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An increasing number of absentee buyers
are interested in non-cropland, such as pasture and woods,
for recreational property. The strong economy in the
nonagricultural sector fuels this demand. As a result,
non-cropland values remain strong in all areas and increases
in traditional areas of strong recreational influence. 1st
Farm Credit Services’ area has pockets of this influence
along the Illinois and Mississippi Rivers.
Chicago collar counties transitional
areas and to a lesser extent real estate around the larger
downstate towns such as Peoria, Bloomington, and the Quad
Cities area, continues to fall under development pressure.
The non-agricultural sector is fueling demand for suburban
and semi rural housing. This development pressure has been
strong for the past ten years. It is expected to continue as
long as the general economy stays sound and interest rates
remain low.
Agricultural real
estate is in demand
A large increase in ag real estate value
over a relatively short time raises the question - is this
increase in value an artificial bubble that will be short
lived?
During the past year, the most
significant influence on farm real estate has been the
steady demand by tax-differed exchange buyers. The primary
economic factor affecting agricultural properties in this
region has been the demand for residential land in the
Chicago collar counties and the subsequent demand for
tax-free land purchases with the proceeds from the
development land sales.
In 2001 there were 28,002 residential
building permits issued in the Chicago Collar Counties. In
2002 and 2003 there were slightly over 30,000 permits issued
in each year. In the first half of 2004 there have been
16,658 permits issued, indicating that we will see more than
30,000 permits again this year.
On average each building permit
represents approximately .25 acre. This results in a demand
for residential land of approximately 7500 acres. These
types of tracts sell at an estimated average of $30,000 per
acre, resulting in approximately $225,000,000 that could be
in the market for reinvestment. If 50% of this is invested
in farmland (or $112,500,000), this represents a demand for
31,389 acres, using the average value per acre of our
benchmark farms as a guide ($3584).
Throughout Illinois the same type of
demand is occurring around some other cities and towns. The
result is a demand for almost as many acres as found in the
Chicago area example. The demand for residential
development appears to remain strong, even as interest rates
begin to edge up.
Many development land contracts are based
on a multi-year take down, an agreement to purchase part of
the land now with an agreement to buy additional land in the
future. This assures that we will see continued demand for
tax-differed purchases over the next 18 to 24 months.
Another source of farmland demand comes
from investors who recognize the investment stability. Farm
income, combined with appreciation in value, has proven to
be excellent investment.
Finally, over
the past few years there have been a number of ethanol
plants and rail grain terminals constructed in the northern
half of Illinois. This has increased marketing
opportunities for commodities. These investments have added
to profitability and stability in farm income in the area.
This positive marketing influence continues to attract the
attention of farmland investors.
Where do
values go from here
It is hard to imagine another year with
the kind of increase we have seen from 2003 to midyear
2004. However, there are enough factors in place to believe
there may be modest increases in farm real estate value over
the next 12 months, with some leveling off in the next 24
months.
Despite a slight incline, interest rates
are remaining relatively low in comparison to the not to
distant past. Housing starts appear to continue at
approximately the same pace they have for the past few
years. Stability in farm income combined with a history of
steady appreciation in farmland value continues to attract
investors.
With
these factors in place I expect to see some modest increases
in agricultural land value over the next months. |
