Is Missoula overbuilding its apartment supply? Experts say yes

Matt Mellott with Montana Commercial Real Estate of Missoula speaks during the first-ever Missoula Market Watch, a new annual forum aimed toward commercial investors and business owners, and modeled on similar events in larger cities. (Martin Kidston/Missoula Current)

By Martin Kidston/Missoula Current

At the current rate of building, Missoula could be facing a surplus of multi-family homes in the coming years, serving as a red flag for investors looking to launch a new project, a commercial real estate expert said.

While housing remains a hot issue in Missoula, it’s often viewed from the perspective of the renter or buyer. But during the inaugural Missoula Market Watch on Wednesday night, the issue was examined from the perspective of an investor.

“The thing you have to ask yourself is, can multi-family investments defy the law of cycles forever, or will it keep going up forever?” asked Matt Mellott with Montana Commercial Real Estate of Missoula.

“It’s been the golden child investment for several years now, with increased interest in apartments,” he added. “As demand has increased with that asset class, it signaled to developers to build because you could make a profit there.”

Mellott said cap rates remain low in Missoula, though that’s expected to change as interest rates rise over the coming year. Occupancy rates also remain low in Missoula at roughly 3 percent, but that could also change with the current rate of building.

According to building permits, Mellott said, as many as 14 multi-family projects are expected to come online in Missoula over the next 18 to 24 months. Together, they’ll offer around 926 new units.

But given the local population and a projected growth rate of 1.2 percent, the city can absorb just 168 new multi-family units each year. At the current rate of building, Mellott said, Missoula could be left with a hyper supply of multi-family units – a move could drive up vacancy rates.

He based his figures in part off the 2016 ACS Housing Summary.

“If we continue with these numbers at the rate we’re going, the vacancy rate will be about 5.3 percent in 2018 and 6.8 percent in 2019,” said Mellott. “We’re on track to build about 75 percent more rental units and 175 percent more apartments than demanded. That’s just the main projects and doesn’t track the small stuff.”

A new apartment project is looking for residents on Wyoming Street near downtown Missoula. (Martin Kidston/Missoula Current)

A spring report released by the Missoula Organization of Realtors also found that the number of single-family building permits issued in 2016 increased 26 percent over the prior year, with 223 total units. The number of multi-family units that year increased nearly 83 percent, with 534 new units.

As the balance tips toward a higher vacancy rate, Mellott said, renters would likely benefit from lower prices. However, he added, a higher vacancy rate may not bode well for property owners or commercial real estate investors.

“Expanding vacancy is a problem if you’re an investor and you’re making long-term investments based on assumptions surroundings today’s vacancy rates, and assuming that’s going to stay the same,” Mellott said. “I’m not suggesting that a 6.8 percent vacancy is a tragic number. But a rising vacancy rate, along with increasing interest rates – that’s a compounding problem for investors.”

Given the trending factors, Mellott scored multi-family housing as a high risk for commercial investors looking to Missoula for opportunities. In contrast, he said, building single-family housing priced between $200,000 and $275,000 provides a hot investment opportunity.

“The number one risk in the Missoula market right now is buying or building multi-family housing that you don’t plan to keep for an entire market cycle, which is seven or more years,” said Mellott. “But right now, the supply of houses priced between $200,000 and $275,000 is very low.

“If you can find ways – and that may mean going outside the city limits – of finding land to build on, in this market segment it presents a good opportunity.”

Contact reporter Martin Kidston at info@missoulacurrent.com