Pho Thai is opening a second location on the west side of Sioux Falls. “We have a lot of customers that have requested it, and Sioux Falls is growing, and we want to be a part of that,” co-owner Kim Ueng said. The original Pho Thai opened in 2019 in Shriver Square at 11th Street and Phillips Avenue”, according to the article. The new location will feature the same menu and have the same hours as the downtown location.  

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Multiple developers are beginning projects on the southeast side of Sioux Falls along Six Mile Road. “I think we’re seeing more and more people move to the southeast side of Sioux Falls. Sioux Falls has to grow somewhere, and that’s what we’ve been seeing. The Brandon school district has been desired, and (this area) allows people to be in the Brandon school district who still want the amenities (of Sioux Falls)”, said Zach Jacobson with Signature Companies. Dawley Farms retail opportunities also help drive people in Sioux Falls to seek out eastside residences.  

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Stadium Plaza, which is located off of 69th and Cliff is quickly gaining tenants and adding new businesses to the area. According to the article, “A new fast-casual restaurant, a fitness studio and a medical office will be among the latest additions to a fast-growing south Sioux Falls intersection.“  “We’re very excited for the new businesses to bring locations to the development as the housing nearby will have some built-in customers looking for their services and become a valued amenity for the neighborhood,” said Chris Daugaard, a partner with Ernst Capital, which assisted the property in its Signature Fund IV, which raised capital – largely from local investors – to support multiple projects for developer Clint Ackerman, owner of Signature Cos.  

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Both commercial and residential growth is ramping up on the east side of Sioux Falls along Arrowhead Parkway. “I think we are meeting expectations,” said Clint Ackerman, owner of Signature Cos., which is developing multiple east-side properties, including 180 acres north of Arrowhead Parkway and west of Six Mile Road. “Commercial and multifamily is ahead of schedule or ahead of expectations, so we focused on getting that done and slowed down the residential. … Now, a majority of our activity is on the east side of Sioux Falls”, according to the article. The Alibi and Scapegoat are two restaurants that have recently opened allowing additional choices for residents in the area.  

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Two years ago, the northeast corner of 69th Street and Cliff Avenue was among the last large parcels of available land in the rapidly developing area of south Sioux Falls. One year ago, there were hints of its promise as the first commercial buildings began taking shape. Today, it’s a bustling corner filled with retail and residential growth – plus more on the way.

“We were attracted to the potential of a new, infill development on a corner that was already seeing so much traffic,” said Chris Daugaard, a partner in Ernst Capital. “The location was destined to be attractive.” The 20-acre parcel became part of Ernst’s Signature Fund IV, which raised capital – largely from local investors – to support multiple projects for developer Clint Ackerman, owner of Signature Cos.

“There was so much activity already around this area, and the concept of retail with multifamily really brought in uses that complemented one another,” Daugaard said. “There was an opportunity to partner with others looking to build or locate businesses there, bring in some of our own retail to complement it and add in a multifamily project to capitalize on the development. We felt it could be a real win-win, and that’s definitely been the case.” Zach Neugebauer, owner of Year Round Brown, saw the potential early. He invested in a retail center called The Bloc fronting Cliff Avenue that also became a location for his tanning salon.

“Year Round Brown has seen a significant increase in traffic since moving a few blocks down the road to the new location at The Bloc,” he said. “This large space really allows us to offer our full line of services such as sunbeds, spray tanning, red light therapy and 3 Degrees infrared saunas with virtually no wait times. As for the location, the combination of a great tenant mix bringing more people to the area and easy access off Cliff Avenue makes visiting Year Round Brown really enticing.” The retail center leased quickly and now includes Gloss Nails, Starbucks and Cookie Co.

“The feedback on our strip mall has been just as positive,” Neugebauer said. “The tenants have all expressed happiness with the consistent daily traffic, visibility and tenant mix. In addition to the success we are having at The Bloc, we are also really excited with the development around us.” The corner also proved a hit for new B&G Milkyway franchisees Josh and Christie Aberson. They’re wrapping up their first season and said the location has been fantastic.

“It’s truly a neighborhood restaurant, and the surrounding community has welcomed the store with open arms,” Josh Aberson said. “It’s very approachable from either north/south- or east/west-bound traffic, but also pedestrian with a lot of families making it a destination for a walk, bike ride or after-school treat. We hear that the oversized patio space with turf, games and furniture is exactly what customers were looking for and now the double drive-thru is open and running great to ease those busy drive-thru lines. We’ll be excited to see the rest of our neighbors finish out their projects and construction to finalize the development.” That progress will be continuing through this year and into next. Casey’s General Stores is making solid construction progress along 69th Street. And soon, the first residents are expected to be living within an easy walk of the neighborhood businesses.

The Overture is a 258-unit apartment building that will offer lofted studio, one- and two-bedroom apartments. “They are very interesting and appealing floor plans,” property manager Ilaria Blackwell said. “We’re already getting interested in them in anticipation of residents moving in before the end of the year.” The apartment community will include an attached two-story clubhouse and full slate of amenities, including a swimming pool, extensive indoor-outdoor community space and a fitness center. “The walkability is incredible here,” Blackwell said. “Whether you’re walking for coffee or fitness, Sioux Falls Christian Schools or the USF sport complex, there’s such a wide variety right nearby.”

Additional retail centers are under construction with a number of tenant announcements expected soon. “We’re looking to fill in with some more businesses that are complementary to what you see already. It would be great to add some retail service businesses or office-type users. We have room for something like a day care or bar/restaurant,” Daugaard said. “We love the idea of adding amenities to the neighborhood, both for use by our apartment residents and others in the area.”

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Scooters is expanding into Harrisburg along Willow Street and Creekside Avenue, near Creekside Commons and Creekside Plazas I and II.   “Willow Street has some new additions opening soon, and we’re excited to be part of that growth as well along the street,” according to the article. 

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There’s no question rising interest rates present a challenge for development and construction. But in the multifamily market, they also could support continued high occupancy and ongoing demand from residents priced out of a continued tight single-family housing market. Against that mixed backdrop, Sioux Falls-based real estate investment firm Ernst Capital is pursuing a robust development pipeline with a strategic approach to the markets where it operates. We sat down with partner Chris Daugaard for a closer look at the market and what it means for investors.

How would you describe the conditions in the multifamily markets where you do business? The multifamily market is very strong locally and regionally in the markets where we focus. While there has been some rent growth slowing nationally, we continue to see stable rent growth, and that’s needed because we also have expense growth, especially the cost of maintenance and increased property taxes. What we saw after COVID was an unsustainable pace, so I think some moderating of rent growth is both expected and appropriate. We’ve had to actively manage rent a bit more, but when it’s set appropriately, the lease-up has been very strong in all our new communities. We’re seeing rent growth trend back to normal portfolio-wide to a couple percent or low single-digit annual increases for the most part. 

Do you sense more competitiveness in the multifamily market today? I think it will become more competitive as the units that have been permitted start to get delivered. In Sioux Falls, throughout this year and into next, you’ll see a fair number of additional units come on the market, and we’re seeing some of that already. It can vary. If you bring on a small number of town home units, you often see that lease-up quickly, but it can be different bringing on an 80-unit building all at once. That said, we just delivered a 50-unit building on the west side in January, and we’re seeing 20 units per month absorbed, which is very healthy. We don’t have any concerns about that. Of course, that’s one property, but in general we feel good about the rental demand.

What impacts has the interest rate environment had on your industry? It’s made projects more difficult to put together, and interest rates are rising faster than the expected return on real estate investments. So that’s a real challenge. I think most developers feel the higher interest rates are somewhat temporary and will come down in a few years. The fundamentals of our market are still very strong. So there continues to be momentum within the development community to continue to put together great projects for Sioux Falls because there’s that demand. I expect we’ll do less volume in new deals, but we will be raising more equity and less debt, and that will broaden our capital pool a little bit. Of course, the effect on returns is that they are lowered in the short term, but long-term investors are still owning valuable assets in strong markets that we expect will appreciate over time.

Does the impact of interest rates on homebuyers ultimately help the multifamily market? Definitely. In the short term, there are people who would like to move into single-family homes and are struggling with inventory and affordability. That continues to lend itself to a very strong multifamily market. But I also think you’ve seen multifamily developers react by building more town homes, where you can have a front door and a backyard and an attached garage, plus amenities like a clubhouse and swimming pool, and you don’t need to worry about lawn care and snow removal. So in these situations, people may rent longer and not feel as much of a need to move into a home, especially as the cost of a home mortgage changes dramatically.

Does the recent bank volatility have an impact on the commercial real estate investment market? It has somewhat. We’re always keeping a watchful eye on the markets generally, so what happens in the banking sector impacts rates for new projects and how banks look at lending dollars, especially as they are regulated. We have great relationships with local and regional lenders that have managed their business much more prudently than what you’ve seen in headlines from banks on the coasts. We take steps to make sure our deposits are protected, but we’re confident in our local and regional banks and their strength. I also encourage individuals to ensure their deposits are earning as much interest as possible. One thing we’ve done as a firm is more actively manage our cash to secure some interest and return on the cash deposits we hold for reserves and operations and capital projects. We’ve become more active in that, and I encourage others to do the same. 

Why does it make sense for investors to work with a firm like Ernst Capital given these kinds of market conditions? The difference begins with experience. Ernst Capital was started in 2007, and we’ve seen periods like the Great Recession as well as years when Sioux Falls had more multifamily units than the market was demanding. It helps us understand what it looks like when rates are higher or when there’s additional vacancy or when unforeseen costs come up. And that experience helps us to plan for those things. Keeping an eye on risk mitigation is important, and a capital firm like ours helps do that. Our eye is only on the investment, not the other parts of the deal, and it helps us stay focused on driving returns for our investors.

What are your expectations for the Sioux Falls market going forward? I expect continued population growth even if it’s not as hot as a year or two ago, and right now there is a challenge to start and complete new projects with interest rates this high. However, I think you will potentially see some pent-up demand a year or two from now if Sioux Falls isn’t able to start a lot of new multifamily work this year. Our hope is to not only maintain the type of investments we’re working on now but find new opportunities to start projects in Sioux Falls. We think the exceptional population growth and demand for quality housing units will support that, and we hope to position ourselves to meet the demand.

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The projects are getting bigger. The geography is getting bigger. And the combination led to the biggest year yet in 2022 for Sioux Falls-based real estate investment firm Ernst Capital Group. “For us, 2022 was a record year in a significant way,” partner Chris Daugaard said. “We focused both on setting up our portfolio for long-term success and on capturing larger opportunities that are allowing us to build some economies of scale.”

For instance, the firm is invested in 14 active construction projects, which continue in 2023. Combined, they total more than 2,500 units of multifamily housing being added to the portfolio in addition to multiple retail centers. “Our average multifamily development in the past was 100 to 150 units, and now it’s not uncommon to see 275 to 350 units,” Daugaard explained. “We saw an opportunity while interest rates were still favorable and worked  to start new projects in a condensed time frame of eight or nine months, instead of spreading them out over 18 months as we might have done in a different environment.” That strategy allowed Ernst to appropriately time the interest rate environment and build projects, while addressing the continued high occupancy rate in its portfolio and within the markets it serves. “Our occupancy is holding very firm – currently 97 percent occupied and between 97 and 98 percent leased on a general day, and that’s been pretty consistent even in the heart of winter,” Daugaard said. “So it’s still very healthy and strong both in Sioux Falls and the other markets we’re developing.”

Ernst began with real estate investments in Sioux Falls, and about half its current development pipeline is still within the city and adjacent communities. But the firm also has expanded with investments in Brookings, Box Elder, Sioux City and Rapid City, as well as Des Moines, and with a planned entry into Omaha. “We’re making a more deliberate effort to grow in markets that we think have strong fundamentals and the stability to deliver similar results as we’ve seen in Sioux Falls,” Daugaard said.

Ernst also prioritized investing in its current portfolio within the past year, including significant refinancing across the portfolio and capital investments to support its existing assets. “These are things that might not have needed to be done today, but we had an opportunity to either set aside funds or start work today knowing we have to do it in the next few years, so we were able to take advantage of the low interest rate environment,” Daugaard said. “We did as much as we could to remove hurdles that might have presented themselves in the future.” That included things such as refreshing common spaces in some commercial buildings and setting aside reserves for build-outs or tenant needs. “On the investor front, I think investors continue to appreciate the consistent returns we’ve seen from real estate, especially multifamily,” Daugaard said. “We haven’t had any real drop-off in investor interest from the past couple years.” The coming year will bring continued investment in multifamily development on the east side of Sioux Falls, where Willows Edge had a successful lease-up and demand for residential options continues. Projects also are in development in northwest Sioux Falls, the far east side and in Omaha.

Existing work will continue in the Stadium Crossing development at 69th Street and Cliff Avenue, and in Harrisburg, where additional multifamily and new retail are under construction. Key drivers going forward continue to be construction costs, which have moderated some but more importantly have become more predictable, he said. The slowdown in single-family housing has improved the labor supply more broadly in construction, he added.  “Our focus is on making sure we do what we can to build efficiently and find the right deal and the right deal structure in an interest rate environment that’s changed drastically.” The changing approach to financing has weighted deals heavier in equity, he said. “Even if our deal sizes moderate this year, we could be raising more capital than last year,” Daugaard said. “Our deals will likely have a lot more equity in them.”

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