There are not enough Intermountain ranches
— Interest remains strong despite commodities
When it comes to the Intermountain region—Idaho, Montana, Wyoming, Nevada, Utah and Colorado—the farm and ranch real estate market was steady… at worst. A welcomed change. Some brokers described it in glowing terms.
“I’d say it’s stronger than it’s been for at least a decade,” John Knipe, president and managing broker at Knipe Land Company, told WLJ. Knipe is based in Idaho but covers the Intermountain region and beyond.
When asked why, Knipe explained his reasoning simply: buyer confidence.
“I think probably Trump, the economy, and the consumer indexes being up. It’s the strongest it’s been in 16 years.”
Other brokers consulted voiced similar perspectives. “The last year’s been pretty good,” reported Mark Pyrak, owner/ broker of Fort Benton Realty. Pyrak covers Montana.
“We’ve had good land values and good interest.” Relative to most of the rest of the country, the Intermountain region has seen the least change in terms of overall land values in the past year, according to the most recent USDA Land Values report.
Total farm real estate value—including land, machinery and buildings—for the Intermountain states saw a lot of no change. The largest gain was seen in Idaho with a 4 percent overall increase. Colorado saw the lowest overall increase at 0.7 percent.
The same was true of pastureland values in the Intermountain region. Most of the Intermountain states saw little to no change in their pasture values. The states also boast some of the lowest prices in the country for pasture land.
Blair Newman, owner/broker of the Wyoming-based Newman Realty, described the market in his area in a more measured tone.
“It hasn’t gone down or anything. I’m still showing stuff, but I’m not going to as many closings.”
Newman explained that this dynamic as a combination of sellers’ asking prices not reflecting the current markets, and demand exceeding supply on commercial ranches. This latter point was something every broker discussed at length.
“There’s always a demand for working grass ranches,” said Cory Clark, co-owner and broker of Clark and Associates. Clark mostly works Wyoming. “It seems like I can’t list enough of them because as soon as I list them, I sell them.”
Pat Bates, owner/broker of Bates Land Consortium that deals all across the Intermountain region, echoed this.
“When it comes to the working ranches that are true commercial ranches that are owned for beef production, there’s been a lot of absorption from bigger places. A good, big commercial cattle ranch—1,000+ head year-round capacity— is very rare.”
Newman was not the only one who highlighted the issue with unrealistic asking prices either. Several brokers noted that sellers still have memories of recent highs. When feeder cattle were fetching $250/ cwt. and corn was $8/bushel, buyers were eager to own more land and had the money to pay for it. But that is not the case anymore and some sellers are still hoping for those highs.
“Most of the sellers want prices that are more substantial and higher from two, three, four years ago,” noted Pyrak. “Most buyers don’t want to pay that top level and aren’t paying.”
“If a property is overpriced, it’s not going to sell,” quipped Knipe. “But if property is priced competitively, they are on fire. It’s white hot for that kind of property.”
He added an interesting detail from his experience; the terms of the sale have an impact on the selling price. He explained that if a seller offers financing, rather than asking for a cash-only sale, they expand the possible pool of buyers. This additional risk can be a benefit, one he estimated at as much as 20 percent.
“A seller can get a little more money if they’re willing to finance the deal.”
Who’s selling and who’s buying
When it comes to who's sold ranches in the Intermountain region lately, the answer has been: not many. Those who have, however, follow a familiar pattern.
“There is, as we say, the graying of the agricultural and the livestock industries throughout the country,” explained Bates, having celebrated 47 years of ranch brokering himself. “Those are the ones who are selling.”
There was an unfortunate refrain to this too.
“The biggest thing I see is we have a lot of farmers who get up in years who don’t have family members who want to continue the operation and the legacy,” lamented Pyrak. “Some are starting to sell and some are still waiting, hoping maybe one of their kids will come back to the farm. But most of them are facing the reality that that’s probably not going to happen.”
Unlike most of these familiar stories, however, some of the brokers had some good news. While not all the ranches they sold were staying within their literal families, many went to other ranchers. Several brokers told WLJ that neighbors and newcomers to the area made up most of the buying ranks, but not many investors or those coming from outside of agriculture.
“The buyers are typically not pilgrims,” Bates said. “Typically, the buyers are people that have been in the business, have been successful, and so there’s expansion. Sometimes they are trading up.”
He estimated that 65-70 percent of the transactions he’s been involved with or known about in the past year have been by “individuals or families that are expanding and maintaining their operations.”
“Generally, they’re selling from a high-dollar area to a more ag-valued area,” explained Newman, who described the buyers he’s seen lately as “real people” involved in production ranching.
“People can sell for a lot of money in the Front Range of Colorado for instance, and move here to Torrington and buy something that makes more economic sense with the same carrying capacity or even the same yields.”
Several brokers credited the recent improvement in the area market to Internal Revenue Code Section 1031 Exchanges.
“More things are selling because more people are doing the 1031,” said Knipe, pointing out that a sale using the exchange means they will soon be a buyer.
“It’s tricky, but the rule of thumb is you have 45 days after you close to identify three properties, and you have another 135 days to buy.”
Effectively, the more people sell using a 1031 Exchange, the more activity there will be in a market. Knipe said his company saw a remarkable number of 1031 Exchanges happen in the past year.
“I won’t say all the sales are 1031—there are certainly buyers who can write a check for whatever they want—but all the deals I’ve done for the last 15-20 years have been mostly cash sales.”
But he said this past year has been almost all 1031 Exchanges.
“It’s much stronger than we’ve ever seen.”
He did point out that the 1031 Exchange is not without its pitfalls however.
“You have to buy equal or greater priced, and you have to take on the same debt you had or greater debt. There are a few hooks in there that people don’t know and don’t realize.”
Another commonly-cited dynamic within the Intermountain real estate market was the impact of commodity prices. Pyrak felt this impact in Montana.
“We’re off anywhere from 10-15 percent from that top,” he said, referencing the recent price highs from a few years ago. “The reason for that is one of our major commodities that’s been produced here forever is wheat, and wheat prices have been very low for several years.”
He pointed out that a few years ago, wheat was pushing $12/bushel.
“But it’s been $4-5/bushel for the last two years.”
This year’s devastating combination of drought, heat, and fire has additionally done severe damage to Montana’s wheat crop in terms of yield.
“The year before, ’16, was a booming year,” Pyrak said. “The average crop was 60 bushels or more. This year, their average crop is 35 bushels. So, the lower prices and the lower yields are affecting some of the producers’ buying power.”
Crop commodities aren’t the only ones having an impact on the Intermountain real estate market either.
“The cattle commodity process directly affects the activity on land,” Pyrak added. “When they’re low, no one wants to buy a ranch. But when they’re good, you can’t find enough ranches.”
He did point out, however, that the prices for what few properties have sold recently have been relatively steady in spite of the low commodity prices.
“That’s where I see some opportunity,” he said. “We just get an upturn in the cattle and wheat commodity prices in the next three to six weeks and things will be good and booming for next year.”
Looking ahead, several brokers saw causes for optimism and concern outside the agricultural world. Several brokers looked warily at the possibility of federal interest rate increases.
“If we ever face the music and the Fed ever does what it should do and we get back to 8 or 9 percent interest, there’s going to be a very painful time,” Bates cautioned, describing the country as having been drunk on cheap money for a disconcertingly long time.
“We used to see interest rates go up and down in five- and six-year cycles, but we haven’t seen it go up significantly in 14 years.”
The current tax reform effort that includes discussions on removing the estate tax was a hopeful beacon to Clark, however.
“If we can get this tax bill passed, I think things could get even better. I think, in 2018, the farm part is a litle tougher—irrigated ground is a little tougher— because of the commodity prices are where they are today. But as far as the ranches, I see a strong ’18.” — Kerry Halladay, WLJ editor