Two of the biggest land deals of all time include the 586,412 square mile purchase of Alaska from Russia in 1867 and the 828,000 square mile Louisiana Purchase from France back in 1803. While vacant land parcels this size today are impossible to find, there’s still plenty of opportunity for buying land in 2020.
Historical Trends of Land Sales
Land has become an increasingly attractive investment since the Great Financial Crisis in 2010. According to NAR, over the past ten years alone, residential land prices have increased by more than 25%.
But it’s not just residential land that is in demand. The dollar sales volume for all types of land increased over the past 12 months:
- Residential: +2.9%
- Recreational: +2.7%
- Industrial: +2.4%
- Ranch: +2.4%
- Office/Retail: +2.4%
- Agricultural (irrigated): +2.2%
- Agricultural (non-irrigated): +1.5%
- Timber: +2.0%
How COVID-19 has impacted land sales
For the first two months of 2020, commercial land sales in the US were up significantly compared to the same two-month period in 2019. By April, however, the volume of land sales was lower than any month since 2010.
Earlier this year, Cushman & Wakefield released 5 Fast Facts: COVID-19 Impact on Land Sales. The report notes:
- US land sales in Q1 2020 (12-month rolling) totaled $21.6 billion, an increase of 7.4% from Q4 2019.
- The negative impact of COVID-19 on land sales has varied by sector, with industrial and agricultural land sales among the least impacted by the pandemic.
- Half of the land brokers reported that COVID-19 has had no impact on suburban multifamily land sales.
- A fourth of land brokers saw industrial land sales activity increase in the wake of COVID-19 as large eCommerce and distribution firms continue to hire.
- 75% of land brokers see no negative impact from COVID-19 on agricultural land sales, since food-producing agricultural land may serve as an investment property hedge against potential economic downturn.
The Future of the Land Sector
If a global pandemic can’t stop the demand for land, it’s reasonable to ask what will. Although some commercial real estate asset classes are currently struggling, the future of the land sector continues to look bright.
Land real estate can generate income
The average American baby boomer household has a net worth of $1.2 million, and this demographic is using land as a way to diversify investment portfolios and generate income:
- More than 30% of farmland is rented or leased, allowing an immediate return by renting agricultural land.
- Over the last 20 years, farmland has produced a steady 12% annual return, about double what the stock market has returned.
- Investing in suburban land and rural real estate now can provide future profits as more people choose to leave cities and telecommute.
Suburban living is “cool” again
Although population growth has been shifting from major metros to the suburbs and rural areas for quite some time, COVID-19 has increased the speed of this trend:
- Demand for land 45 minutes or more from major metro areas is growing, as millennials who want to start families realize they can’t continue living in large cities.
- Improved technology and remote work opportunities allow employees to arbitrage income from high paying jobs with living in more affordable areas.
- Even when a vaccine for COVID-19 is found, people will likely continue to reconsider their urban lifestyles and leave crowded urban areas for places with more room.
Industrial land demand keeps growing
In CBRE’s Industrial & Logistics 2020 US Real Estate Market Outlook, the demand for industrial land is projected to grow, driven by new construction and infill development in supply-constrained markets.
- Rent growth of 5% is forecast for 2020, on par with recent years.
- High-quality, first-generation Class A warehouse space typically generates a rent premium.
- Light-industrial warehouses smaller than 120,000 square feet will likely see accelerated demand from e-commerce companies racing to offer customers same-day delivery.
Fundamentals of Investing in Commercial Land
The supply of commercial land for sale is limited and demand is increasing, making land an increasingly attractive investment.
Benefits of investing in land
The biggest advantages of investing in commercial land include:
- Minimal competition
- The sector’s low cost to own and maintain
- Land purchased “in the path of progress” can generate quick profits
- The flexibility to buy and hold, subdivide, develop, or rent out
- It is a perfect asset for the passive income investor
What to know before investing
All investments come with a certain level of risk, and land is no exception. There are several items CRE investors should research before investing in land:
- Property zoning
- Previous use
- Property lines
- Soil productivity
- Mineral and oil rights
Land Trends by Region
While there’s no guarantee that investing in land will generate profits, there are some things investors can do to increase the odds for success. This first step is knowing where to look for land.
Here are five states where land is affordable and development demand is strong:
Recent trends in land sales in Texas
Demand for land for sale in Texas is growing in all parts of the state, with the average price of rural land just under $500 per acre. West Texas is attracting buyers from the prosperous Dallas/Ft. Worth area, while Far West Texas continues to focus on industrial land uses.
Recent trends in land sales in Montana
Land sales in Montana continue to be strong. The median land asking price is $4,421 per acre with listings staying on the market for about 400 days, offering plenty of opportunity for investing in land in Montana.
Recent trends in land sales in South Dakota
Investors looking for income-producing cropland are helping to drive the demand for land sales in South Dakota, where cash rental rates for non-irrigated cropland range from $29 to $179 per acre. Land near Sioux Falls has some of the highest prices in the state, with cropland priced at nearly $5,400 per acre.
Recent trends in land sales in Idaho
Land sales in Idaho are helping to increase the average value of farm real estate, with values increasing by 4.5% last year. Over the last several years, investment groups have been buying large blocks of farmland in southern Idaho, focusing on income and long-term growth in the Boise real estate market.
Recent trends in land sales in Nevada
Land sales prices in Nevada have increased to their highest level in years. There is currently less than a one month supply of inventory in the Reno/Sparks housing market, a sign of potential growing demand for residential land development in Reno.
It’s likely that the pandemic will create yet another group of people looking for land in suburban and rural areas away from large, crowded urban areas. Unlike every other commercial real estate asset class, land is in fixed supply, with both residential and industrial land uses showing the highest increase in sales volumes year-over-year.