It’s in the data: Missoula company offers up commercial investment opportunities, risks
The number of calls to a commercial real estate company in Missoula are picking up, as developers and businesses across the country look to the Garden City for new investment opportunities.
Sterling CRE, which recently expanded its reach into new markets, unveiled its second annual Market Watch at Stockman Bank on Wednesday night, where it provided investors with the latest data on commercial real estate trends in Missoula.
The research is designed to help investors make informed decisions based upon actual market data, not anecdotal evidence. While such data is often available through third-party services in major metros, it was lacking in Missoula, until now.
Based on the information provided in this year's Market Watch study, Sterling adviser Matt Mellott offered his company's top investment opportunities – and risks – for investors looking at commercial real estate property in Missoula.
Top Three Risks
Development of single family homes priced above $350,000:
Mellott said investors building spec homes in Missoula priced over $350,000 are fine for now, though that could change if the market corrects itself.
“If there's a market correction, you can still sell a $250,000 house, but you'll have a very difficult time selling a $350,000 or $450,000 house. People will pull in, they'll downsize, or they won't buy altogether.”
Traditional big-box retail:
Mellott said it's no secret that traditional retail chains are struggling and many of those stores located in Missoula are expected to file for bankruptcy this year, including Shopko, GNC, PetSmart and Rent-A-Center, among others.
“If they don't adapt and they continue to sell a product and don't have an experience to go along with it, they're going to get run out of town by Walmart or Amazon or whoever else. There's a half-dozen other retailers who can sell it for cheaper than they can. So investing in those types of retailers is a pretty scary place to be.”
Stabilized multi-family properties you don't plan to keep through an entire cycle:
“If you buy a property that has a net operating income, right now, of $100,000, and you buy at a 5.5 percent cap rate, which is typical for this area, you're going to pay $1.82 million,” Mellott said.
But if that same investor assumes his or her rent will grow 3 percent each year, pushing his or her net operating income to $109,000 three years from now, a life-changing event that requires the investor to sell could spell disaster in an environment with rising interest rates.
“A 6.5 cap rate on a $109,000 net operating income means you'll sell for $1.86 million, which means a net loss of $140,000 three years from now. Rising interest rates are not your friend when you talk about buying low cap-rate products.”
Top opportunities
The small, flexible turn-key space for lease or sale:
Missoula has an abundance of gray-shell space that takes months to finish, and most tenants aren't willing to wait that long, Mellott said. They want space now, not later.
Providing that finished space presents an investment opportunity.
“If you have a pretty vanilla set-up with three offices and a conference room and a waiting area, there's a hundred tenants out there that can move into that right away. So if you can meet that need, your rent is going to be higher and overall, your vacancy is lower, and both of those things increase your return. That's true of warehouse and retail as well.”
Redeveloping shuttered retail sites:
While traditional retail is struggling, it could present opportunities to savvy investors willing to convert the location to another use, Mellott said.
“If you take a spot like Shopko – they're hurting right now and the odds are they'll be out of business before too long. But if you can buy a product like that at a very high cap rate now, where you have 7.5 acres of prime real estate, all the parking you can ever need and a 100,000-square-foot building, the opportunities for redeveloping it are huge.
“You can take and add value to that property. You buy it now, get some income while you can, while you're planning your next step, knowing full well that the lease isn't going to be around for the term of the lease. It provides you an opportunity to get into adaptive reuse projects.”
Look west in Missoula for development opportunities:
Missoula is awash in change and changes in traffic patterns resulting from major transportation projects could bring new investment opportunities to areas that have been overlooked.
That includes Russell Street and West Broadway, which could siphon traffic from North Reserve once the Montana Department of Transportation completes its two-year Russell Street project.
“Any time traffic or demographics change in a given area, it's going to open up new opportunities. One of those opportunities is along West Broadway for retail-type uses. If your traffic goes up, the retail value of your property is also going up, and that will expand to office and other things like that.”
The same may be true west of Missoula, where the county is looking to complete a road grid, complete with new connections between Mullan Road and West Broadway.
“It's prepping for a wave of development for both residential, office and retail. This won't happen tomorrow, but as you look out on the horizon, you see an opportunity.”
Building single-family homes priced between $200,000 to $275,000:
Mellott and other real estate experts say there are thousands of buyers in Missoula looking for homes priced under $275,000. Those homes, however, are hard to come by.
“When the median household income is $50,000 in Missoula, this is what you can afford. If you can find a way build that, and especially if you can do infill, there's a huge market for it. There's also a gap in single-family rental housing infill – not apartments. When you look at the availability of single-family homes for rent, there are very few and they go very quickly.”
Make triple-net lease investments and sell them:
As Mellott put it, “You either find the tenant and build them a building to suit, you write the lease properly and turn around and sell it. The market you're selling to isn't just Missoula. You're selling to a national, capital audience. We get calls all the time from people all over the place just looking for return. If you can provide that return and you're lease is written properly, then you stand to benefit.
“Another way to make a triple-net lease investment is to either find poorly managed buildings or vacant buildings, and you either improve the management or you fill the building up and write the leases property. You're not really selling a building at that point, you're selling a bundle of leases to investors.”