Report: Vacancy rates dive in Missoula as supply, permitting fail to keep pace

Vacancy rates in apartments across Missoula dropped in the third quarter of 2020 as fewer new units came online and the demand for housing continues to grow, according to a new report published this week.

As expected, the tight supply is pushing prices up.

Published by Sterling CRE Advisors, the report found that vacancy rates in Missoula fell from 4.1% in the second quarter of 2020 to 1.2% in the third quarter. Only 115 new units have been delivered this year, though an additional 72 units are expected to open by year's end.

Together, it represents a 32% decrease in new deliveries over the prior year.

“Last year at this same time, the vacancy rate was 3.3%,” said Matt Mellott of Sterling CRE Advisors. “Everyone in the rental market feels a 2% drop in vacancy, whether that means paying more for rent or struggling to find a place when you need to move.”

The drop in vacancy rates was based on a survey of more than 5,600 market rate units over one week in August. The results suggest that Missoula continues to suffer from a significant lack of supply. Nationwide, the long-term vacancy rate is around 7%.

The report attributed the lack of supply to construction delays due to COVID-19, neighborhood opposition to high-density apartment developments, and a city staffing shortage at the permitting office.

During its budget presentation in early August, Development Services told City Council that it had experienced several failed recruitments last fiscal year and currently had nine vacancies, including the department's top director, five planner positions, two inspectors and a transportation engineer.

“It’s a complex problem, made up by a lot of factors,” Mellott said. “We need to support more efficiency in Development Services so developers can start making up some of the ground lost in regards to housing. Population growth is coming – it's here already. How we handle this moment is key for Missoula’s future.”

During recent hearings on several proposed development projects, city planners and housing officials have said Missoula will need around 600 new housing units a year to keep up with demand. But the current rate of development this year won't meet that need.

That's having an impact on pricing, according to the report. The average asking rent in Missoula has risen 9% over last year to $1,005. That's still below the national average of $1,463.

“While rents in Missoula are on the rise, local prices are still slightly lower than the national average,” the report said. “Asking rents in the third quarter of 2020 on average showed a 7.5% increase over the second quarter of 2020.”

Around 115 apartment units have been delivered so far this year, and 72 more are expected to open. Another 180 units are under construction and expected to open next year.

According to the report, 909 units are in planning but only 709 are currently in active permitting. One sizable project proposed off Interstate 90 at the base of Grant Creek could bring close to 1,000 new units to the market, though it is heavily opposed by area residents.

The requested rezone to accommodate that project was rejected last month by the Consolidated Planning Board. The project's  fate is now in the hands of the Missoula City Council, which will decide the issue later this month.

“A vacancy rate this low is concerning,” said Mellott. “Through a commercial real estate lens, there is a huge amount of opportunity for development in Missoula. But that’s in the long range. The reality right now is that rents are rising fast and apartments are scarce. A clear path forward for developers is key to righting the ship.”