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Report: Apartment construction in Missoula falls in 2019, even as demand grows

Posted at 12:48 PM, Feb 20, 2020
and last updated 2020-02-20 16:25:24-05

MISSOULA — With a growing population and a robust labor market, Missoula’s need for new apartments will continue to grow, especially as single-family homes increase in price and fail to meet ongoing market demand, a new report suggests.

But despite the need for multi-family units, the construction of apartments fell in 2019 and vacancy rates ended the year at just 3.7%. As a result, landlords stripped away incentives and rent prices ticked up, according to Sterling CRE Advisors in Missoula, which tracks the data.

“There’s fewer new construction of apartments in the past year and population growth has been stronger than in the proceeding year,” said Matt Mellott with Sterling. “Those two factors combined have increased the demand for apartments, and supply isn’t keeping up.”

According to the firm’s data, 266 apartment units came online in Missoula in 2019, a decrease of nearly 31% over the prior year. That resulted in falling vacancy rates throughout the year and rising rents.

With a population growth of 2.2%, it’s estimated that Missoula will need around 300 new apartment units per year to keep vacancy rates steady. The construction of single-family homes also fell in 2019, leaving nearly all forms of housing in short supply.

Berkshire Hathaway placed the median list price of a home in Missoula at $429,000 this week and the median sold price at $320,000. Just 185 homes were up for sale.

“The harder the city makes things like (townhome exemption developments), the harder it is for people to buy homes,” said Mellott. “People that would otherwise want to buy or go rent single-family houses aren’t able to do it because the cost is so high, so they’re living in apartments by necessity, not by choice.”

The tight market also has other impacts, the report suggests. With vacancy rates low, housing experts have seen a shift in leasing trends as landlords roll back incentives. A year earlier, many landlords offered everything from free rent to gift cards in a push to fill units after a boom in apartment construction.

The lone exception to tight vacancy rates may be student housing on the University of Montana campus, Mellott said. With two new student housing projects completed in downtown Missoula, campus living has fallen out of vogue and vacancy rates are as high as 20%.

“It’s an inventory that’s kind of a ghost because we don’t track it and nobody else tracks it, but there’s still capacity that’s there,” Mellott said. “If affordability gets out of control, it’s a viable spot that could start siphoning off demand for apartment units.”

The report, which culls national data, suggests that population growth in Montana, Idaho and Arizona will continue to climb as West Coast residents seek cost relief and quality of life. Missoula’s economy is also strong, helping bring new workers into the community to fill skilled positions.

As long as the labor market continues to grow, demand for all forms of residential space will rise. But with land values and construction costs high, meeting the city’s housing needs is becoming increasingly hard.

That holds true in Missoula’s new opportunity zone off West Broadway as well, where interest among developers is high, Mellott said. But so far, housing hasn’t emerged as part of the mix.

“What we’re seeing is most of the benefits of the opportunity zone are being absorbed by the current landowners,” said Mellott. “There’s been a price appreciation inside the opportunity zone simply because of the tax benefits. It’s actually making it really tough to do opportunity zone projects for residential because the rents aren’t high enough to support the land values that have gone up.”

Several projects are underway in the opportunity zone, but all represent commercial development, including professional offices. Such construction can fetch higher rents, making the projects financially feasible, Mellott said.

High property values in other parts of the city also make housing difficult, especially if the goal is to create workforce housing.

“The only place that has some land within range is the Mullan and Reserve area, and even that’s appreciating too, just not to the same degree the infill stuff has,” said Mellott. “Land costs and construction cots are high, making it hard to pencil a project.”