Fire Sale or Feeding Frenzy? Missoula Office & Retail Market Update
Missoula’s office and retail sectors experienced healthy sale and leasing activity throughout 2018. At year-end there were sixty-eight (68) transactions recorded between both property types with thirty-four (34) transactions dedicated to retail properties and thirty-four (34) acquisitions attributed to office buildings.
The median sale price per square foot for office property in 2018 came in at $134.76 psf. On the leasing front, overall office lease rates averaged $14.07 per square foot in 2018 which is a $0.35 per square foot drop from the 2017 average. Much of the decline can be attributed to new downtown office deliveries that have pulled some tenants away from existing second generation buildings in other areas of Missoula. As a result, landlords have offered more competitive rates in those areas outside downtown to entice tenants to renew in their current spaces or attract replacement tenants.
New downtown leases in 2018 have increased over $3.00 PSF year over year to an average rate of $20.39 PSF. In order to give a clear overall downtown average, this number excludes some “Class A” space leased by tenants such as ClassPass, who absorbed suites well into the mid $20+ PSF range.
Missoula experienced new office construction numbers totaling 106,138 square feet in 2018. As of Q1 2019, future office development slated to deliver over the next 24 months shows nine (9) projects in the works totaling over 177,000 square feet. If job growth and population increases stay on pace with recent years, Missoula should be able to continue to absorb 100-120,000 square feet of new office space each year. It will be imperative to continue to monitor basic employment figures moving forward to avoid overbuilding and market saturation.
The retail sector held steady in Missoula in 2018 despite drastic changes nationwide in regards to big box chains and heightened media attention surrounding the impact of e-commerce. The 2018 overall median sale price for retail property in Missoula came in at $134.00 per square foot across thirty-four (34) transactions. Missoula has felt a bit of the ripple effect on retail vacancy with rates climbing 2.77% over 2017 to 6.26% in 2018. Several large vacancies in Southgate Mall, Grant Creek Town Center and Russell Square have contributed to the increase. We anticipate that the vacancy rate for retail space in Missoula will continue to grow with news that the ShopKo at South Ave & S Reserve St will be shutting its doors in June. Even so, Missoula’s retail vacancy rate is still below national and regional averages of 8% and 7.75%.
If job growth and population increases stay on pace with recent years, Missoula should be able to continue to absorb 100-120,000 square feet of new office space each year.
Paradoxically, several new retail deliveries totaling 104,772 square feet in 2018 combined with the arrival of some national restaurant chains contributed to a boost in rental rates by $1.92/SF in 2018 to a new median of $15.92/SF. Missoula’s retail market boasts a wider mix of local small business owners paired with larger corporate tenants which has helped keep retail sales and lease rates steady for many owners. Looking forward, indications are that the traditional retail model is rapidly evolving and customers are looking for a more immersive experience when visiting stores. Experiential retail, which blends the convenience of e-commerce with the touch and feel of products in a stimulating environment, has kept consumers coming to stores. Blending experiences with food and beverage has also become an emerging trend with retail space (i.e. Flying Squirrel, Indoor Mini-Golf, Escape Rooms, etc.). As of Q1 2019, we are tracking fifteen (15) new retail developments underway set to deliver within the next 24 months for a total of 129,000 square feet.
Developers and investors should keep an eye on job growth and population figures as we progress through 2019 to see if we are on pace to absorb the square footage set to deliver in the coming months. If you would like to learn more about trends, opportunities and risks in the Missoula office and retail market for the coming year, you are invited to reach out to a Sterling CRE Advisor today!