Despite facing a number of headwinds, some of which are inherent (loss due to severe weather and wildfires) and others which are operational (declining profit margins), the US land markets are poised to attract more money and attention in the coming years. Advances in technology (agtech) and a shift in collective social values (increased focus on environment), will increase the production capacity – and ultimately cash flow – that land can produce. A low interest rate environment and the historical relative price stability of land will also help drive greater demand for land properties. This market climate will encourage more institutional money to move into the property type and will accelerate the consolidation already underway.
“Buy land, they’re not making it anymore.” – Mark Twain
Lay of the land
Approximately 9 million acres of privately owned rural land was transacted in 2019, an aggregate area roughly the size of Denmark. With over 1.9 billion acres of land, the continental US is one of the largest, most fertile, and developed land markets in the world; yet land is often (and too quickly) categorized as a niche asset that doesn’t get much market attention. However, the stage is set for that to change in the years ahead.
A real asset, land is closely related to real estate. However, because more than 80% of the US population lives in urban areas which account for approximately 2% of all US land, rural land (simply referred to as land from here on out) is rarely in the spotlight. So, despite its close relationship with real estate, it is clear that land is the middle child amongst the real asset siblings.
Similar to real estate, land must be managed to become productive and generate cash flows. We see four common productive uses of land:
- Cropland: used for growing crops for either human or animal consumption
- Forest: used for growing trees or preserving habitat
- Range & Pasture: used for raising and grazing animals
- Vacant Land: land with no current built structures, but potential for development
Each of these uses of land plays a critical role in our national and global economy and will continue to do so in the future. Even though the US is blessed with an abundant supply of acreage, there are major forces underway that will likely bring more market attention to focus on land in the coming decade. Some of these forces are headwinds that pose challenges to existing landowners and valuations (i.e., severe weather events, wildfires, and shrinking farm profit margins), while others are tailwinds that will increase the potential value of land (i.e., technological innovations, greater collective focus on the environment, population dispersion from urban areas). In this report, we look at the historical trends in transaction data for continental US land before discussing why land is attracting growing attention from institutions as an investment.
In this report we leverage over 1.1 million land transactions across more than 2,900 counties in the continental US. Each transaction occurred between January 2000 and November 2020 and was greater than $10,000 and more than 20 acres. Multi-property sales were excluded to eliminate the potential confusion with sales that cross multiple county boundaries. To observe differences in different property types, we grouped the property types that were recorded at the county level into four categories. The categories of properties include:
- Cropland: Includes lands described as agricultural, farm, nursery, orchard, truck crops, and vineyard. More than 749,000 historical transactions.
- Forest: Includes lands described as forest, mountainous land, and recreational vacant land. More than 76,000 historical transactions.
- Pasture & Range: Includes lands described as dairy farm, livestock, pasture, and ranch. More than 61,000 historical transactions.
- Vacant Land: Includes lands described as commercial, general, industrial, and residential vacant land. More than 227,000 historical transactions.
The regional comparisons in the report are based on the regions defined by the US Census (excluding HI and AK). The following are the four regions and the states contained in each:
- Midwest: IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI
- Northeast: CT, MA, ME, NH, NJ, NY, PA, RI, VT
- South: AL, AR, DE, FL, GA, KY, LA, MD, MS, NC, OK, SC, TN, TX, VA, WV
- West: AZ, CA, CO, ID, MT, NM, NV, OR, UT, WA, WY
A growing market
Over the last 20 years the US land market has grown at a rate of 5-6% per year.
Aggregate Acreage: The aggregate acreage transacted in 2020 (8.4 million acres through November 2020), was 3.6x the amount of acreage transacted in 2000 (2.5 million acres). The compound annual growth rate (CAGR) for the last two decades for acreage transacted is 6.6%. Total acreage transacted grew positively year-on-year 14 of the last 20 years.
Number of Transactions: The count of land transactions in 2020 (89,961 transactions through November 2020), was 2.9x more than the number of transactions in 2000 (30,111), or a CAGR of 5.6%. Total count of land transactions grew positively year-on-year 14 of the last 20 years.
- There were notable differences between property types. In particular, Cropland has seen the most positive increase in transaction count (6.5% CAGR), while Range & Pasture has seen no growth (0.0% CAGR).
Transacted Volume: The total transacted volume ($) for land in 2020 ($32 billion through November 2020), was 4.6x more than in 2000 ($5.7 billion), or a CAGR of 8.9%. Total dollar volume of land transactions grew positively year-on-year 14 of the last 20 years.
- Again, there were notable differences between property types. Cropland and Vacant Land have seen the most positive increase in transacted volume, with 9.7% and 9.1% CAGRs, respectively, while Range & Pasture had the lower end of the range of growth (4.2% CAGR).
Increasing market activity has helped to stabilize and support annual price appreciation between 3-5%.
- Annual price appreciation for land (i.e., YOY changes in median price per acre) has generally been between 3-5%, with some variation by property type which is discussed below. Over the last two decades this level of price appreciation has exceeded inflation. While the price appreciation of land has trailed other investment options (i.e., stock market), it has experienced greater price stability and is overall less volatile.
- Cropland: Since 2000, the median price ($ / acre) increased by 1.9x, from $1,683 in 2000 to $3,260, or a CAGR of 3.4%. There were positive YOY price changes in 199 of the last 228 months (87%). The most severe monthly YOY negative price change occurred in December 2009, when the price fell 5%.
- Forest: Since 2000, the median price ($ / acre) increased by 1.7x, from $1,500 in 2000 to $2,537, or a CAGR of 2.7%. There were positive YOY price changes in 158 of the last 228 months (69%). The most severe monthly YOY negative price change occurred in March 2010, when the price fell 12%.
- Range & Pasture: Since 2000, the median price ($ / acre) increased by 3.7x, from $999 in 2000 to $3,756, or a CAGR of 6.8%. There were positive YOY price changes in 159 of the last 228 months (70%). The most severe monthly YOY negative price change occurred in April 2007, when the price fell 29%.
- Vacant Land: Since 2000, the median price ($ / acre) increased by 2.8x, from $1,113 in 2000 to $3,184, or a CAGR of 5.4%. There were positive YOY price changes in 174 of the last 228 months (76%). The most severe monthly YOY negative price change occurred in April 2009, when the price fell 12%.
Other key factors that have affected the price appreciation include size of property (acreage) and region.
- Acreage: Approximately 80% of all land transactions are for tracts of land less than 100 acres. There is a persistent price discount for transacting larger tracts of land. By comparing the price per acre for transactions of larger tracts (more than 300 acres) to smaller tracts (less than 100 acres), we quantified this “big-to-small” discount. Over the last 2 decades, the big-to-small discount has averaged approximately 60%, meaning that buying larger tracts has resulted in lower per-acre pricing. The big-to-small discount was greatest for Cropland (71%) and smallest for Forest (58%).
- Region: Pricing differences based on region and property type varied. In terms of absolute price per acre, the West stands out as the most expensive acreage for Cropland and Forest, but then trails the Midwest and South for Range & Pasture and Vacant Land – at least in the most recent years. However, it is the Midwest that has seen the strongest price appreciation over the last two decades – driven predominantly by the Range & Pasture (11.3% CAGR), Forest (4.9%) and Cropland (4.3%). In the Northeast, Forest and Vacant Land prices have increased the most since 2000 – 5.4% and 6.1% per year, respectively.
Despite the pandemic, positive market trends for land continued through 2020.
- Prices remained intact – did not see the pricing pullbacks that were seen in 2007-2009 and generally avoided the downward pricing pressure seen across many types of real estate (i.e., hospitality, retail, office).
- The average dollar size of transactions held steady – despite the slowdown early in the pandemic, the rest of the year made up for the lost ground.
- The average acreage transacted continued to converge – heading towards the 75-100 acre range.
Market environment ripe for change
Land properties are facing numerous headwinds, both in the near-term and long-term…
- Loss due to severe weather and climate events: 2020 was a devastating year in terms of severe weather events. According to the National Oceanic and Atmospheric Administration (NOAA), there were 22 separate billion-dollar weather and climate disasters across the US in 2020. This was well above the prior annual record – 16 events – which occurred in both 2017 and 2011. These 22 events cost the nation approximately $95 billion in damages. While this measure is imperfect – as it is not comprehensive (e.g., events with loss less than $1 billion) and includes loss estimates for other items other than land – it does illustrate the risk of these events.
- Declining profit margins (and increased reliance on government support): Reading the headline numbers, 2020 would have looked like a bumper year for farm financials. However, on a deeper look, one would see that the massive jump in nominal net farm income (up 43% from 2019) was not driven by increased demand for crops and livestock, but actually was driven by coronavirus government stimulus. Remove the government stimulus and cash receipts from the sales crops and livestock are expected to fall 1% in 2020 from 2019. Over the last decade, farm profit margins excluding government support have fallen from approximately 25% to 18%.
- Concerns on the financing side: Debt loads across farms have been increasing since 2010 and continued the trend through 2020. On average, 65% of total farm debt in 2020 is real estate related, while the remaining portion is non-real estate. Rising farm real estate debt has been the driver behind increased debt loads and recent deterioration in solvency ratios. Over the last two years, some concern has been raised over frothy valuations and loose credit standards, and comparisons have been made to the 1980’s crash. However, the worst of these concerns have not come to fruition (yet?) and the credit environment remains relatively benign – although many lenders are proceeding with greater caution.
…however, recent technological and social changes point to a brighter (and higher yielding) future…
- Advances in technology: In the last few years, there has been a significant increase in investment in technology and innovation focused on improving agriculture and land management. Despite the agtech industry still being in the nascent stages in terms of adoption, the amount of venture capital and institutional money that has moved into the space is a boost of confidence that this is not just a quick fad. Current VC investment is pacing around $20 billion per year – more than 6x from 2012. Technologies that touch all aspects of the agricultural process are being created – from growing, harvesting, storing, transporting, and selling – the agtech revolution aims to touch and modernize nearly all aspects of agricultural production and land management in the coming decades.
- Shift in collective social values (increased focus on the environment): In the not so distant past, when portfolio managers and other capital allocators talked about “green finance”, “socially responsible investing”, and “ESG” (environmental, social, and governance) it was hard not to be skeptic. While these concepts were agreeable and seemingly virtuous, they also seemed like potential marketing ploy or cover for under-performance. However, social and regulatory demand for more considerate capital allocation coupled with the right political climate, have made these once-questionable terms seem far more serious in 2021 and beyond. Additionally, if these social, political, and capital winds keep pushing towards a world where ESG factors are given greater weight in decision making, new markets may be created or expanded (i.e., carbon, conservation) which could benefit sustainable land management practices.
- Shift away from urban centers: Even before the pandemic, many people were moving to lower cost of living metropolitans in the South and West. The pandemic appears to have accelerated this, as well as sparked a renewed surge in demand for suburban living – especially single family homes. If this trend continues, more housing will be needed to meet the demand, which means more construction on properly zoned land.
…making land properties relatively well-positioned for the years ahead.
- Low interest rates and higher inflation expectations: The recovery will likely be as uneven as the pandemic recession itself – where some parts of the economy flourish while others struggle. Seeking to stimulate growth and a speedy recovery, the Federal Reserve has committed to keeping interest rates low for the foreseeable future and has changed the way in which it will target inflation. With access to cheap credit and seeking yield, many capital sources will be looking all over for yield – resulting in more attention given to the alternative investment space, including land. And the close tie to commodities for many types of land should be attractive, as it will serve as a partial inflationary hedge.
- Historical price stability: Even though land has not been the most exciting asset type in the past, the long-term track record of a positive reward-to-risk profile will likely serve as a confidence booster for many capital sources looking to enter – whether on the debt or equity side.
- Ripe for consolidation: Greater presence of institutional ownership may spur a new wave of consolidation across the land market. While consolidation is not new to the land market, the speed of consolidation in terms of the number of farms and average size of farms has slowed in recent decades
In conclusion, even though the current land market faces significant headwinds, the social, regulatory, and technological tailwinds are stronger. Coupled with the current economic environment outlook – characterized by low rates, positive inflation, and high valuations – the present period appears to be ripe for institutional capital sources to take a renewed look at land assets.