Apartment boom convinces Sioux Falls developers to go big


SIOUX FALLS (AP) – There was a chance to postpone the project.

Railyard Flats is set to be a touchstone of downtown Sioux Falls when it’s finished, as the city’s first step in transforming the banana-shaped stretch of land that cuts through its core, for so many years serving the crews and trains of BNSF Railway.

But the COVID-19 pandemic created a new set of data points for any developer to consider, as consumers stayed home, businesses closed and thousands lost jobs, the Argus Leader reported.

They could have pulled the plug, said Anne Haber, partner for developer Pendar Properties.

“There was a point in there where we had to say, ‘OK, are we going to do this or are we content to hold off until next year?’” Haber said. “The consensus among the ownership group and the development group and our tenants in the building said, ‘Let’s do this. We believe in Sioux Falls, and we believe in downtown.’”

Railyard Flats is a mixed-use project with retail and office space planned, but it also represents a significant boost to apartment living downtown, with 41 units planned.

Sioux Falls developers are showing a lot of faith in multi-family housing in 2020 as the coronavirus pandemic continues to wreak havoc in the private sector, hurting retailers and restaurants and contributing to what is shaping up to be a down year for commercial development.

Apartment construction is already outpacing last year, and developers and city planners expect a strong end to the year leading into the start of 2021.

The city’s permitting office has logged an estimated $65.8 million in apartment projects so far this year, already jumping ahead of the 2019 total of $65.3 million. The increase in apartment construction doesn’t necessarily represent a complete pivot away from institutional or retail construction, but the virus is causing developers to internally shift their focus as they consider current economic forces, Sioux Falls planning director Jeff Eckhoff said.

“I think the developers are staying in the space that they’ve always been,” Eckhoff said. “We have developers who do both; they’ve probably focused more on apartments.”

Momentum should continue to increase as the rest of the year continues, pending any problems caused by weather or unforeseen circumstances, Eckhoff said.

In the first half of September alone, contractors had been issued permits for a combined $14.9 million for new apartments. Projects approved last month included a 60-unit addition of to the nonprofit Sunnycrest Village senior living complex in southwestern Sioux Falls and an addition to the Locale Apartments in the southeastern corner of the city, including multiple buildings and a clubhouse and pool area.

Apartments have also proven to be a favored option for property investors so far this year, with multi-family property sales approaching $80 million, according to the Mid-2020 Market Outlook Report from Bender Commercial Real Estate.

Values have consistently gone up in the past few years and “radically low” interest rates this year have helped balance the scales for both buyers and sellers, said Nick Gustafson, a broker for Bender.

Gustafson helps clients to find investment properties and considers new construction apartments to be a supply input for the market.

Builders easing off on new construction of multi-family units has helped contribute to a stronger outlook this year, Gustafson said.

Vacancy rates are hovering around 7% or 8%, compared to rates of as high as 15% after a jump in new construction.

“Developers have really exercised a lot of discipline,” he said. “Tapering off large projects to make sure vacancies and these large projects stabilize.”

The large projects may soon return.

Developers look at vacancy rates when it comes time to build. More people paying rent means more value for the investor.

Economic effects of the coronavirus pandemic sparked early concerns over how it would affect renters ability to pay their bills. However, Sioux Falls has appeared immune from some of the trends unfolding in other cities, said Daren Ketcham, vice president of Legacy Development.

“We’ve seen in the Sioux Falls market a really strong tenant base and strong occupancy across the multi-family sector,” Ketcham said. “Residents in Sioux Falls have continued to pay their rent at much higher rates than national averages.”

Legacy started construction this summer on a 253-unit apartment complex on 10 acres of land in western Sioux Falls. The Westview Heights campus will cost an estimated $27.4 million to build, with the first building and amenities expected to be up and running in early summer 2021.

Multi-family housing is cyclical when it comes to property sales or construction of new apartments, with developers looking at supply and demand. In the case of multi-family housing, it comes down to a number of different factors such as how many units have been added in past years and the current vacancy rate.

“Vacancy gets low, that sparks building, lots of them come on line and then it sort of slows down for a few years,” Eckhoff said.

Apartments in Sioux Falls have demonstrated in the last few years that even an abundant amount of growth can be quickly absorbed by the number of new families moving to town.

Apartment construction has ebbed in the last couple of years but only because of massive influxes of new rental units during previous years, with Sioux Falls adding 1,589 apartments in 2016 and 1,215 apartments in 2017.

The quick drop in vacancies speaks to what market analysts call “absorption,” or basically the rate at which new apartments are leased.

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