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Most of the city’s commercial real estate sectors still appear to be in a position to support additional growth.
That’s according to the annual Bender Market Outlook from Bender Commercial Real Estate Services, which analyzed occupancy in retail, office and industrial properties and found it stronger across the board than the national average.
That’s against a backdrop of national disruption, though, which could create additional impacts on the local market.
The change in federal administrations has brought uncertainty because of numerous policy changes, including tariffs and forthcoming tax legislation, said Reggie Kuipers, Bender Commercial’s president.
“The underlying U.S. economy appears robust and last-mile inflation incredibly sticky,” he said. “With pro-business White House and Trump policies putting upward pressure on inflation, 2025 is set up to be a turbulent year. We can expect short-term pain for long-term gain.”
The Sioux Falls economy is “chugging along,” he said, noting increased growth within the broader metro area.
Looking at building permits per capita, the Sioux Falls area ranked just above middle of the pack in a regional comparison.
“We have a glut of large office spaces and apartments to backfill, but other sectors are healthy,” Kuipers said. “With our population growing at a strong clip, we expect the apartments to backfill fairly quickly. We also predict that 2025 will be the second-highest year of building permits in Sioux Falls history.”
Data centers emerge
A clear trend in the commercial real estate sector is interest from data center users. While data centers have existed for decades to store digital data, with the emergence of technology related to artificial intelligence, new data centers “are much more robust and help AI technology learn and calculate responses to all sorts of questions, problem-solving,” Bender partner Rob Kurtenbach said. “The computing power needed for AI technology is very extensive.”
Data center developers are looking for access to fiber internet, water and, most importantly, power, he said.
“They need a lot of power,” he said. “Oftentimes, the amount of power needed is in rural communities. These areas usually have access to alternative energy sources like wind, solar, natural gas plants, etc. Site selection is primarily driven by the availability and accessibility to power.”
Companies looking for the facilities, referred to as hyperscalers, include tech giants such as Amazon, Alphabet, Microsoft, Meta and Nvidia.
“Quietly, there has been a lot of demand for South Dakota as a whole,” Kurtenbach said. “We are viewed as a business-friendly state to these users, have a good climate for data centers to be in and have plenty of available land near areas that already have or can create substantial amounts of power. We are actively working with numerous clients on data center land deals.”
Office market
The national office market set a record high 20.9 percent vacancy rate in 2024, though there was more space being leased throughout the year than was vacated.
In Sioux Falls, the overall office vacancy rate continues to be below the national rate at 11.6 percent. Both have risen in the past decade.
“The gap between the national and local rates also continues to widen, highlighting the challenges we see nationally,” Bender partner Andi Anderson said.
“We see demand returning to pre-pandemic levels.”
Sioux Falls is still experiencing high amounts of office vacancy, with 1.1 million square feet available. Of that, more than 800,000 square feet is in buildings 10,000 square feet and larger, representing more than 75 percent of vacant square footage.
Downtown, space is tight despite adding multiple new office towers, with 5.9 percent vacancy, compared with 13.9 percent vacancy in suburban areas.
The Bender report predicts continued limited space for office users looking for 5,000 to 10,000 square feet, construction numbers increasing downtown and for medical offices, and conversion announcements for some vacant call centers.
“For 2025, we expect some exciting announcements and are looking forward to opportunities and growth in the office market,” Anderson said.
Retail market
The Sioux Falls retail real estate market remains strong.
With an overall vacancy rate of 9 percent, the city is lower than the national average of 10 percent and “experienced a significant increase in property sales compared to last year,” Kurtenbach said.
“Nationally, the retail landscape presents a mixed picture. On the one hand, there have been waves of store closure announcements with the potential for more on the horizon. On the other hand, several national retailers continue to thrive and push forward with expansion plans and new locations.”
Online retail also continues to capture a growing share of the market. The Bender report predicts that the Sioux Falls market will add quick-service restaurants in adjacent communities and start to see retail interest in areas such as the Veterans Parkway corridor and future 85th Street interchange.
Industrial market
The industrial sector is watching closely the impact of tariffs on manufacturing, transportation, warehousing and product distribution across the U.S., Bender partner Rob Fagnan said.
“While it’s still too early to determine their full effect, we will monitor this closely over the next few years,” he said.
Nationally, the industrial market weakened, with vacancy rates reaching a 10-year high of 6 percent by the end of 2024.
“Accompanied by negative net absorption, this put downward pressure on rental rates,” Fagnan said. “Locally, the market has shown mixed signals.”
Vacancy rates edged up to 3.7 percent by the end of 2024, while new construction and absorption remained strong, he said.
“This was largely driven by owner-occupier sales, which totaled $110 million. Lease rates continued rising, influenced by inflationary construction costs,” Fagnan said. “Looking ahead, 2025 appears promising, with numerous projects already underway.”
The Bender report predicts that new construction will increase, lease rates will stabilize, vacancy will drop, and sales transactions will remain steady.
Land market
The metro land market in 2024 was strong, according to the Bender report.
“We saw increased land purchases in neighboring communities due to Sioux Falls development constraints, a trend expected to continue,” Bender partner Bradyn Neises said. “In response, the city of Sioux Falls is working on greater flexibility in development opportunities and pushing for more infrastructure investment to support growth.”
Unimproved land sales reflect this shift as developers seek opportunities in Sioux Falls’ neighboring communities, he said. For the first time, the percentage of sales in those communities edged out Sioux Falls for the majority of sales.
Improved land sales had a solid year, with office and multifamily transactions increasing, retail land sales holding steady, and industrial land sales down. The industrial sector’s slowdown isn’t caused by a lack of demand but rather a lack of available options, signaling the need for additional land supply.
Confidence in the market remains high, Neises said.
“Sioux Falls and its surrounding communities continue to attract investment,” he said. “With proactive planning and infrastructure improvements, the region is well-positioned for sustained growth in 2025 and beyond.”
Multifamily market
After two record-setting years, Sioux Falls’ multifamily market experienced “a significant downward shift in 2024,” with permits down to 1,244 units, Bender partner Alex Soundy said.
Conventional vacancy rates rose to 10.14 percent, with true vacancy rates closer to 14.33 percent when factoring in lease-up units, he estimates.
“Rent growth remained flat as higher vacancy rates led to increased concessions — such as free rent and move-in incentives — providing renters with short-term opportunities,” Soundy said.
Despite financing challenges, Sioux Falls saw $87 million in multifamily sales across 22 transactions.
“Three large, all-cash REIT purchases totaling just over $60 million in sales signal strong institutional confidence in the market’s future,” Soundy said.
Looking ahead to 2025, there are two key drivers for multifamily sales, he continued: The rising cost of homeownership will increase investor confidence, and upcoming loan maturities will create opportunities to capitalize on distressed assets.
“As vacancy rates stabilize and demand continues to grow, Sioux Falls remains a dynamic and resilient market,” he said. “With strong long-term fundamentals and a thriving economy, the city continues to be an attractive destination for multifamily investors.”
Capital markets
Investment sales volume in global, national and local markets remains below the records set in 2021 “but has turned the corner and is rebounding nicely,” Bender partner Nick Gustafson said.
“Interest rates and global trade uncertainty continue to be restraining inputs. Inflation has proven stubborn, mainly due to the massive increase in the M2 money supply over the last four to five years. It increasingly appears that interest rates will remain static for the foreseeable future.”
Investors generally are well capitalized and sitting on substantial cash, he said.
“Sellers are adjusting to new valuations, and we predict robust transactions in 2025,” Gustafson said. “Storm clouds on the horizon are federal issuance of Treasury bonds and potential global trade disruptions.”
The post Bender Market Outlook finds local commercial real estate largely still in expansion mode appeared first on SiouxFalls.Business.
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