Market Trends: Hall and Hall Winter Spring 2012 newsletter article:
Before launching into the hard numbers for 2011, I wanted to share a philosophical discussion we have been having within the company related to the age old question of “is bigger better?” In analyzing our business mix, we realized that as much as 90 percent of our business comes from existing clients or from referrals from friends and clients. For that reason we have, somewhat reluctantly, come to the conclusion that the experience and knowledge base provided by our work for and access to literally thousands of clients and friends over a broad geographic region allows us to offer the very best advice and service to you in virtually any situation. On the real estate sales side, it allows us to cast the broadest net to bring in potential buyers. With that in mind we have decided to continue to allow organic growth as opportunities arise taking advantage of the latest communication technology and our partnership structure to be sure that you receive the full advantage of our experience and knowledge base. Basically, we will let you dictate our growth as “bigger” seems to allow us to serve you better.
All of us at Hall and Hall feel very fortunate to have been part of a wonderful year for our company. Unfortunately, I am not sure that the type of year we experienced was actually reflective of the market in general but first the numbers. During the course of the year we were involved as buyer’s and/or seller’s agent in transactions totaling approximately $343 million, the highest volume in our company’s history and more than double that of 2010. It is statistically meaningful to actually include transactions from the 4th quarter of 2010. The total transactions for that 16-month period came to $464 million. The spread between asking price and sale price was only 8% compared to 18% in 2010 – an indication that sellers are now pricing competitively in recognition of the new market reality.
A significant volume of sales came at the end of 2010 and they continued into early 2011. The combination of the Arab Spring and European debt crisis put a pretty major damper on the market through the middle part of the year. It picked up again toward the end of the year. The average deal size was also up significantly from 2010 and many had a significant agricultural operating component. The larger deal size related more to the mix of deals – not higher prices unfortunately. It seems that the much publicized ”one percent” were prepared to put money into hard assets that were in many cases oriented around scenery and recreation but also had good operating characteristics. (See “Washing its own face” Page 1 & 6)
The market for smaller recreation ranches and private retreat properties was notably slow throughout the year with lots of inventory and a limited number of transactions. Many prospects in this category either did not show up at all or showed up with tepid enthusiasm and went home empty handed. In terms of pricing, it seems that the new reality has set in, and sellers on the whole have been prepared to price their properties in recognition of the fact that we are now looking at pre 2005 values. It has not been a market where buyers would chase something they fell in love with, as evidenced by the narrow spread between the ask and the sale price. It seems that sellers needed to price themselves in the market and then buyers would show up. We are hopeful that the tidbits of positive economic news in the U.S. and the appearance that Europe will get its act together will cause this segment of the market to improve in 2012.
The market for operating farms, to a large degree, and operating ranches, to a lesser degree, has remained very strong with good demand. Farmland was one of the headline stories for 2011 with prices pushed higher from both investor and farm operator buyers. A combination of factors is behind one year appreciation rates that in some of the Corn Belt states approached 30%. While appreciation for farmland in the Rocky Mountain and High Plains areas generally did not reach these lofty levels, the market and appetite for production land remains extremely strong. Factors contributing to this market include increased commodity prices and low interest rates that contribute to lowered expectations for yield. There is still an enormous amount of private and institutional capital seeking farmland investments that typically yield, on a net rent basis, between 2% and 4%. However, without another round of commodity price increases, land values are more likely to return to a more normalized appreciation rate. Operating cost increases and higher interest rates are also likely to raise yield expectations and reduce net income, putting downward pressure on farmland prices.
Pure operating ranches have not seen the extreme appreciation rates shown in farmland over the last few years. However, the outlook for operating ranch values is favorable due to the same factors that contributed to increased farm values. The prospects for improving cattle prices are particularly good because we are looking at the lowest cow herd since the early 1950s and producers are expected to begin to build their herds. This invariably drives beef prices higher.
In summary, we see a stabilizing market for operating ranches with scenic and recreational qualities. We hope the same will soon hold true for smaller recreation ranches and private retreat properties. There will likely be an improving market for pure operating ranches. We think the jury is still out on operating farms but the few negative factors we detailed above might well take a year or two before we see the adjustments unfold. ?