Two Office Markets in One City: What Sioux Falls' Split Tells Us

The national office market has been the most talked-about (and most worried-about) sector in commercial real estate for four years now. Remote work, hybrid schedules, and corporate downsizing have hammered demand in cities across the country. But the national story is starting to stabilize. And in Sioux Falls, the office picture is more nuanced than any single vacancy number can capture.

The National Recovery (Sort Of)

NAR's March 2026 report shows national office net absorption at negative 2.5 million square feet. That is still negative, meaning more tenants are leaving office space than moving in. But a year ago, the number was negative 14.9 million square feet. That is a massive improvement, even if we are not in positive territory yet.

National vacancy stands at 14.0%. Rent growth is a modest 1.1%. Cap rates have climbed to 9.0%, reflecting the risk premium that investors demand for office assets right now.

The class breakdown is revealing. Class A space led leasing, absorbing 19.4 million square feet. Companies are upgrading. They want nicer offices to lure people back. But Class A also carries the highest vacancy at 20.1%, because so much of it was built speculatively. Class B lost 16.8 million square feet of tenants, with vacancy at 12.5%. Class C lost 4.5 million square feet, but actually retained the lowest vacancy at 5.5% and the strongest rent growth at 1.3%. Smaller, cheaper spaces are holding up because small businesses still need a place to work.

The extremes nationally tell their own story. Davenport, Iowa, and Myrtle Beach, South Carolina, have the lowest vacancy at 1.9%. San Francisco has the highest at 21.7%. Geography and industry mix matter enormously.

Sioux Falls: One City, Two Realities

Sioux Falls' overall office vacancy is 12.1%. That is below the national 17.6%, and on the surface, it looks manageable. But the average obscures what is really happening.

Downtown Sioux Falls has a vacancy rate of 4.1%. That is tight. About 110,000 square feet is available in the entire downtown core. If you are a business looking for downtown office space, your options are limited. However, if you keep reading, you'll see this isn't even the most competitive section of our market.

Suburban Sioux Falls tells a completely different story. Vacancy there is 15.2%. Still below the national average, but not by much. The gap between 4.1% downtown and 15.2% suburban is striking.

The Small Space Crunch

Here is another layer. Spaces under 10,000 square feet have just 2.7% vacancy. That is incredibly tight. If you are a small business, a startup, or a professional services firm looking for a modest office, there is almost nothing available.

Of the roughly 1.2 million square feet of total available office space in Sioux Falls, 78% of it sits in blocks of 10,000 square feet or greater, concentrated in just 19 buildings. Remove those large block vacancies from the equation and the overall vacancy rate drops to roughly 3%.

So the "office vacancy problem" in Sioux Falls is really a "large suburban building problem."

What Happened to the Call Centers?

Many of those large suburban vacancies are former call centers. These buildings were purpose-built for a business model that has shifted. Call center work moved remote or offshore, and the buildings were left behind.

The good news is that creative repurposing is already underway. Former call centers are being converted to churches, daycare facilities, and manufacturing space. These are not glamorous transformations, but they are practical ones. The buildings are getting second lives that serve the community.

Downtown is seeing its own notable conversion. The U.S. Bank building at 141 North Main is being converted into an AC by Marriott hotel. That is a strong signal about downtown's trajectory. When a prominent office building becomes a hotel, it tells you two things: office demand alone is not enough to fill the space, and downtown's value as a destination (not just a workplace) is rising.

From Confusion to Confidence

Bender Commercial describes the Sioux Falls office market as "moving from confusion to confidence." That feels right. The pandemic scrambled everyone's assumptions about office space. For a few years, nobody knew what tenants wanted, what buildings were worth, or how much space anyone actually needed.

That fog is lifting. Investment sales volume for office properties was up 24% year over year. Capital is flowing back in. Buyers are seeing value, particularly in well-located properties with strong tenants.

The headline vacancy number in Sioux Falls does not tell the full story. Downtown is tight. Small spaces are scarce. The real challenge, and the real opportunity, is figuring out what to do with a handful of large suburban buildings that no longer fit the model they were built for. The market is solving that problem one building at a time.