College students studying real estate often spend considerable time understanding how the value of a property moves over time.
In a nutshell, here’s how it unfolds.
Property value consists of two main variables: land value and structure value. As time goes by and buildings age, structures become less valuable – they are depreciated. But land should increase in value over time given its finite supply. To maximize property value over the long-haul and offset depreciation losses, owners must regularly renovate or even overhaul structures to avoid obsolescence and ensure it is achieving its highest and best use.
You likely see this in action every day – for example, remodeled homes or apartment buildings; obsolete buildings torn down and replaced with mixed-use developments; houses along a popular street reimagined as office or retail space; old manufacturing plants retrofitted into trendy lofts; dilapidated buildings being sold “as-is” because buyers only care about the land beneath.
How farmland investment interacts within this concept is unique because there are few, if any, depreciating structures.
The only value variable for most farms is the land itself, which theoretically appreciates. One caveat being permanent crop farms, where valuable trees or bushes on the land produce fruits and nuts for many years but must eventually be replaced.
And in the case of farms, the land often appreciates faster than other types of real estate because of the sector’s unique supply-and-demand characteristics and because agronomic advancement is making the property more productive and profitable for farmers.
Green Street Advisory Group explained it like this in their 2021 report on farmland investing:
“Unlike traditional real estate, farmland values have experienced a nearly uninterrupted rise over the past ~30 years thanks to continuing improvements in productivity growth. Historical productivity growth was driven by the transition to mechanical power and the application of nutrients. Future productivity growth will be driven by technology (improved genetics, precision agriculture, etc.).”
The importance of appreciation to farmland assets is a big reason why Farmland Partners has started including historical farmland appreciation data by state in its press releases about acquisitions.
Sure, the annual rental income that the farm will receive is an important consideration, but we believe the increase in asset value over time will be vital to the investment’s overall return.
The data we cite comes from the U.S. Department of Agriculture’s annual survey of Land Values. According to USDA figures, the states in which Farmland Partners owns properties have seen the following average annual appreciation rates from 1970 to 2022.
Put simply, farmland has historically gained in value, adding steady returns to compliment rental income.
I guess you could say we appreciate farmland’s appreciation.
Note: This article contains Forward Looking Statements.