Sioux Falls office space market shows resilience even during a pandemic

KELOLAND.com Original

SIOUX FALLS, S.D. (KELO)–  Even during a pandemic and with more people transitioning to working from home, citywide Sioux Falls office vacancy ended at 9.9% in 2020, the exact same as 2019.

According to a MIT report, by the first week of April, 34% of the U.S. workforce who previously commuted to work reported that they were working from home due to the coronavirus pandemic.

The University of Chicago said that number meant nearly everyone who could work from home was doing so, because they estimated that 34% of American workers have jobs that can be performed remotely.

“The office market was rocked, but Sioux Falls showed some resiliency,” Reggie Kuipers, Office and Land Specialist for Bender Commercial said during their 2021 market outlook.

Prior to the pandemic, 3.4% of people worked from home, during the pandemic, 88% of people were working from home, Kuipers said. It is estimated that 57% of financial services workers can probably work from home.

There is 8.3 million square feet of tenant occupied office space in the city of Sioux Falls. Even though vacancy did not drop this year, the lease rates did drop slightly.

In the Sioux Falls office market, there were 39 sales transactions for a total of $95 million in 2020. There were two major buildings that contributed to this, the Stanford Health building, which sold for over $30 million and the Courthouse Square building, also known as the KSFY building, which sold for over $20 million. Even without those sales, there were still 37 transactions for a total of $42 million, which means it is still showing resiliency.

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“We had 39 business owners or investors that say ‘You know what, in the middle of a pandemic, I’m going to invest in an office building in Sioux Falls.’ That to me, is a sign of confidence,” Kuipers said.

In the downtown office space over the past few years, there have been submarkets added. These submarkets are know as downtown, uptown and east bank. Kuipers says he looks for continued expansion of the office space, especially on the east bank, in the next few years.

Downtown there is 2.36 million square feet of tenant occupied space. Class A vacancy rate is at 2.2% and Class B/C is at 11.3%. Class A office space has been under 5% for five consecutive years.

“It is probably time for us to see a multi-story, multi-tenant office building downtown,” Kuipers said.

Kuipers said the asking lease rates did go down, but they don’t think that is a cause for concern.

Class A vacancy was at the bottom, and Kuipers said it is time for a new office space downtown. Class B/C did go up a little last year, but nationally these numbers are 15-17% combined, so it is good to own an office building downtown and it is hard to find space.

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The suburban market has 5.9 million square feet of tenant occupied office space in Sioux Falls. Vacancy decreased this year, with overall being 10.4%.

Lease rates did go down a little bit, but Kuipers thinks it is more of pro-active landlords getting out in front of blooming vacancy spot and keeping their buildings full.

Kuipers addressed the “ghost buildings” throughout Sioux Falls.

“These tenants and or their owners are still paying their rent and they are paying mortgages. It remains to be seen what happens as we shift and we come back to the office in 21, how much of this space is needed and what will happen,” Kuipers said. “We are going to keep a close eye on that.”

Kuipers said they predict that in 2021, office space vacancy will increase and construction will decrease unless they see a big new construction project downtown, but Kuipers thinks that will probably be a 2022 project. Office sales are predicted to hold pretty steady, the amount of transactions, however, the amount of sales volume will decrease.

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In previous years, densification has become popular, getting more people in less space. However, Kuipers said you may be able to expect reverse densification, less people in more space, which will lead to some office redesign and new layouts.

2020 had people seeing more home offices, which Kuipers said we can expect to continue to see.

There will be some addition sub-lease space on the market this year, primarily from call centers, the tech industry and maybe some operations.

“The one shining star in 2020 was these professional service based businesses, independent medical, banking, engineering, insurance, daycares, we did a ton of daycare deals last year,” Kuipers said.

Kuipers said they saw a couple new banks coming to Sioux Falls last year, which shows the signs of resilience in the market.

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