Land: They Aren't Making Any More Of It

Those iconic words come from the 20th century humorist Will Rogers, who opined on many subjects but hit a grand slam home run with that one, when it comes to discussing real estate.

Land. It is fast "disappearing," and despite the wild economy we are living through, is (depending on "what" and "where" it is located)  skyrocketing in value in many parts of the United States. Of particular interest is farmland in America's heartland. Commodity prices are high, as corn futures hit new levels every week due to worldwide demand for it as both a food and fuel source. In many parts of the U.S., hay prices have gone up because farmers are taking pasture land out of grass/hay production and planting corn fencerow-to-fencerow in an attempt to cash in on record corn prices.

Even land with a bit more "rise and fall" to it is in demand. I just put acreage that has been in my family since the 1800s into contract with a buyer. Located in the foothills of the Appalachians, its value is in hay, use for cattle production, recreational/hunting ground, and development into weekend getaway cabins/cottages. Further, it has been used for timber production and continues to be valued for its significant maple and oak stands.

Many stories in recent months have examined the emergence of farmland as perhaps the nation's most valuable investments (though with the past two weeks' stock market rollercoaster, a lot of folks are looking to skyrocketing gold prices as an alternative for their investment dollar). There was even a cover story in one of the nation's weekly news magazines, Time, touting farmland as the place to put your money.

CCIM Institute's Commercial Investment Real Estate (CIRE) magazine has as its cover story this month a piece on how "opportunistic investors" are placing their bets on land. Whether its farmland, or fallow development ground, money is moving into those areas. Rich farmland has been trading at a premium for more than a year. Development land is trading at bargain-basement prices, and has been slower to trade, due mostly to lack of capital by developers, lenders unwillingness to risk capital when development is nil, and far fewer developers even in the game these days.

The farmland play is fascinating. The highest priced land is in the heartland region of the U.S., as I noted earlier, with demand no one has seen in decades and unheard of prices being bid.

There may not be much call for tracts on which to build commercial real estate in 2011, but agricultural land is a different story. From real estate investment trusts to alternative energy providers, buyers are acquiring expansive land parcels that can generate revenue from crops or solar power.

“Wall Street is investing heavily in agricultural land, and there are a multitude of reasons why,” says William Hugron, CCIM, senior vice president of Newport Beach, Calif.-based Ashwill Associates.

In the Midwest, REITs, pension funds, and other institutional investors are buying farmland as a diversification play and an alternative to more volatile property types. Once acquired, these commercial real estate entities bring in professional farm management companies to operate the holdings.

Even timberland is enjoying increasing demand, Hugron says. Indeed, the NCREIF Timberland Index showed total annualized returns for the property type averaged 0.75 percent in the first quarter of 2011, significantly higher than the average return from the same period a year ago, and ending several years of declining returns.

As with farms, the trend in timber is toward professional management companies that can maximize productivity and enjoy economies of scale.

Development land, on the other hand, is a "throw the dice" investment. Housing starts are pretty much non-existent. Apartments are being developed, but not much else. Lenders are taking back development land at levels far exceeding their comfort zone. In fact, I've received calls from two different lenders in the past two weeks asking whether I would consider listing land they have in their inventory from developers that went bust.

Even at bargain-basement prices, most land investments today are a gamble. A land buyer is placing a bet that demand for commercial real estate projects will return before property taxes and other holding costs eat up the potential return to be made from the site’s eventual sale or development. And since the onset of the recession, few investors have been willing to take that risk.

“The land market is dead,” says Dan Fasulo, managing director of Real Capital Analytics. “That said, activity is perking up in a few select markets around the country.” The New York-based research company tracks commercial real estate transactions, but with few land sales occurring, it hasn’t published a land investment report for years.


Though the market for commercial land is weak, U.S. transaction volume in the sector topped $1 billion in both the fourth quarter of 2010 and the first quarter this year, RCA found. That’s up from roughly $500,000 per quarter throughout 2009. During the peak year of 2007, quarterly volume averaged $8.6 billion.


In Manhattan and a few other markets, well-heeled investors are buying and holding land until the demand for new construction returns. And they may not have long to wait. Construction nearly ground to a halt after the collapse of Lehman Bros. in 2008, Fasulo notes, and vacancy rates across commercial property types are declining despite slow economic growth. He predicts that development will come roaring back in primary markets this year as investors and developers race to deliver the first new projects.

Here in Central Ohio, the only development taking place -- for the most part -- is multifamily. The demand for apartments in many markets across the U.S. is strong, and as a stable, secondary market, the Columbus area has room for more inventory. But within a couple of years as new units come online we will again become saturated and new building will slow down. Nationally, demand for land for MUH has again picked up, and the CCIM article concurs with my assessment:

REITs — especially apartment REITs — will begin a flurry of site acquisitions this year in a race to be the first developers to introduce new projects in primary markets, Fasulo predicts. Other investor types will follow that lead in the ensuing years and in other property types as demand recovers.

The CCIM article looks at demand and trends in general, and examines, in particular, the Florida and Texas markets, as well as problem markets that were hardest hit by the housing "bubble," and then where CRE properties were mostly likely to get into trouble.

Worth the read, then pass it on.