Article / November 6, 2020

Real Estate Opportunities: Looking Outside the Cities

Rural real estate opportunities, specifically in agricultural real estate, are poised to outperform urban real estate – despite the COVID crisis delivering a gut-punch to global real estate returns.

A large-scale flight from the cities could create significant advantages in rural real estate investing over urban. Urban real estate has enjoyed all the attention in recent years, but as COVID reshapes the world, that may no longer be the case.

In fact, we may see better real estate opportunities in rural areas rather than conventional urban opportunities like commercial or multi-family.  

Farmland real estate opportunities are looking especially attractive

Zoom towns and satellite cities – A shifting landscape

 

People joke that 2020 was a decade of change packed into a single year. Trends already established pre-COVID (e-commerce killing off commercial retail spaces) sped up. Others derailed (migration to major urban centers, expanding office spaces).

During the 2008 mortgage crisis, the US’s property values were hardest-hit in suburban and rural areas, where vacancy rates were much higher

Urban centers held together much better, in part thanks to cities’ economic diversity and vibrant tech sectors. Millennials were moving in, and a robust rental market allowed for an adaptable workforce.

Millennials were flocking to cities in the pre-COVID era. 

Then COVID swallowed the world.

Many city-dwellers believe the allure of big cities may be lost forever, dubbing 2020 the Year from Hell for dense cities like New York. 

Retail and office space have also seen a drastic decline in the face of emergent technologies changing the way we work. This trend accelerated due to widespread COVID stay-at-home policies and lockdown measures. 

The incoming commercial real estate bust could be more massive than in the 1990s and disproportionately affect major cities.

Consider Vancouver, where home prices grew over 200% faster than New York City since 2000.

Home prices in certain areas look inflated. 

As people become accustomed to remote work, many companies are adopting permanent work-from-home models. If that trend continues, we will likely see a contraction of real estate dedicated to office space everywhere but a few prime urban locations, like Tokyo and Singapore. 

Also, the likes of Amazon transforming dead malls into fulfillment centers are a sign of the times. Large swaths of commercial real estate are rezoning for mixed-residential and industrial purposes.  

Where are people going?

 

Whether it’s for a short time or a permanent change, people are leaving dense metro areas. Satellite cities and “gateway communities” (also called “Zoom towns”) are attracting remote workers and people searching for greener pastures across the US. 

Even CEOs and C-Level executives are exploring remote work opportunities. 

More people will continue working from home in the post-COVID world. 

These transformations are insanely complex, and nobody knows how it’ll look by the end of 2021. Neighborhoods near public lands are becoming increasingly remote work-friendly.

These transformations present a world of opportunity for real estate investing in areas further afield from urban centers.

Rural communities cover 72% of the United States and include 14% of the total population (46.1 million people). The US Census Bureau puts that number up to 60 million.

Some of these communities will see a boom in their real estate market, but there may be a subsequent bust as the pandemic fizzles out. 

One of the most significant obstacles holding rural economies back is the lack of a reliable internet connection. SpaceX’s Starlink is on a path to change that. In recent months, rural communities in North America have already experienced broadband connection beamed from space. 

Space-based internet services could have profound implications for the world’s rural areas

“What a difference high-speed internet can make,” tweeted the Hoh Tribe, a Native American community in remote Washington state. “Our children can participate in remote learning, and residents can access healthcare.”

Bringing rural communities into the 21st century will significantly impact the value and diversity of use-cases in rural real estate. There will be less incentive for talent to move away and into cities. 

Instead, knowledge workers fleeing the college towns and startup hubs across the country may ultimately migrate into rural areas.

That’s a shift needed more now than ever, as the average age of farm producers (decision-makers) is about 57. The ag industry is starving for knowledge workers who can navigate the many agtech advancements such as data processing, precision tech, and satellite imagery.

The merits farmland real estate opportunities

 

While Starlink’s aspirations may be several years away for most rural land dwellers, and the migration effects of the pandemic may prove to be a short-lived boom-bust cycle, there is one investment class that stands the test of time.

The rising value of farmland is nothing new. In the US, farm real estate has been steadily appreciating since the 1980s.

Source: https://www.ers.usda.gov/topics/farm-economy/land-use-land-value-tenure/farmland-value/

Raw land, farmland, and agricultural real estate opportunities in rural areas have several benefits over their urban counterparts:

  • Lower price competition, therefore, property prices are comparatively lower.
  • The option to diversity income from land subdivision (i.e., a mix of timberland, livestock, and processing facilities)
  • Fewer restrictions in rural property development
  • An excellent choice for long-term investment strategies
  • Growing opportunities to serve markets in satellite towns
  • Several ways to invest, from REITs, ETFs, and land-lease to crowdfunding
  • Potentially low cost to own and maintain (especially raw land)
  • Favorable taxes and interest rates on loans as of 2020

[ Income Investments and Farmland ]

Agricultural land enjoys stable returns and value appreciation through long-term economic cycles. There exist several methods of investing in farmland. Cash rent is the most common, but many investors are turning to crowd investing

As the ag sector becomes more financialized, and more investment options are available to the average investor, liquidity will increase.

In 2020, nothing sounds rarer than an investment that promises regular, stable returns while the underlying asset appreciates over time.

Double that with the ability to diversify your crops or business operations, and you have a long-term store of value plus a more stable income stream.

Source: USDA, Acretrader

 

Looking Ahead

 

Agricultural land as an alternative investment has the highest potential for stable returns and attractive ROI, even in the face of a prolonged economic recession.

If trends brought on by Covid are entrenched, land value in rural areas will increase as workers ditching the office and commuting lifestyle embrace life further afield from city centers.

Also, investors will continue to seek alpha in alternative investments as traditional long-term investments become less appealing. That combined with the increased liquidity in financialized agricultural instruments creates the perfect storm for farmland investing.

Even if the entire COVID urban-rural migration and remote work mega-trend fizzles out (which is doubtful), agricultural rural real estate maintains and appreciates its value in the long run. After all, people still need to eat.

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