One often overlooked real estate segment has held its ground in the broader market retreat that began in February, and its resilience may help lift its status in the eyes of investors and portfolio managers.
Farmland has a reputation as a safe, if boring, investment arena, thanks to its steady but low returns over the years and its illiquid nature — relative to an office building or single-family home, farmland is difficult to flip. But in a turbulent environment where legacy market dynamics are tossing and turning, some see farmland as an attractive bet.
"Over the years, I think more and more institutional investors have considered incorporating farmland as part of the portfolio, especially to balance out volatility in the equity market," Wendong Zhang, assistant professor of economics at Iowa State University, told S&P Global Market Intelligence.
Pension funds and insurance companies have long been dominant players in farmland. It was not until 2013 that the market welcomed its first real estate investment trust with a farmland focus, via Gladstone Land Corp.'s initial public offering. But any REIT portfolio would have benefited in recent weeks from some exposure to Gladstone Land or the other name in the space, Farmland Partners Inc. Both companies own cropland, as distinct from pastureland or farm infrastructure. But each has a characteristic footprint and focus; Gladstone Land is oriented around permanent crops in coastal markets where fruits, vegetables and nuts are cultivated, while Farmland Partners is more of a Midwestern row-crop play.
While many staid lodging, retail, office and even multifamily names have suffered huge losses since February, Farmland Partners and Gladstone Land have recovered much of the ground they gave up.
In an interview, Farmland Partners Chairman, President and CEO Paul Pittman said the fundamental thesis around farmland rarely, if ever, changes, even in market downturns. A black swan-type event may take a huge bite out of the value of farmland-related assets like tractors and planters, but not out of the land itself.
"At the end of the day, this is all about global food demand and fundamental land scarcity for high-quality [agriculture] parcels," he said. "This does not make for a very exciting story, but that doesn't really change very fast, ever."
That is not to say there is an outsized short-term gain to be had. Farmland remains, even now, essentially a safety play and a hedge against stock market volatility. "The power of the asset class is that safe-haven nature that comes from the underlying cause, which is food demand," Pittman said.
Data show remarkable stability of cropland values over the years, even during the 2007-2008 financial crisis. Cropland values over the last two decades have climbed gradually, at rates a little above inflation. Zhang, of Iowa State University, said it takes about a decade for a specific interest rate cut or hike to be capitalized in the farmland market.
The Federal Reserve's recent interest rate cuts have lowered return expectations around farmland, and a protracted pandemic scenario could be devastating for crop values, which would have negative implications for farmland values, Zhang added. But interest overall in the space, for now, remains high.
In Gladstone Land's coastal markets, where nuts, berries and other specialty crops are grown, owners benefit from growing global demand for health-food products. In an interview, David Gladstone, the company's chairman, president and CEO, said the trouble he expected around sourcing and securing field labor amid the broader market volatility has not materialized given the government's proactive measures to head off that potential problem.
"The farming side of the business that sells to grocery stores and those eating fresh food, I think, is in great shape," he said. "And I think the real estate that produces those will continue to hold its value and maybe even go up a little bit this year."
Gladstone added that the company's lenders are all still "very interested" in financing farmland acquisitions. He said he takes calls with the group daily. "Between now and June, we are going to be very busy in closings," he said.