Montana advisor offers commercial real estate predictions for 2023

Claire Matten

(Sterling CRE) In 2023, Montana CRE investors, owners, tenants and developers are seeking answers after a volatile year.

As we look ahead, here are trends we predict will shape the commercial real estate market in Montana. Knowing what’s next can help guide smart decisions about your next Montana commercial real estate move in 2023.

• The ask-bid gap will begin to close as sellers become more realistic about pricing. Sellers with well-performing assets have been holding tight to 2021 pricing as the cost of capital continued to climb.  As we get comfortable in our “new normal” Sellers will start to adjust to market expectations
• That may not happen until later in the year, as we don’t expect pricing to level out until the third quarter of 2023. This means that there will likely be a drop in the number of transactions completed in 2023
• Commercial real estate defaults may rise as short-term notes become due. Rising interest rates along with increasing labor costs, inflation, and other factors will cause some owner-occupier stress. Investment deals financed under record-low interest rates set to adjust will find some investors unable to hit their return targets
• Speculative development will slow in 2023. Money center banks (i.e. JP Morgan Chase, Wells Fargo) have paused on speculative development, a trend that is trickling down to the local lender level as well.

Overall, these trends suggest that the commercial real estate market in Montana in 2023 will be marked by an air of caution and uncertainty, as stakeholders navigate a shifting market landscape – at least for the first few months.

It will be important for property owners and investors to stay up-to-date on market trends and be prepared to adapt in order to achieve success.

Montana CRE: Multifamily in 2023

• Vacancy rates will continue trending upwards, approaching equilibrium. That’s especially true for Missoula and Gallatin counties, as thousands of units are set to deliver in both markets. Specifically, knowing that at least 2,000 new units will be added to the Missoula market in 2023, we predict this will lead to higher vacancy rates. In Gallatin County, we’re anticipating at least 1,300 new units to come on board through the new year – creating another situation where vacancy rates are likely to rise.
• Rent growth will plateau or slightly decrease in 2023. As the supply of rental units increases and demand potentially flattens, landlords may have to compete more aggressively for tenants by lowering rents or other incentives – which has already begun in Gallatin County, as many incentives are now available for renters.
• Cap rates for multifamily assets will increase by 150 basis points or more in 2023, as compared to 2021 averages. The cost of capital and unknown exit cap rates will result in lower risk tolerance and returns will need to move higher in order for deals to pencil.
• It is likely that the leasing market in Montana may become more competitive in 2023, as landlords navigate a shifting market with more options for tenants.

Montana CRE: Industrial in 2023

• Speculative developments will decline as lending restrictions remain in place. This means that there will be fewer new industrial projects being built, as developers face challenges in securing financing
• In turn, we expect that rents for industrial properties will hold steady due to the lack of speculative product delivering in 2023. With fewer new buildings coming onto the market, demand for existing industrial space is likely to remain strong, helping to support rental rates
• Cap rates for industrial assets will increase by 150 basis points or more in 2023, when compared to 2021 averages. Cap rate movement in this sector is tied to the debt market and what a buyer is able to pay to meet their required returns
• While some investors may remain cautious about investing directly in cannabis-related assets, “cannabis adjacent” uses, such as packaging, private incubators, cosmetics manufacturing and distribution centers serving the cannabis industry, will continue to draw interest in 2023
• Industrial outside storage (IOS) will remain popular but may become more difficult to find due to zoning restrictions. As demand for industrial space continues to grow, IOS properties may be seen as a valuable asset but may be more difficult to come by due to limited availability. However, IOS is an emergent asset class that is not yet widely used in Montana

Claire Matten is a CCIM/SIOR with Sterling CRE in Missoula.