In A Turbulent Market, Could Farmland Be The Answer CRE Investors Are Searching For?

Volatile economic times often lead investors to surprising places.

When the pandemic hit and many retail shops were forced to close their doors, online shopping soared. This e-commerce surge led to a massive demand for industrial real estate, causing the once-sleepy asset class to boom.

But in today’s economic climate, with high inflation, growing geopolitical tensions and an overall sense of uncertainty, where can commercial real estate investors turn? One option they may want to consider is something that has been right under their feet for years but is often overlooked as an asset: farmland. 

Artem Milinchuk, founder and head of strategy at FarmTogether, which ​​offers both accredited and institutional investors opportunities to invest in farmland, said farmland is a subset of real estate that holds many of the same investment characteristics as traditional options, but with historically stronger returns and less volatility.

“In uncertain times, it’s important to build a well-diversified portfolio that can weather the ups and downs,” Milinchuk said. “Farmland, with its historically low correlation to other assets, like real estate, low volatility and tendency to perform well in high-inflation environments, is something investors may want to start exploring.”

U.S. farmland has been valued at close to $3T, and that number continues to rise. In 2022, while other asset classes were still struggling to recover from the impact of the pandemic, cropland values increased by 12.4% nationwide and reached more than $5K an acre, the highest on record since 1970. 

One possible reason for this increase is that the products produced on farmland are things people can’t live without. The ​​Organization for Economic Co-operation and Development has predicted that the amount of agriculture needed for food, feed, fuel and industrial inputs will increase by 1.2% every year over the next decade.

Milinchuk said that along with its historical stability during economic downturns, farmland volatility has been around 6% over the last three decades, which is lower than real estate, the S&P 500 and some publicly traded indexes. Additionally, farmland can be resilient to the issues that plague other asset classes during periods of high inflation.

“Farmland is a real asset, and they are not making any more of it,” he said. “So in periods of high inflation, farmland prices tend to go up.” 

He added that farmland returns are tied to food and fuel prices, so as the consumer price index goes up, so do returns. Milinchuk said that in the last 30 years, returns for farmland investments have been at around 10.5%, making it “a great capital preservation tool.”

Also, amid growing calls for companies to make greener investments, adding sustainable farmland to their portfolio can help them reach their sustainable investing goals.

For investors who are used to making their returns on more traditional asset classes like office or multifamily, Milinchuk said there are some similarities. Farmland is a long-term investment offering a historically stable income with the potential for price appreciation and an increase in rental income. 

However, unlike real estate where investors have to contend with the asset depreciating as it ages, this is not an issue with farmland. If the soil and crops are being maintained properly, there is no reason for land to depreciate.

“In real estate, you don’t typically get to benefit from your tenant’s business,” Milinchuk said. “With farmland, while you can do a typical rental model, you can also do rent plus revenue share, rent plus profit share, or a direct-operated model where you're essentially running a farming business. So if, for example, corn and soybean prices are really good, as they have been for the last couple years, you can reap outsized returns.” 

He explained that FarmTogether investors have three models of farmland investing to choose from. If investors go with that pure rental model, they will purchase the title to a piece of land, and rent it out to a farmer, who typically plants row crops that come in annually like soybeans or corn. The farmer will pay upfront, so the investor does not have to worry about losing out if the crop does not perform well.

However, those looking for a higher risk, higher reward opportunity can invest in a farm with permanent crops including trees, nuts and fruits and enter into a long-term rental agreement and profit share model, where the farmer will run everything but offer a percentage of their returns. 

Finally, there is a direct-operated model where FarmTogether contracts farmers who will run it. The farmer gets paid a fixed salary or fee, similar to a superintendent at an apartment building, and the investors see returns from the sale of the crop and as the farmland value continues to rise. 

Investors who are interested in learning more can visit the FarmTogether site, where they can view articles, videos, webinars, podcasts and more all dedicated to educating them on farmland investing, Milinchuk said.

“I come from the buy-side investor environment and I hate being sold to,” Milinchuk said. “This is why our approach is based on education and honesty. We will be upfront with investors about the pros and cons of farmland investing so they can make a choice that’s right for them.” 

Looking toward the future, farmland investing is still in its “first inning,” Milinchuk said, but he hopes that is on the verge of changing. 

“If you look at the last 20 years and how much has changed in real estate and how many different asset classes there are to invest in now, it’s remarkable,” he said. “In the future, more people will be adding farmland to that list.” 

This article was produced in collaboration between FarmTogether and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.