina said.

“We shouldn’t make sweeping statements about grocery, but for many of the strong brands, this was a big unlock, and I know we’re going to see expansions,” she said. “And there will be grocery stores that literally just focus on you driving up and getting groceries. There will be models where you come in to buy some, but your basic items will be picked up and put in your cart.”

After the terrorist attacks of Sept. 11, 2001, retail also saw growth in home-related businesses as people stuck closer to home – a cycle Scardina said likely is being repeated.

“And consumers will continue to look for convenience, and they’re more open to paying for convenience now,” she said. “From our perspective, we feel optimistic that while we’ll see volatility over the next 18 to 24 months, that there’s a bright future, a path forward. We’ll see new types of brands take space, and we feel like there’s an opportunity to be involved in the reshaping of the retail landscape.”

Challenges ahead

The landscape looks the toughest for independent restaurants and some full-service ones, Scardina said.

“We’re going to see a lot of restaurants go out,” she said. “It’s just been very difficult, and the federal aid hasn’t really supported specifically what the restaurants need, especially the independents, so I think that will be problematic. We do think there will be a fallout of chain restaurants with indoor dining. You can’t imagine servicing 20 percent of your diners curbside is going to make up for having a dining room full of people.”

Quick-service restaurants are still going to expand, she added, though some of them also have seen noticeable drops in business because of having to use only a drive-thru with delivery options.

“I think restauranteurs have been amazing, and I think everyone is trying to work together to salvage this, but it will be a rocky road the next few months.”

In Sioux Falls, the community continues to be isolated from the biggest fallouts seen in the industry so far. Brokers who work in the market daily say they expect that will continue.

“With Pier 1, for example, they were going to restructure, but COVID hit, and they had no cash, and they were forced to close the whole company. Sioux Falls was a top store, so if they had restructured, we would have kept Pier 1, but everything went up in smoke,” Tysdal said, while adding he doesn’t expect the space to stay empty for long.

“Many times as soon as a retailer goes dark, there’s generally immediate interest in the space. Sioux Falls performs so well, many times there’s somebody in line.”

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Sioux Falls retail market in 2020: Uncertainty mixed with some signs of life

At first, 2020 looked like the year that would bring the next wave of national retail to Sioux Falls. This is how it’s looking now.

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