Real estate interest in farmland is sprouting, as land values are up 7% nationally year over year
By Ashley Fahey
Tampa Bay Business Journal
Published: Sep 15, 2021

Soaring land values, inflation concerns and a desire among real estate investors to diversify their portfolios is prompting new interest in farmland real estate.

U.S. farm real estate value is averaging $3,380 per acre this year, up $220 per acre, or 7%, from 2020, according to U.S. Department of Agriculture data from August. Since 2010, the value of farmland real estate has been rising annually, beyond a slight dip in 2016.

But the increases seen so far in 2021 represent the highest year-over-year jump seen since 2014.

Real estate values for farmland remain highest in the Midwest, averaging more than $5,000 per acre in places like the Corn Belt, which includes Illinois, Indiana, Iowa, Missouri and Ohio.

"The last six months have been an off-the-chart period for Midwest farmland," said Bruce Sherrick, professor and director of the TIAA Center for Farmland Research at the University of Illinois. He said high-quality farmland in the Corn Belt is up 15% to 20% this year.

The growing value of farmland real estate — combined with plenty of capital looking at less mainstream, but potentially more stable, asset classes — is prompting a wave of inquiries about farmland real estate opportunities.

One group formed a qualified Opportunity Zone fund, Promised Land Opportunity Zone Farms I LLC, which invests solely in farms across the United States. The fund was created earlier this year by Aurora, Illinois-based investment management firm Servant Financial, working with farmland REIT Farmland Partners Inc., based in Denver.

John Heneghan, president of Servant Financial, said he had been looking at OZ properties and investments in multifamily and mostly urban settings but never found the right fit. Since Covid-19, Heneghan said he was looking for something that felt safe amid the pandemic's disruptions.

"I started getting comfortable on the macro for farmland and looked into regulations on how OZ tax benefits would apply to farmland," he continued. "Long story short, it was, in my mind, easier to do (an OZ) project on farmland than in an urban setting."

There's less specific guidance on how much a property has to be improved when dealing with just land and not buildings, Heneghan said. A tax advisor Servant consulted with before launching the fund estimated up to 40% of OZs are in rural America but many funds hadn't figured out how to use the tax benefits in those areas. Beyond farmland, it's hard to do much at scale, Heneghan continued.

Last month, the fund purchased 4,528 acres of cropland in eastern North Carolina for $29 million, bolstering its portfolio of nine farms and 3,800 acres in Illinois, South Carolina and Mississippi. Heneghan said Promised Land is under contract on a citrus farm in California.

At the properties acquired by Promised Land, improvements are made in drainage, irrigation and grain storage, which helps a farm's productivity, Heneghan said. The fund goal is to raise between $200 million and $250 million in equity.

Interest in investing in farmland real estate is as high as it's been in 30 years, Sherrick said. Pension funds are among the types of institutional players in the space; there are only a couple of REITs, public and private, that specialize in farmland. Nuveen Real Estate Ltd. is one of the biggest institutional players in farmland.

Heneghan said a lot of farms today are still owned by farmers. He estimated less than 3% of farmland is currently institutionally owned.

"Most people I talk to in family offices and other institutions, they’re not familiar with the farmland performance and return profile," Heneghan said.

Sherrick said farmland is an underleveraged and stable asset class. It's also viewed as a good hedge against inflation, and agricultural products are among the few items the U.S. exports more than it imports, he added.

But, Sherrick continued, it can be difficult to pull off a fund because farmland doesn't turn over in great enough quantity to have a ton of liquidity.

"Everybody is trying to start a fund or program," he said. "There are literally trillions of (assets under management) chasing farmland now. The interest is very high (but) it becomes a difficult thing to pull it off without access to deal flow (and) specialized management ability."

It's a long-term investment, too, and requires understanding how farm policy, trade and the food supply chain function. There are also key differences between farmland assets and what gets planted: Row and permanent crops, for example, yield different returns.

Sherrick said investors wanting to add farmland to their portfolio mix need infrastructure in place to acquire and manage it, as well as to understand the intricacies of farmland real estate. There are also external factors, such as increased weather risks from climate change, that'll have to be considered in acquiring and managing farmland real estate.