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Missoula Apartment Investor Report – Q3 2019

Missoula Apartment Investing Isn’t for the Faint of Heart

Activity surrounding Missoula apartment properties has ramped back up from its 2018 slump thanks to the return of rock-bottom 10 year treasury rates (1.647% as of this writing). Because apartment buildings that are marketed well are usually mobbed with activity, finding a solid investment property in Missoula can be difficult.  But, with the right market data and trend analysis, spotting the hidden apartment gems is within reach.  Read below for insights on the market.

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What’s Up, What’s Down and What’s Coming Soon

Job growth is up, vacancy rates are down and  lots of new apartment projects are in the pipeline.  But, there’s also a large chunk of ghost inventory in student housing at the University of Montana that could have a big impact on the overall apartment market.   Plus, with the city clamping down on Townhome Exemption Developments (TED), what does this all mean for the Missoula apartment market going forward?

Jobs, Jobs, Jobs

The Missoula job market is booming.  That is thanks to a diverse group of employers, including Cognizant / ATG, ClassPass, Submittable, LumenAd, Consumer Direct and others, that are hiring qualified people as quickly as they can snatch them up.  As we discuss here, job growth powers the commercial and investment real estate market in Missoula (and any city). Strong job growth spurs increased demand for both office / warehouse space.  It also means employees are more likely to form new households (rather than living with relatives or roommates), which kicks demand for apartments and rental housing into high gear.

Vacancy and Rent Trends for Q3 2019

Overall, apartment vacancy in Missoula is down from the Q2 level of 4.74%, with a rate of 3.32% for Q3 2019.  This sample of 5,244 units, in apartment buildings with 5 or more units,  was taken between August 10-17th and has a margin of error of 0.953% at 95% confidence level.

Historically, vacancy rates reach their lowest point in Missoula near the end of summer, then steadily climb as Q3 ends and we head into winter.  While we anticipate this trend to continue, the exact degree to which seasonal vacancy will impact the Missoula market is clouded by several variables (discussed below).

Rents for studios, 1 bd/ba,  2bd/1ba and 3bd/1ba units were up in Q3 while the 2bd/2ba and 3br/2ba were down slightly.  Overall, studios and 2br/2ba units had the lowest vacancy rates.   Across our survey, almost no property owners were offering rent concessions, free rent or incentives.

 

In the city of Missoula, the South Hills submarket had the lowest vacancy rate while the Mullan/Reserve market was experiencing the highest vacancy rates due to an increase in new units being delivered.  Outlying areas such as Target Range, East Missoula and Lolo all had low or no vacancy, though the sample size in those areas makes anomalies more likely.

In new development activity since our last quarterly update, Tollefson Construction finished 30 new rental townhouse units near the Wye.  The Sawyer student living in the Old Sawmill district opened as well, adding 57 apartments to the stock of multi-family units in town (though co-living projects are outside the scope of our survey).  A new building at Brooklyn West on Mullan Rd also opened, adding 36 more units to the mix.  Additionally, we’re tracking approximately 90 more units slated to be ready by the end of 2019.

Population Growth and Apartment Demand

The burst of new jobs in Missoula will likely accelerate population growth further.  From 2017-2018, population growth in Missoula County was approximately 2.2%.  However, even a small jump in the growth rate will have a substantial impact in demand for housing of all types, especially rental units.  A 0.1% increase in the rate of growth alone could potentially justify a new apartment project that might not have made economic sense if growth rates remained constant.  That’s also true in the opposite direction if population growth rates slow.

This also assumes that the average household size and proportion of Missoulians living in multi-family housing units remains constant year-to-year.  But, what happens if the economic realities of new and existing home prices cause a larger percentage of Missoula residents to move toward apartment living out of necessity?

Who is TED and what does he have to do with it?

The city’s push to restrict the use of Townhome Exemption Development (TED) could have that exact effect.  The TED process has served as an expedited means of creating new land parcels on which homes can be built and sold to single family home buyers.  More parcels generally means more single family homes, which should in theory help slow the rate of growth in housing prices.  Given that the subdivision process is a long (often multi-year) and expensive ordeal in Missoula, developers have shied away from using it to create new housing parcels in favor of the less risky TED process.

However, newly adopted restrictions at the city level could pour cold water on the TED process.  If new single family homes are harder to construct and sell, then fewer will be built.  As a result, demand for multi-family living arrangements will likely increase out of necessity, if not out of desire on the part of tenants.  Higher costs for single family attached or detached homes will force people into a smaller and (comparatively) more affordable multi-family living arrangements such as apartments.

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Ghost housing stock

According to the article cited above, approximately 20% of UM’s student housing units are vacant.  In a college town with enrollment of nearly 10,000 students, that is a significant hidden soft spot in the local apartment market.  Given the rapid escalation in rents and housing prices across town, this unused pocket of housing stock could provide needed supply in the market to help dampen rent growth.

Student housing “co-living” projects such as ROAM and the Sawyer have amenities that make them more attractive options than residing in the dorms.  However, leaner economic times could see a reverse in the trend away from higher-rent student living off-campus and toward the less expensive dorm room option.  Were that to happen, it would have a ripple effect on the Missoula apartment market as more campus housing stock was utilized to the detriment of off-campus options.

What Now?

In the near term, the apartment outlook is healthy.  So long as job and population growth continues at or near its current pace, and apartment developers remain disciplined in their project deliveries, the market should maintain its stability.  The rate of new unit deliveries is at or near an equilibrium point with current population growth numbers.  Any change to that trend would have a direct impact on the number of units needed to keep vacancy rates stable.

For the long term, the outlook depends heavily on the fundamentals of the market.  Make sure you’re using the right assumptions in your investment or development decisions. The market when you start a project may look very different when you finish that same project.  Or, the assumptions you make when buying an apartment property in Missoula now may be quite different from the realities in a few years.  Questions that must be answered accurately are:  How many other units are being built in the market?  When will they come online?  How do rents in the apartment building you’re considering buying compare to the Missoula market and all its submarkets?  What is the availability of capital for apartment properties?  What are other properties selling for, both in terms of cost per unit and in cap rate?

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For details on apartment investment sales comps in Missoula, along with market and development data, you’re invited to contact Sterling CRE Advisors Matt Mellott or Claire Matten.  The next time you’re contemplating the purchase, sale or development of an apartment project in Missoula, Matt and Claire will provide you with the market data, analysis and access to off-market opportunities to make it a success.  Sterling CRE tracks market and development data that is not available anywhere else and helps investors and developers make informed decisions on their projects.