Several large projects have made a significant dent in Missoula’s housing shortage and the rental vacancy rate has increased significantly as a result, leading to lower prices on some types of units.
That's according to Claire Matten with Sterling Commercial Real Estate Advisors in Missoula. She recently compiled a survey and analysis that showed Missoula's current overall apartment vacancy rate at 8.24 percent. That's much higher than the average vacancy rate of 3 percent in 2017, according to the Missoula Organization of Realtors.
Matten said the new 468-bed ROAM Student Living project downtown, as well as new apartment complexes near Reserve and Mullan, and the large Cambium Place housing project in the Old Sawmill District had a direct impact on vacancy rates. It’s a reversal of a four-year trend of an ever-tightening rental market.
“The apartment rental market has been exceptionally strong since 2014 in Missoula thanks to millennials forming new households, 30- to 40-year-olds remaining in multifamily [housing], and baby boomers downsizing to apartments,” Matten said. “Missoula’s status as a leading destination for retirees has also impacted the rental market and will likely contribute to large gains in health care employment in the future."
She said job growth in Missoula has resulted in rapid population growth in recent years.
"This has had a ripple effect on the occupancy levels of multifamily developments," Matten added.
A wave of new apartment construction hitting the market in the summer of 2018 started to lure renters away from their old digs, leaving many of those vacant. That’s called “decreased absorption rates” in industry parlance.
Matten said there are indications of more concessions offered by landlords to get new tenants in the door, such as discounts on the first month’s rent and lowered prices. However, she said developers are now starting to look to avoid building more apartments in Missoula.
“Higher borrowing costs and increasing vacancy rates should lead to a cooling off of the apartment boom,” she said.
An estimated 295 units are set to be delivered in 2019, compared with 525 units built in 2018 and 311 units built in 2017.
“This is significantly off the pace of the preceding two years,” Matten explained. “However, the ongoing challenge of finding affordable single-family housing within Missoula city limits will keep demand for multifamily housing steady.”
Interestingly, the highest vacancy rate in Missoula is for two-bedroom, one-bath units, and the rental competition created by all those vacancies shows owners reducing rates to fill them.
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However, one-bedroom, two-bath units are almost completely occupied and have higher rental rates as a result.
The asking rate for the single vacant one-bedroom, two-bath apartment Matten found was $995 per month, while the average asking rate for the 133 vacant two-bedroom, one-bath apartments was $862 per month.
“One could speculate that the one-bed, two-bath occupancy level could be related to fewer of these units currently offered,” Matten said. “This style of unit would appeal to couples on the brink of expanding into single-family housing, or single professionals who like the idea of a master suite with a bathroom along with an additional bath for guests. Since the highest population percentage in Missoula falls in the age range of 20-39, this unit style most likely attracts a large portion of this demographic.”
Matten also analyzed the vacancy rates in different neighborhoods, finding that the Target Range neighborhood has the lowest vacancy rates and the northwest area of town has the highest rates.
“With a good deal of multifamily development occurring on the west end of Missoula in recent years, it has apparently filled a need,” she said. “Target Range and Mullan/Reserve corridors are showing the lowest vacancy rates, while areas such as the Northwest and South Side of Missoula are hitting the higher end of the vacancy spectrum.”
The mellowing multifamily building boom presents opportunities, she said.
“With Missoula’s economy on solid ground and favorable migration trends, this sector should remain healthy for developers and investors in the future,” she said.
Local real estate agent Brint Wahlberg told the Missoulian that builders are seeing a shortage of skilled workers and higher construction materials prices. That's leading to higher building costs.
"There's a national skilled labor supply shortage," he said. "It's really impacting the building industry. From excavators to electricians to plumbers to framing crews, their labor costs are way up. It's hard to find, it's hard to book."
Wahlberg said the lack of availability means delays pile up on projects, meaning projects that used to take four to six months now take eight to 10 months. And that means extra loan payments, which adds to the cost of the project.
"Everything piles up," Wahlberg said.