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Missoula’s multi-family housing market remains tight as rents, construction costs climb

Economic experts in Missoula believe the city’s tight housing market could threaten the city’s economic well being, making it harder for companies to recruit and keep employees who may not be able to find, let along afford, housing in the city.

Missoula’s population growth continues to outpace the local housing supply, just as land and construction costs have risen – a combination that could stress the city’s housing market into the foreseeable future.

Economic experts in Missoula believe the results could threaten the city’s economic well being, making it harder for companies to recruit and keep employees who may not be able to find, let alone afford, housing in the city.

“This whole housing affordability problem in Missoula is something we’ve been paying attention to in recent years,” said Matt Mellott, head broker and a principal at Sterling CRA Advisors. “It makes Missoula less competitive to attract new businesses. From an economic growth standpoint, it can be a detriment.”

According to the latest data, the vacancy rate for multi-family housing in Missoula fell below 1% at the close of 2020. While it has softened slightly in the first quarter of 2021 to 1.25%, a healthy market has a vacancy rate of 5%.

As the supply tightens, the average cost of rent has climbed 5.5% over the last year. 

“You’re seeing these pretty wide swings,” said Mellott. “What happened in Missoula is exactly the opposite of what happened in most major metros, where vacancy rates went up and lease rates went down. Missoula has run counter to that over the past year. That’s just a supply and demand imbalance, and it’s as simple as that.”

The past several years lend insight to the currently tight market. In 2016 and 2017, developers in Missoula were briefly overproducing units, which resulted in a vacancy rate increase by 2018. In response, the number of newly developed units began to slow around that time, just as the population began to grow annually by roughly 2%.

Now, the city is awash in a renewed building boom as the market tries to catch up, but it’s going to take time to do so, Mellott said.

“Clearly, you need to create more supply,” he said. “It’s pretty clear that the market has picked up the signal, but because of the planning timeline associated with any type of project, it takes some time for that to deliver.”

Housing experts in Missoula have said the city needs around 800 new units annually to keep up with population growth. The county added 2,200 new residents last year, but only 175 multi-family units were delivered to the market.

This year, data suggests that around 230 new units will come online, though that’s still not enough. But future years could see that change.

“The development pipeline shows the market is getting the signal,” Mellott said. “We’re tracking 900 units in 2022 and in 2023 and beyond, about another 600 or 700 units are anticipated.”

But just because a project is planned doesn’t mean it will be built, he added. If construction costs continue to climb or some other variable comes into play, various projects may not happen.

“Your construction costs are climbing faster than rental rates are climbing and incomes are climbing,” Mellott said. “The cost of lumber has increased 100% or more since last June. That’s going to have a big impact on construction costs.”

Sterling surveyed area builders over the past year to get a better sense of the rising costs associated with new construction, including multi-phased projects. The same unit build in 2019 with the same footprint and the same materials jumped 15% the next year.

Those costs are beginning to add up and land prices aren’t helping. They too have climbed an additional 10% or more, Mellott said.

“The cumulative effect is that it will make apartment units more difficult to pencil, and single family homes as well,” he said. “With construction costs rising faster than rents are rising and incomes are rising, all while the population is growing, at some point something has to give.”

Data suggests the market at some point will respond, and it could do so in a number of ways. It could result in an increase in local wages as employers struggle to attract and retain employees. But with construction costs rising 15% or more each year, it’s unlikely wages will rise at the same rate.

Mellott said developers could also accept lower margins, though banks and investors might not find that acceptable and respond by holding back on providing construction loans. Labor and construction costs could stabilize as the economy reopens, but that too is uncertain. 

“One other possibility is that population growth will drop,” Mellott said. “It may be that the workforce is not able to live here, and if they can’t afford to live here they won’t take jobs here, and if they don’t take jobs here, the population growth will level off or decline.”

The current market conditions could also prompt city and county leaders to address regulatory issues and permitting, though that also takes time – sometimes years in recent cases – and it’s often unpredictable.

The city recently denied one developer’s effort to provide more housing density in the high-income Grant Creek neighborhood before turning around a month later to approved a high-density project in another neighborhood. 

“One possibility, which isn’t always popular, is that the market could respond by increasing density. It’s a regulatory question,” Mellott said. “It resets some of the calculations on what it costs to build a unit. If you’re able to spread that land and infrastructure cost out over more units on the same piece of land, your overall cost goes down.”

Sterling and other industry leaders in Missoula plan to tackle the questions over the coming months as they work to find solutions for developers and investors, and to help steer Missoula’s booming housing market toward a more equitable end.

The city is trying to do the same by subsiding the market – buying properties with affordable housing in mind. Others want the market to correct itself and believe it’s possible with a little guidance.

“We’re trying to understand the needs, wants and desires, and what roadblocks people are facing in finding homes or rent,” Mellott said. “We firmly believe when an economic need is understood, the market will find a way to meet that need.”