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Norman C. Wheeler & Associates - June 2011
General Market Conditions and Sales
Currently, the market is bifurcated into various submarkets with values based strongly on the locational characteristics of properties as well as their Highest and Best Use.
In over-supplied and transitional markets values continue to soften; whereas, in scarcely supplied markets values appear to be steady or increasing based on emerging sales. Scarce markets include agricultural production lands and high amenity large ranch ownerships. All markets were low in sale volume during 2008 and 2009 but emerging sales show some strength in specific sectors with others reflecting substantial downward adjustments.
There is strong evidence within the Montana land market, as well as throughout the West, that properties transitioning backwards and away from probable uses related to development are exhibiting the greatest amount of decrease in demand and value within the current market. Conversely, properties which have high quality recreational amenities are in demand, but are scarce. The sales of these types of properties are suggesting increasing market values based on a limited number of sales.
There is increasing activity in the transitional market that exists between base agricultural lands and high amenity recreational lands. As the following chart shows, within this segment of the market transitional lands are exhibiting downward value movement. These are properties which during heavy demand and scarce supply reflected upward value movement as outlying markets with lesser quality recreational characteristics begin to sell at higher values more reflective of top amenity markets.
There were also agricultural lands that spiked upward by anticipated development demand for large tract or common ownerships within larger rural ownerships. Many major rural developments have been shelved or gone bankrupt in the current cycle. As these properties are remarketed what is seen is that entitlements or planning expenditures such as government approvals and access to sewer and water, roads and utilities, have minimal or no contributory value. The anticipated uses that drove values between 2005 and 2008 have evaporated. These properties are still desirable as they are marketable, but lower transaction values reflect a major shift in Highest and Best Use and changing buyers.
However, within the market we still see occasional strong sales but these tend to be aligned with high amenity recreational ranches that are in short supply. While they reflect strong values in the current market, these properties were not spiked by development or speculative buying. Many were listed at very high values in the 2005 to 2008 cycle and simply sat out. These are what we often refer to as the insincere listings. They are now moving for what their market value would have been in 2007 and 2008 when they were over-listed. Thus, they do not show the decreases related to changing Highest and Best Use and again noting these particular properties are scarce.
Base agricultural production land in western Montana has always reflected somewhat of a premium compared to eastern Montana. Over the past buying cycle, however, base agricultural production lands in western Montana were driven to even higher values. Due to supply and demand, these lands transitioned to values more reflective of better grade recreational properties which were scarce.
The outlying and more marginal, close in properties escalated rapidly in value to catch the already high valued recreational market. Now the marginal segments are transitioning back in value due to a lack of demand, an oversupply and transitioning market features. They are falling back toward what will be established as the clearing price for agricultural land in western Montana. Based on historic trends, we expect this value to be 20 to 30% greater than base agricultural values seen in eastern Montana.
Values related to agricultural properties in eastern Montana, particularly large livestock ranches, have remained fairly consistent over the past several years based on limited volume. Much of the volume seen in 2010 was primarily comprised of an investment entity that purchased multiple large ranches in the Miles City area. Absent the actions of that one buyer, it is not evident, based on other demand or sales in the eastern Montana market, that the volume associated with that market would have increased substantially in 2010. In early 2011, a 52,000 acre ranch purchase in central Montana sprawled into a buying opportunity that grew to over 170,000 acres in 6 months. That sale is specific to one buyer and a specific area and provides limited data about general market trends in central or eastern Montana.
Overall, sale volume in 2011 is increasing as are average land values but these are based on larger sales and sales being made in the more steady segments of the market. These are not commodity based agricultural transitions and are related to both scarce property and scarce buyers. Scarcity governs production agricultural land markets and high recreational amenity properties. Owners of these lands are not sellers, and instead are more likely to be buyers.
Marginal segments of the western Montana land market which lack desirable amenities are reflecting a substantial lack of demand. This becomes the unrepresented part of the market in which many properties simply sit. With no demand and no purchasing power related to these properties they are not reflecting a clearing price.
The factors exhibited in the market at this time must be held against the background of low interest rates. If interest rates within the market start to move, then we expect diminished value for agricultural production land and increasing downward or unrepresented value for many segments of the market.
In markets that are falling, we have seen certain value changes. These have been analyzed and summarized from the complete data retained in our working files. A summary of these downward adjustments seen in the market has been omitted herein for confidentiality purposes. However, our database contains 19 specific larger parcel resales or paired transaction between 2006 and 2011 that exhibited value losses due to the factors set forth above. These involve over 100,000 deeded acres and a total sale volume of nearly $115,000,000. The range of loss runs from -22% to -65% and overall they average a -44% loss in overall market value within this period.
These sales lead to a conclusion that within the general market, sales that are older than 2009 or 2010 in some instances require a substantial downward adjustment to provide indications consistent with the current market.
A recent study by a major agricultural lender documents an average loss between 2006 and 2011 of -52% in western Montana relative to this market.
We have also documented sales showing increased or stable values for sales related to higher amenity larger units. These are related to site specific sales or agricultural production land sales within stable markets. We have confirmed sales of over 270,000 deeded acres in volume within the larger parcel market over the past 12 months which involved over $170,000,000. A summary of these sales is also retained within our working files but is omitted herein for confidentiality purposes.
Our research indicates the best interpretation of the data is based on an overall market discount rather than trying to identify annualized rates. The application of any adjustment is not general however. Different segments of the market are less affected and some show no loss. The application of any adjustment to sale data always requires substantial market experience and appraiser competence. It must be carefully considered on a sale by sale basis. The point must be stressed one more time. Look for evidence of adequate sale analysis as to each specific sale referenced as well as competence and experience when presented with sale data within this market.Please feel free to contact our office for additional information. Thank you for your interest -- Clark Wheeler
N. Clark Wheeler was a recent invited speaker at the Ninth District Federal Reserve Bank of Minneapolis. On May 18, 2011, Mr. Wheeler, owner of the 53 year old appraisal firm of Norman C. Wheeler and Associates, made a presentation on agricultural land values and trends within the district to the bi-annual meeting of the Agricultural Advisory Council to the Ninth District at the bank headquarters. The talk was attended by the bank president, Mr. Narayana Kocherlakota, as well as senior staff and the council. The talk was followed by a question and answer session and Mr. Wheeler was invited to attend the entire council meeting including roundtable discussions related to commodity and real estate values and trends. Norman C Wheeler and Associates, with offices in Bozeman and Missoula, Montana, works throughout the region on a wide variety of valuation projects.