As real estate prices continue to soar and property remains in short supply, will land be the next big investment?
- Land value growth has risen slowly over the past decade, but an uptick in demand is pushing prices up.
- Vacant land can be a valuable investment for long-term investors but requires a number of considerations.
Land likely isn’t the first thing to come to most investors’ minds when they think of investing in real estate. Investing in residential real estate, such as a fix and flip or rental property, or even buying shares of real estate investment trusts (REITs) are far more common investment strategies. But as the stock market experiences volatility and real estate prices continue to soar, land is looking more and more like a smart buy in 2022.
Land demand has slowly but steadily grown over the past decade, with the average price growth falling between 2% and 4% annually. Agricultural, including irrigated and non-irrigated farmland or cropland, and timberland are among the slowest-growing sectors, often with price growth between 0% and 1% annually.
On the other hand, residential and commercial real estate land — which can be used to develop new industrial, retail, office, multifamily, or single-family homes — falls between 3% and 5% on average, showing a much higher demand for this type of land.
But over the past two years, demand for all types of land has been accelerating. From 2020 to 2021, farmland average prices grew 6%. National Land Realty, a brokerage specializing in land transactions, saw a 155% increase in rural land sales in 2021. Residential and industrial land also saw an uptick in demand as the housing shortage and supply chain challenges put pressure on rents and home values.
Homebuilders and industrial operators, including industrial REITs, have been snagging up lots for future developments. According to a recent study published by the National Association of Realtors (NAR), estimates predict land to increase across all sectors by 2% in the coming year, with residential and industrial continuing to lead the way with growth in the 3% to 5% range.
They aren’t making more land
Land is one of the few commodities that they simply can’t make more of. Despite the vast amounts of vacant land across the country, a lot of it can’t be developed. That leaves a finite amount of developable land to invest in today and in the future. And with today’s housing shortage and our growing population, the demand for land, housing, and real estate will continue to increase — not slow — in the future.
Land buyers usually own land for personal use; for example, they want to develop the land in the future, preserve it, or are actively using the land for recreation, farming, or hunting. But it’s not the only reason to invest in land. Holding vacant property to benefit from future appreciation can be a lucrative investment when selecting the right piece of land.
A lot of vacant land sits in rural areas, away from high-density markets that see less demand. But population patterns are shifting. People are looking for more rural areas to call home, and Southern markets, in particular, are growing at incredible speeds. Meaning that rural areas with limited demand today may be in a very different position within the next 10, 20, or 30 years.
Should you invest in land?
There are many factors investors need to consider when it comes to investing in land:
- The costs to develop vacant land
- The availability of land
- Access to public services such as water, electricity, sewage, or roads
- Zoning restrictions
- Environmental issues
- Mitigation and conservation easements that could impact the ability to develop the property in the future
There are also ongoing costs to consider, including the maintenance of the land and the property taxes.
Demand for land is growing at greater rates than we’ve seen in quite some time; however, price appreciation is nowhere near residential housing price growth, which has increased 18.1% in the past year. Investors should look at land as a long-term speculative investment, one that, if chosen wisely and with the proper due diligence, could pay off handsomely in the long run.
Those who aren’t willing to speculate on individual lots may want to consider investing in a REIT that owns, manages, or invests in land. There are several farmland REITs to consider, including Gladstone Land or Farmland Partners. Investing in land can be a smart move in 2022, but it definitely requires careful consideration and due diligence before buying.
Jan 31, 2022