Feb 19 2010
Ranch Market Trends
Market Trends by: Jim Taylor and Tim Murphy – Hall and Hall
Market Trends as a title itself is not fitting for a year end synopsis of 2009 as the ranch market stood fairly still for this calendar year. Portions of the market are seeing volume off by as much as 80%. The activity that has occurred points towards receding values, in some cases as much in percentage terms as was witnessed in the mid 1980’s. Though the future is hard to predict in this current environment, there are several aspects of this market worth discussing.
We are fortunate at Hall and Hall that our volume has not been off as much as the overall market. We are off about 1/3 from 2008. Transactions are still occurring, both on listed properties about which we have let you know in our monthly e-market updates as well as a number of “under the radar” ranches that were handled confidentially and do not appear on our website or in any of our periodic updates. There are buyers looking at ranches to buy and, combined with a normal level of internet activity, it appears there is still quite an audience. What are selling are high quality “recreational” ranches at discounted levels in most cases. The speculative buying market has completely vanished and today’s buyers are looking for long term family holdings or pure agricultural operations. It is interesting to note that activity on the “pure ag” side has been comparatively high and values are stable to perhaps very slightly lower.
The western ranch market has proven to be not as volatile as the markets for other types of real estate – just less liquid. The majority of landowners have enough wealth to endure these tough economic times and most have not leveraged their ranch land assets. However, there are notable exceptions. Several “deals” have occurred this last year related to situations where excessive leverage came into play. They sold at discount levels approaching 20% off of the 2005/6 market. We anticipate that there will be a few more of these sales that will have to work their way through the system in 2010 before the market reestablishes its equilibrium. In that regard, we have re-evaluated the market and we now feel that 2005 through early 2006 was in fact the rational peak in the market and many of the sales that occurred between then and 2007 reflected what has come to be known as “irrational exuberance” or perhaps a “bubble.” We reckon it will be a long time before we recover any of that last 25% that occurred after 2005/6. In the same way, we hope that once the few real distress sales work their way through the system, a more sane base will be established.
At this point, there is simply not enough volume to state that there is a defined discount in the market. For sellers who are forced to sell, it has taken upwards of 20% discounts off of 2005/6 to entice buyers. We have not seen many “short sales,” where the debt exceeds the sale price. It has also been gratifying to see a few sales where a willing seller and a willing buyer with neither party under duress came to terms at price levels that are within range of the 2005/6 market – some even arguably at that market level. This is a more likely equilibrium point once the few remaining distressed situations have moved through the system.
Clearly, each part of the market is reacting differently. The greatest loss in value is for lands that earlier experienced exceptionally high price increases such as those found in near proximity to resorts and the more sought after western cities. Many properties in these locales experienced high levels of speculation. In contrast, the more remote and more agriculturally based properties did not see such high levels of price inflation and as a result they are now not experiencing high levels of price deflation.
What is a welcome feature of these recessionary times is the appearance of some exceptionally high quality properties for sale. Presently, there are multiple opportunities available for ranches that represent truly lifetime opportunities. There are indicators pointing towards increasing volume in 2010. Twelve months ago, our economy was still freefalling causing unparalleled levels of uncertainty. In spite of the fact that our country’s economy continues to languish and we may experience a lengthy transition back out, there is a far different sentiment today. Year end 2008 sales collapsed without carrying business into 2009. While Hall and Hall’s 2009 sales have been off, we have carried some business into 2010 and more importantly, contrary to the beginning of 2009, there are buyers in the market and sellers have come to accept that whatever bubble was there has now burst. Also, the buyers that we are seeing, while they are expecting to get a good buy, are more focused on finding something that they like and that will work for them. This year may prove to be the best time and the last chance for buyers to capitalize on the few remaining “deals.” In addition, because the deals are often not available on the specific property that one wants to buy, there is an extensive inventory of very well priced opportunities. For an educated buyer, this is an attractive time to look.
It is important to address a segment of the market, mentioned briefly above, that has been remarkably stable over the last decade. That is the farm market and to a somewhat lesser degree the market for ranches whose value is almost entirely based on their agricultural production. While we saw some softening in prices over this last year, these properties are generally in demand and there are very few actively on the market. Top quality farm properties are particularly hard to find. They are being pursued both by the usual suspects – operators and private investors – and by institutional investors lured by high commodities prices and the ability of these properties to be leased out or operated directly at a good profit. Again, the recognition of investment quality rural real estate as a legitimate asset class is becoming increasingly pervasive and it is creating growing demand across the board.
Looking farther down the road, the demographics are favorable with the baby boomers moving into retirement and investment quality rural real estate increasingly being recognized as an asset class that fits into a long term investment portfolio. It is also one of the few asset classes where the investment is measured based on long term appreciation, inflation protection, stability and, most important of all, the pleasure and happiness that the land brings to its owners and their employees, friends and families.
