Where’s the Missoula Apartment Market Going?
2019 Q1 Update from Sterling CRE
Multi-family housing units have long captured the interest of investors across the country. The relative stability of the asset class, coupled with the availability of favorable financing terms through Fannie Mae and Freddie Mac, have made apartments a safe haven for investment capital. The thinking goes that empty apartments can always be filled, even in a down market, with modest reductions in rent. So, while the upside of apartments may be less, the risk of vacancy often found in higher-return office, industrial and retail investment properties is mitigated.
Since the last recession ended in 2009-2010, apartment buildings nationwide have seen an influx of investment capital. The Missoula market has been no exception. With a relatively high transient population (due to the University), and a high percentage of renters vs homeowners (41% renters in Missoula County, according to the American Community Survey for 2018), Missoula has been very attractive to apartment investors.
As a part of Sterling CRE’s on-going research, we collect and analyze data on the commercial and investment real estate market in Missoula county (and beyond). Summarized below, you will find some of the highlights for our 19-Q1 apartment report. As always, you’re invited to contact Sterling CRE’s team of advisors for your next acquisition, disposition or development of an apartment asset in Missoula.
In order to properly vet an apartment building investment, the assumptions that one uses for vacancy rates (both physical and economic), rental rates, rental rate growth and new development activity are of critical importance. In short, bad assumptions make for bad investments. Our purpose in collecting this data is to provide investors and developers with information that equips them to make sound investment decisions and to avoid the creation of asset bubbles.
In what is becoming a steady drumbeat, the greatest opportunity present for the development of apartments in Missoula is in the delivery of affordable units.
This collection was taken Jan 21-28, 2019 and has a sample size of 4,208 market-rate apartment units. The margin of error is 1.1% at 95% statistical confidence level. This survey excludes the ROAM student housing complex downtown as well as Cambium Place luxury apartments, though there are numerous vacancies at both properties.
For Missoula County apartment buildings over five units, vacancy rates across the board have historically been lowest in Q1 and Q2 and considerably higher in Q3 and Q4. For Q1 2019, this trend has held true. Overall vacancy for apartments registered at 5.99%, down from the Q4 survey rate of 8.24%. Normal seasonal shifts in occupancy, along with landlords offering rent incentives of whole/ partial months free and/or store gift cards contributed to the decline in vacancy rates.
By unit type, studio apartments were the only floorpan to have a higher overall vacancy rate over the preceding quarter. Vacancies of 2 bed / 1 bath units dropped the most and experienced a small bump in average asking rates (3.6% higher from 18-Q4 to 19-Q1).
Looking at submarkets, vacancy rates in Midtown were down the from 10.6% to a new rate of 6.35%. The North/West submarket also witnessed a large drop in vacancy from 13.1% to 5.78% as lower average rental rates in the area helped attract new tenants. For 19-Q1, the Target Range area was an anomaly showing no available units as of the collection date.
The most notable new delivery of units since the 18-Q4 update was a 35-unit complex at 830 Crestmont (Crestmont Heights) in the South sub-market. On the horizon for delivery in the remainder of 2019 are 34 new units in Lolo, Porter Apartments (54 in permitting) and 76 more units at Brooklyn West in the Mullan/Reserve Submarket and the Sawyer Student Housing in Old Sawmill** (Downtown submarket). On the whole, planned deliveries of new units for 2019 are down from 2018 as rising construction costs, vacancy rates and interest rates take their toll.
In what is becoming a steady drumbeat, the greatest opportunity present for the development of apartments in Missoula is in the delivery of affordable units. Developers utilizing smaller floorpans, higher density and cost-competitive offerings stand to gain the most upside as they meet the demands of the market. Once again, high construction costs, rising interest rates and regulatory hurdles continue to be a headwind for the development of attainable units.
Sterling CRE’s research database has extensive detail on rental rate trends by type, location and amenities.
Call us today for an opinion of value for your existing asset or for assistance in conducting a feasibility study for a new development.
**Sawyer will not fall into the collection criteria of this survey, but will also serve to pull potential tenants from other offerings nearby