Persistent economic uncertainty has been the overwhelming theme of the past 12 months. While the US is not currently in a recession, many economists believe one could be on the horizon. In the meantime, the dual whammy of high interest rates and persistently high inflation is beginning to take its toll on the commercial real estate sector.
Yet, despite headwinds, appetite for real estate remains high. As investors seek alternative real estate assets that can offer preservation of capital and downside protection, the farmland market is increasingly attractive. Below, I break down the factors driving the continued shift among investors toward this asset, and the avenues now available to participate in this market.
Commercial real estate is under pressure
The high interest rate environment has taken its toll on CRE valuations. Interest rates are at their highest level in decades after a series of aggressive rate hikes from the Fed – no fewer than 10 consecutive times between March 2022 and May 2023. These rising rates, combined with general economic uncertainty and the high-profile collapses of SVB, Signature Bank and First Republic Bank have contributed to a tightening credit market for CRE loans. Given the high levels of leverage on commercial real estate, this puts downward pressure on valuations.