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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A Starbucks and an Anytime Fitness are opening in a new strip mall on the north side of Sioux Falls.  “The area of northwest Sioux Falls has a growing population of students, with about 1,500 at Jefferson and more than 2,000 at Southeast Technical College.”, according to the article. The Starbucks location is anticipated to open mid-March.

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Whether it’s working with investors or evaluating real estate opportunities, each element of her role is a good fit for Karla Jackson. A vice president at Ernst Capital Group, Jackson helps identify new real estate investment opportunities and works with investors to raise capital for these investments.

“I find my role with Ernst Capital Group to be both rewarding and exciting,” said Jackson, who joined the Ernst team 10 years ago. “I enjoy working with investors and have gotten to know many of them well over the years. And the real estate side of what we do is very exciting. There’s never a transaction that replicates the one before.” A north-central South Dakota native, Jackson grew up around real estate and finance. Her father was vice president of a community bank and owned a real estate firm that focused mostly on agriculture and residential transactions. Her first job out of college was in a banking call center environment. Her career evolved into business development, which ultimately connected her with Ernst. Jackson is a licensed securities representative, investment adviser and real estate broker, allowing her to provide a broad range of support to Ernst and its investors.

“I’m able to help with everything from raising capital, assessing new real estate investments, determining the opportune time to sell assets and communicating that value to investors,” she said. While many of Ernst’s recent investments have involved new-construction development projects, the firm also looks to purchase existing real estate. One example, WaterFall Plaza, led Ernst to acquire the existing retail and office center in south Sioux Falls. “We took a look at the asset and determined that it was a good fit for our fund,” Jackson said. “We have worked very hard over the years to establish a good reputation within the Sioux Falls market. We have selling groups approach us for nonlisted assets to see if we have any interest in buying. It feels good to know that groups feel confident in our process to reach out to see if we can strike a deal that works for both sides of the transaction.”

While there’s strong demand from accredited investors to work with Ernst, Jackson and colleague Chris Daugaard continually meet with interested investors. The process consists of meeting with new investors, reviewing the open offering and determining if it is a good fit. “Our investors like the local aspect of what our firm has to offer as they can drive by the developments and watch the construction progress until it is completed. We’re also able to offer larger commercial investment opportunities to people who might not have the opportunity to invest in properties like this had we not put together a fund.”

She’s also found a fit with the close-knit, locally focused team at Ernst. “It’s a small team, just eight of us, which makes it a great place to work. I enjoy being part of it and being surrounded by sincere, hardworking people. We support each other, and everyone is ready to jump in if help is ever needed,” she said.

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Casey’s General Store has announced two more Sioux Falls locations, one on the northwest side of town and one on the southeast side of town in the Stadium Crossing development. In the article, Ryan Tysdal who represents Casey’s said, “the proximity to Sioux Falls Christian was a draw for Casey’s, along with all the surrounding neighborhoods. Coffee, doughnuts, pizza, sandwiches, pop – this will become a daily stop for many in the area.” Casey’s plans to break ground on both sites this year.

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A new development on the southeast side of Sioux Falls off of 69th and Cliff that will include a blend of multi-family, office, retail, and restaurants. According to the article, “Our goal was to capitalize on the demand for housing while still being able to serve the people in the community and based on the demand we’ve been seeing in 2022, I think Stadium Crossing will accomplish that”, said Zach Jacobsen, a finance broker at Signature Companies, who is developing the project.

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Four years after the beginning of planning an interchange at 85th Street, federal approval is allowing the project to move forward. “We’re looking to have development work get started in the next 12 to 18 months, and then from there we’d get going on hopefully some of the commercial-office land as the interchange starts to generate excitement. The goal is to get heads on beds out there sooner than later, so when it does open up it’s ready for really great commercial development. We’re working with the adjacent landowners to put a development plan together now. It’s been awesome to see the way that group works together.”, according to Jake Quasney. Please contact us if you have interest in having your business located in this area.

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When Ellsworth Air Force Base was selected as the home of the new B-21 bomber, it meant an influx of nearly 1,500 service members and their families would be coming to Box Elder, just east of Rapid City. In preparation for their arrival and the ongoing growth of the region, a new apartment community is under construction at the gateway to Ellsworth Air Force Base.

Called The Union, it will offer 229 apartments in its first phase, plus a clubhouse, and it represents a partnership between two Sioux Falls businesses committed to growing statewide. The Union is being developed, built and managed by Lloyd Cos., with financing support from Ernst Capital Group. “We’ll ultimately have room for a few hundred apartments, and we anticipate significant demand for them,” said Jake Quasney, Lloyd’s chief operating officer. “When you look at the base’s impact on the community of Rapid City, it’s huge. The stability of that combined with the other growth they’re seeing in the region makes it a great place to be.” It’s also a place in need of more housing, he added. “We have a great team in Rapid City and have really seen traction with our other apartment communities, including our tax credit housing,” Quasney said. “They’re still short of housing, so to have the opportunity to build something in such close proximity to the base and service the community and complement the amenities in the area was a no-brainer.”

Ernst Capital supported the $38 million project with a $7.8 million capital raise. “Ernst’s ability to capitalize a project makes them really great partners to be able to put together the whole package and deliver the investor group,” Quasney said. “They’ve got a strong reputation and for us to have a resource like that to have some of our capital raised by them is a huge value to us as a business with the number of projects we seek to deliver.” For Ernst, the project represents the real estate investment firm’s first deal in the greater Rapid City area. “It’s a unique investment because of the larger development around it and because we’ll be able to draw in folks that maybe want to live on the edge of Rapid City, east of town, as well as those who are going to be on base supporting all the activity there,” partner Chris Daugaard said. “We’d looked at different projects in the Black Hills, in Rapid City for about a decade and hadn’t found the right deal. Our development partners weren’t as active there, but now Lloyd Cos. has started to work on projects there, and when we talked about the demand they were seeing, it was eye-opening. Some of the data around demand and rents was so outside the norm we had to dig in, but we validated it, and it was very apparent Rapid City needed more options for housing and more variety of housing.”

Ernst came into the project “when Lloyd was pretty far along in planning,” he continued. “So we got it put together quickly. We were excited about it and wanted to jump on the opportunity.” The Union also will benefit from being part of Box Elder’s broader Liberty Plaza development. A partnership among the Department of Defense, state of South Dakota, city of Box Elder, Pennington County and Dream Design International Inc., the development is creating a downtown for Box Elder, which doesn’t have a main street. “Liberty Plaza will be a vibrant city center with retail, restaurants, coffee shops and public amenities and services,” said Kelsey Pritchard, director of marketing and communications for Dream Design International. “Liberty Plaza will be one of the most incredible developments in western South Dakota. Along with all the growth we’re going to see in the military population, more nonmilitary folks are going to want to make their way here to put down roots in this up-and-coming community.”

That includes Liberty Center, which is designed for military members and their families as well as the general public. It includes an indoor track, fitness equipment and weights, two basketball courts, group instruction rooms and space for community and military events, including recognition, promotion and retirement ceremonies. This facility also will be used by service members for physical training and certification. The amenities at The Union are designed to complement those at nearby Liberty Center. “It’s got a great clubhouse designed by Lloyd Design Group that will really tie into the community aesthetically,” Quasney said. “Our residents will enjoy a fitness center, outdoor pool, patio and fire pit, lounge and kitchenette with coffee bar.” Housing is a key element of what Liberty Plaza is trying to create in Box Elder and adds to its momentum, Pritchard said. “There is a lot of enthusiasm out here in the broader Rapid City area among business and community leaders to welcome the new mission and support our servicemen and servicewomen,” she said. “This includes coordination for housing, job creation for the spouses and family members of the service people and coordination to support any industries relocating to the area to support the mission. Liberty Plaza is one of our most talked about projects, and we’ve seen a positive response because of its mixed uses and its impact on the community. People are excited that Liberty Plaza will enhance the quality of life and catalyze economic development.”

The current and projected population growth in Box Elder is contributing to the broader growth of the Rapid City metro, Daugaard added. In the latest census estimates covering July 1, 2020, to July 1, 2021, “Rapid City sticks out among other metros,” he said. “It has the highest growth percentage in the region, and many of the metros are not particularly close. Their great outdoor environment and open economy led people who could work remotely to look at the combination of a strong economy and quality of life and choose to move. That all contributes to historically strong demand for housing, and we think The Union is definitely positioned to capitalize on it.”

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