By Martin Kidston/Missoula Current
Missoula investors with a little imagination could find opportunities in purchasing retail properties across the city, so long as they stay away from leasing to big box-store tenants, a local broker said this week.
In a presentation to Missoula-area property owners and investors, Berkshire Hathaway broker Matt Mellott said a new study suggests Missoula has room for retail growth, despite the glum news surrounding the nation’s box-store chains.
That would include the Shopko property located at 2510 S. Reserve Street, which is currently on the market for $11.59 million. It’s unknown if Shopko plans to stay in the location.
“Three weeks ago, Sears, JC Penney and others closed Montana properties, and here in Missoula we’ve lost Hastings and watched Sports Authority dry up, while Staples has downsized and moved,” Mellott said. “There’s been a lot of bad press for retail.”
Despite that bad press, retail vacancy rates remain surprisingly low across Missoula. According to figures presented in the inaugural Missoula Market Watch this week, the retail vacancy rate in Missoula sits at 4 percent, well below the regional average of 6.4 percent and the national average of 7.8 percent.
“In Missoula, the overall retail vacancy rate is the lowest of all the asset classes at 4 percent,” Mellott said. “I found that pretty surprising as we went through the data. The Missoula market for retail is actually pretty strong right now.”
In the first quarter of 2017, the net absorption for retail in Missoula approached nearly 60,000 square feet with an average rent of $13.65 per square foot. In comparison, the average rent for office space in Missoula sat at $13.02 per square foot.
“Retail is actually higher than office, which is rare,” Mellott said. “Office is usually more expensive than retail space.”
With a number of retail construction projects planned in the coming years, the vacancy rate is likely to climb. That includes efforts currently underway in the Old Sawmill District and plans for the Riverfront Triangle downtown.
“I expect that the vacancy rates will initially continue to dip a little bit more until all that stuff comes online, and then we’ll see vacancy rates climb,” Mellott said. “We can’t keep up with absorption in a market the size of Missoula for any extended period of time.”
Mellott noted the success of one local Brooks Street property owner who lost Hastings and Staples within a matter of months, leaving his 48,000-square-foot property vacant.
He has since back filled the property with Cash & Carry, which is gearing up to open, and a separate entertainment business that has yet to announce.
“Big-box retail can be a scary place to be, and fighting Amazon is not something I’d recommend,” Mellott said. “If you’re buying an income stream in the form of a retail lease with a big-box retailer, I would not count on that income stream being around by the time your lease is up.”
While relying on big-box retailers to pay a long-term lease is a risky proposition, Mellott said, landing non-traditional tenants to fill empty locations could provide new opportunities.
“As online retailers shake out, organize and under-capitalize brick and mortar retailers, you’ll have opportunities to obtain good space in good locations,” Mellott said. “If you’re able to retenant them with a tenant that doesn’t fight Amazon, then you’ve got some opportunities.”
Contact reporter Martin Kidston at info@missoulacurrent.com