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Commercial market well in Missoula but apartments, office, warehouses in short supply

From big land sales to coworking spaces with waitlists, Missoula’s commercial market is off to a bustling start in 2021. But shortcomings also remain, including the city’s shortage of housing and industrial warehouse space. (Martin Kidston/Missoula Current)

Measuring Missoula’s economy on a number of fronts suggests it’s doing well when compared to the rest of the country, though the limitation of Class A office space, the city’s low supply of housing and its lack of industrial warehouse space continue to serve as something of an economic drag.

Matt Mellott, head broker and principal at Sterling CRE Advisors in Missoula, said dissecting the city’s commercial real estate data lends insight into how and where Missoula’s economy is growing, and what needs to be done to correct the shortcomings.

From big land sales to coworking spaces with waitlists, the city’s commercial market is off to a bustling start in 2021. But shortcomings also remain, including the city’s shortage of housing and industrial warehouse space.

The later is growing in demand as consumers turn to online shopping, which requires local storage during the fulfillment process and last-mile delivery.

“As fast as it’s built, it’s absorbed,” said Mellott. “As soon as we get a new industrial listing, it typically gets leased almost immediately. Even here, the demand for industrial space is pretty wild.”

Mellott placed the current vacancy rate for industrial warehouse space in Missoula at around 5%, which is well below the historic average. He said vacancy rates continue to fall as shoppers turn to online purchases over traditional retail.

While the vacancy rate for warehouse space is low, the vacancy rates for apartments stands at a scant 1.25% in Missoula, according to Sterling. While a number of projects are under construction, it will take time for them to hit the market.

“The market has picked up the signal,” Mellott said. “The demand has increased and the supply has been constrained by land costs and construction costs and other things like that. It takes a long time to get a project from an idea until there’s people moving in.”

Like the housing market, the city’s lack of supply on the apartment front also has led to an increase in prices. Mellott said the uptick stands at around 5.5% year over year.

Investors also have shown growing interest in Missoula’s housing market.

“There’s a huge demand for apartments, both from tenants and from investors, which has driven prices up both for rent and asset sales as well,” Mellott said. “There’s not a ton that will deliver in 2021, but there’s a lot of units that will hit in 2022 and 2023. I think you’ll see some relief for tenants in the next 18 to 24 months, but not much in 2021.”

Retail continues to struggle nationwide as consumer practices change and the pandemic keeps shoppers at home. But Mellott said the data suggests that Missoula is holding its own and faring better than the national average.

For the most part, he said, most retail fronts that are vacated get filled with new tenants.

“Nationwide, retail hasn’t been doing great, but Missoula is pretty steady,” he said. “As soon as things come available, more or less they get snapped up. As soon as one user leaves, another back fills it, with some exceptions.”

Missoula hasn’t seen a new downtown office building undergo construction in several years, leading to a pent-up demand for Class A office space. The lack of supply has led some companies, like Congizant-ATG, to build their own.

That company has a project under construction in the Old Sawmill District, where it will employ hundreds of workers.

“There’s a couple other companies out there like that, where they want multiple tens-of-thousands of square feet but there’s no space, so you have to go through a build process and that takes two or three years,” said Mellott. “It’s a little constraining from an economic development standpoint. It’s hard to land them in Missoula if they’re demanding Class A office space.”

Despite the city’s challenges on the housing front, the warehouse industry and high-end office space, Mellott believes the data points to an optimistic future and Missoula is faring well despite the challenges of the past year.

“Just by looking at vacancy rates and rental rate growth, it’s all been more or less positive with minor blips while the rest of the county has been hammered on office and retail,” he said. “Even in apartments in more dense cities, the vacancy rates have gone up and rental rates have gone down, and we haven’t experienced any of that.”

Sterling CRE will break the data down on Wednesday in this year’s MarketWatch, which will be held virtually at 10 a.m. The presentation is free but registration is required.