Missoula close to oversupply of office space, study suggests

By Martin Kidston/Missoula Current

The residential real estate market in Missoula is closely tracked by a number of agencies, revealing monthly sales, trends, prices and values. But when it comes to Missoula County’s 7,000 or more businesses and the spaces they occupy, it’s a different story.

As it turns out, little is known about Missoula’s commercial market and how it responds to national trends. That has local buyers applying guesswork as they consider making an investment, though a new effort to track the market could change that.

“The commercial real estate market is known to be generally inefficient, and that’s despite the fact that the value is in multiples of billions of dollars, even in a small town like Missoula,” said Matt Mellott, a local broker with Berkshire Hathaway. “There’s some mystery to it, because no one really tracks what goes on here.”

On behalf of Missoula Commercial Real Estate, Mellott unveiled the inaugural Missoula Market Watch study this week in an effort to better understand the city’s commercial market trends.

According to the study, the vacancy rate of Class A and B office space in Missoula sits at roughly 9.6 percent, which remains below the regional and national average of 12.2 percent and 13.9 percent, respectively.

Of that, roughly 50 percent of the vacancies represent Class B space while 16 percent represent Class A space. Given recent building trends, Mellott said, those vacancy rates are likely to climb.

“We’re actually going the wrong direction,” said Mellott. “Around 22,000 more square feet has come on line in the first quarter of 2017 than has been leased. We’re gaining vacancies.”

That trend is expected to gain momentum as several large projects begin construction within the next few years. Mellott is currently tracking at least five dedicated office projects that, together, will add around 75,000 square feet over the next two years.

Others are expected to follow.

“As the Riverfront Triangle is built out, that will add an additional 175,000 square feet over the next five to seven years,” Mellott said. “You’re looking at 350,000 square feet of office space that needs to get absorbed in the Missoula County market in the next five to seven years.”

To remain at the current 9 percent vacancy rate, Missoula County businesses would need to absorb around 21,000 square feet of office space per quarter. As a result, Mellott said, buying an office building may be a risky investment.

“The number three risk in the Missoula market is Class A and B traditional leased office space,” Mellott said. “If you buy a building with significant vacancy, I think you should be prepared to wait a good long while before it fills up. There’s a great deal of space available currently, with 20,000 square feet of net space introduced to the market in the first quarter of 2017.”

Still, he added, Missoula is on the cutting edge of a boom in entrepreneurial startups, and investors may find opportunity in offering smaller and more flexible office spaces to that type of business.

Instead of long-term leases based on larger tenants, catering to small businesses on a short-term basis could present opportunities.

“The demand I see as a broker is that tenants want smaller space and flexible space they can grow inside of, or get out of leases,” Mellott said. “If you can find new ways to provide that to the market, there’s demand out there for that kind of project.”

Industrial warehouse properties around the Missoula area represent more promise, Mellott believes. Excluding three bulk sites located at Smurfit, Bonner and Blue Mountain, the city’s industrial vacancy rate sits at around 4.8 percent.

“The average user that’s coming to Missoula isn’t consuming 48,000 to 60,000 square feet at a time, though there are some,” Mellott said. “Most of those are happening within 5,000, 10,000 and 15,000 foot blocks. If you look at that type of space that’s available, your vacancy rate is actually lower.”

According to the study, the average rent for an industrial property in Missoula is $7.10 a square foot. But that depends on a number factors, such as the property’s proximity to Interstate 90 and the availability of docks and railroad spurs.

Mellott believes flexible warehouse space could provide an investment opportunity, especially as retail trends shift away from storefronts and focus on the last mile of delivery.

“Amazon and other companies are trying to put distribution centers in smaller towns,” Mellott said. “We’re not talking 1 million square feet, but 50,000- to 100,000-square-foot distribution centers.

“There’s $910 million of investment in Missoula that’s going to bring construction investment, contractors, supplies and lots of business to town, and they need space. If you can meet the demand, you’re going to profit from it.”

Contact reporter Martin Kidston at info@missoulacurrent.com