The agricultural real estate market remained relatively steady amid 2020’s chaos, thanks to the inherent value of the commodities produced by farms, dairies, and ranches.
Considering commercial real estate’s overwhelming involvement with the built environment, the land sector can be an overlooked niche at times. If there was any question about our industry’s diversity in offerings, CRE includes Manhattan skyscrapers and Nebraska farmland. But those familiar with agricultural real estate understand the sector is dynamic, with its own challenges and opportunities as well as familiar issues faced by experts in retail, office, or multifamily properties.
To dig deeper into the land sector, we spoke with Doug Phillips, partner and REALTOR® with Schuil & Associates Real Estate, a firm that specializes in the agricultural land sector. Growing up in the farming industry and earning a degree in agricultural engineering, Phillips entered land real estate in 2008 with the experience and relationships to excel in a dynamic market that remains niche in CRE.
CIRE: Having been with Schuil & Associates for a dozen years, how has the sector changed in terms of investment types, analysis, and valuations?
Doug Phillips: There is a very diverse pool of buyers that look at this sector of CRE. But from the outside looking in, people might see it as a small, old-fashioned industry when, in reality, it’s quite the opposite. It’s dynamic; it’s changing. There is a lot of excitement and activity within the sector. While the typical buyer 50 years ago might have been a neighbor down the street, now it could be a large institutional fund from anywhere in the world.
CIRE: What’s been key to adapting and staying competitive in a market that is modernizing?
Phillips: The ag sector has always been relationship-based, and it will continue to be so. From that standpoint, brokers will need to have those relationships with local growers, dairymen, and processors — and to continue to build those relationships. It’s important to have the trust from those clients, because a lot of local farmers are skeptical of big buyers or institutional funds.
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CIRE: Considering the public health, economic, and social struggles related to COVID-19, how has the pandemic affected the land market?
Phillips: Initially, in March and April, there was some hesitation with buyers and sellers just due to the global uncertainty — that was true across all industries. That first shutdown was unprecedented and gave everyone reason to pause. Nobody knew how long it would last and what the total effects might be. Deals that were in process saw some delays with closings of banks, appraisers, title companies, etc. But everything has seemed to catch back up from the transactional side to where I would say it’s nearly back to normal. On the operations side of agriculture, for growers and producers, business never really stopped or slowed down. Ag is one of the most essential businesses, with food production and processing. It’s not possible for them to flip a switch and shut down their operations for a month or two. You can’t tell a tree to stop growing or a crop to stop maturing or a cow to stop making milk. That never really stopped. Processors now have safety protocols in place, and capacity is pretty much back to full speed.
Now, regarding pricing, we haven’t seen any big adjustments. All ag properties produce a commodity that has its own market. Many of those commodities were drastically impacted in the short term. Dairies are a great example. The price of milk really dropped. Initially, schools were closed. Every kid gets a carton of milk every day at school. Restaurants were closed, so butter and cheese production has really gone down quite a bit. That really affected things like dairy pricing.
On the flip side, you’ve got fruit and vegetable crops that saw the opposite effect. Consumer demand for healthy products instantly increased when shoppers were staying home, trending toward health-conscious buying decisions. In grocery stores, within hours, the produce section was empty.
There was quite a bit of volatility on the commodity side, but the value of the real estate that produced those commodities wasn’t impacted in ways that weren’t already in place. Ag real estate is interesting in that it doesn’t see the swift reactionary adjustments to pricing that you see in commercial and residential. It usually takes at least two production cycles before we really start to see values adjust due to the commodity market. For example, right now, we’re seeing low crop pricing for the almond industry. It’s historically been $2 to $3 a pound, but at the end of 2020 it was between $1.50 to $2. If that trend continues, we might see some pricing adjustments on almond orchards, but right now, we’re seeing it continue to be strong. That’s one example of the time frame for adjustments — and the pandemic didn’t really change it.
CIRE: Considering this delayed or muted reaction, do you see any significant changes in the market in, say, the next 18 months?
Phillips: We’re going to continue to see strong demand for quality properties in desirable locations. For ag, what that means is quality soil and water. Water supply is going to continue to be a big driver for value — especially those in high production areas with irrigated lands, as opposed to those dry farmed or distributed via rainfall. You’re going to see trending increased values of properties that have solid water supply, meaning you have access to wells and a second source like canals, irrigation districts, or rivers. But again, it’s not as nearly as reactionary as other markets.
Because of this, you can see a little bit of increase in demand due to fluctuation in other areas of the economy, like the very big swings on Wall Street. Investors don’t like those wild rides, so they often turn to the stability of farmland as a safe haven.
One trend continuing to gain steam with buyers and existing farmers is sustainable or regenerative ag — with cover crops, conservation tillage, and integrated pest management. You see development for water use efficiencies. A lot of technology with crops on the irrigation side is through drip irrigation or zero-loss to evaporation. These advances are going to continue to add value to those high-value properties.
CIRE: Speaking of environmental challenges, including climate change, how are those considerations factored into pricing?
Phillips: If you plant a permanent crop in the ground, like a tree of a vine, it will need to have a consistent water supply for 50 to 100 years. You’ve got to trust in companies that are advising you about what to anticipate. There are some interesting things out there for due diligence. Software companies have consolidated water data from various sources and overlaid it with satellite imagery to allow buyers to see the water situation on a specific property. They offer full reports with full analyses available to buyers, lending institutions, insurance companies, appraisers, and so on, because evaluating risk is so important.
CIRE: For our readers, who are familiar with CRE but maybe not so much the land sector, what unique challenges or obstacles are inherent in agricultural real estate?
Phillips: There will continue to be market fluctuations when it comes to agriculture thanks to unforeseen events, weather, food safety issues, pandemics, political events, nutritional fads, and changing tastes — these are completely out of human control and have a drastic effect on the bottom line. All of these actions can have an equal and opposite reaction, too. For example, if a huge weather event in Florida can wipe out the citrus industry for a year, then the growers in California and Texas will be in greater demand.
You’ve also got the trendy fad right now of a plant-based diet, meaning less beef and dairy. But that consumption is going to be made up somewhere else, right? People aren’t eating less, they are just shifting. Milk alternatives is one example. You might see less demand, but you have almond milk and soy milk. If someone is privy to where the consumption trends are headed, they can take advantage.
Taking a step back and looking at Schuil & Associates, what’s key to staying competitive as a modestly sized, family-run business in a very competitive market?
Phillips: Although the ag space is large and active, it’s still considered a niche market in the world of commercial real estate. In other areas, you’ve got huge global brokerage companies like CBRE, Cushman & Wakefield, Colliers, etc. Those are followed by an even bigger list of regional CRE companies. But there’s not really any large national or international company that dominates the ag real estate space. Regional companies like ours cover wide areas throughout multiple states and broad industries, but a lot of it is still made up from small, local brokerages — one- to five-person shops that only have one office.
Like I said, farmers are very relationship-based. They would prefer to work with brokers they’ve known for a long time. A lot of our agents come from a farming background. They grew up in the area where their office is. So, not only do they have those types of relationships, the generations before them knew each other. It’s going to be hard for a big national company to come in and change that.
Editor's note: This article is an adapted excerpt from a full-length Commercial Investment Real Estate
podcast. Visit www.cirepodcast.com to listen to the full episode or stream wherever you listen to your favorite podcasts.