How does the Missoula apartment market look and where is it going?
Historically, warm weather outside has equated to tighter inventory in the Missoula apartment market. This trend has continued in 2019, with the overall vacancy rate across all units dropping from 5.99 in Q1 to 4.74% for Q2.
This closely mirrors regional trends in the apartment market. It’s important to remember, though, that Q3 & Q4 typically have seen the biggest spike in vacancy rates, as student turnover in apartment rentals and delivery of new product settle into the market. On an annualized basis, the data indicate a vacancy trend line of approximately 6.3% overall. This is based on a sample size of over 5,000 market rate units in 5+ unit complexes. The margin of error for this survey is 1.004% at 95% statistical confidence level.
Looking around the corner, we anticipate that the completion of a number of new units on Mullan Rd, a townhome rental community near the Wye, a new co-living facility in Old Sawmill District and other smaller projects scattered around the county will result in a bump in vacancy rates for Q3 as the market attempts to absorb those new deliveries.
By unit type, the highest vacancies are being seen in the 1bd/1ba and 2bd/1ba units, with studios and 2bd/2ba units seeing the lowest vacancy rates.
Looking at submarket areas, observed vacancy is lowest in the South and outlying area of Lolo and highest in East Missoula and Midtown.
On rental rates, the overall trend in asking rates is slower, but still steady incline that roughly tracks population growth in Missoula County (2.2% from 2017-2018). Concessions offered to prospective tenants have also dried up over the last quarter which follows the seasonal contraction in the overall vacancy rate.
Missoula Apartments for Sale
Transaction volume is still low verses historical standards, despite the fact that Treasuries are down year over year and from the preceding quarters. However, if the current trends continue, we will see a higher overall transaction count in 2019 than we did in 2018.
A 54 unit project (built in 2000) in the North/West submarket is under contract at approximately a 6.0 cap rate (stated), though its presence inside of Missoula’s Opportunity Zone may have altered the underwriting process on the project somewhat. Its list price is approximately $88,000/unit and $124/sf. Downtown, there is also a 15-unit property under contract (built in 1910). List price per unit is $116,600 and approximately $180/sf.
In East Missoula, there is a newly constructed 15 unit complex (unstabilized) on the market at $135,000/unit for 1br/1ba units, or $270/sf. This is significantly over the median price for each category observed in the preceding years. An 8-unit property, of the mid 70s vintage, is also on the market in the midtown area at $131,250/unit ($202/sf) for 1br/1ba layouts, which is also significantly above observed sale price per unit or per square foot. Another 8-unit property on S 3rd St, built in the mid 80’s, is also back active on the market at a list price that is approximately $93,600/unit and $114/sf.
Properties listed above market comparable (in terms of cap rate, $/unit and $/sf) are sometimes referred to as “1031 bait,” as the only category of buyer likely to close on this type of property is an investor with money from a 1031 exchange that is out of time to find other replacement properties. They will sometimes pick any harbor in a storm and pay cash for an overpriced asset to avoid paying capital gains tax on their exchange. While those buyers are out there, they are the extreme minority of the market. Pricing and marketing toward this category of buyer generally results in significantly longer exposure times than units priced based on market tolerances. The “meat of the market” buyer will finance the property using either community bank financing, or one of the agencies (Fannie/Freddie). Overpriced properties will not pencil for this type of buyer.
Another topic that should be of particular interest to apartment investors is the on-going talks over GSE reform for Fannie Mae / Freddie Mac. Almost a decade after the Global Financial Crisis on 2008-2009, both entities are still in conservatorship. Any structural changes to these GSEs will have a ripple effect on the apartment lending market, as many buyers rely on the lower rates and extended amortization periods from Fannie Mae or Freddie Mac backed products to make their projects meet underwriting standards.
For in-depth analysis of your next planned apartment property acquisition, disposition or development project, you’re invited to contact Matt Mellott, CCIM or Claire Matten with Sterling Commercial Real Estate Advisors. Let us put our data and analysis of the Missoula apartment market to work for your benefit.