Look Beyond Traditional Real Estate – How Farmland Can Complement Your Real Estate Portfolio

The U.S. real estate market continues to exhibit significant variations across sectors in 2024. Despite decreasing interest rates, the residential market still faces challenges to home affordability due to elevated home prices, while the commercial sector, particularly office spaces, remains under pressure due to high vacancy rates and rising debt.

In this shifting landscape, farmland, historically less accessible to individual investors, is gaining traction as a viable option for portfolio diversification. With a reputation for capital preservation and lower volatility, farmland may offer an alternative to traditional real estate investments, especially in the current economic climate.

Overview of the US Real Estate Market

The U.S. real estate market continues to face a complex and evolving landscape shaped by various economic forces. Key sectors such as residential, commercial, and industrial real estate have shown divergent performance in response to interest rate fluctuations, changes in demand, and broader economic conditions.

Recent Performance of Residential & Commercial Real Estate

• Residential Real Estate: In 2024, residential real estate continues to experience price increases, though mortgage rates have eased from their 2023 highs. The average 30-year fixed mortgage rate has fallen to around 6%, down from the peak of 7.8% late last year. However, affordability remains constrained by elevated home prices, with the median home price currently at $412,300. Although inventory levels have improved, the affordability gap persists, and home sales are expected to remain below pre-pandemic levels.
• Commercial Real Estate (CRE): The office sector remains under significant pressure, driven by the shift to hybrid work and rising vacancy rates, which have reached 19.8%, higher than previous highs during the Great Recession and the COVID-19 recession. Notably, life science hubs such as San Francisco, Boston, and San Diego have experienced sharp increases in vacancies. Between 2019 and 2023, U.S. office values declined by approximately $557 billion, with central business districts seeing the largest declines—up to 52%. In contrast, industrial real estate has shown resilience, driven by strong demand for e-commerce logistics and warehousing. Similarly, multifamily housing has remained stable, benefiting from consistent demand and moderate rent growth as consumer spending steadies and high borrowing costs push more potential homebuyers into the rental market.

Impact of Interest Rates

Interest rates have played a pivotal role in shaping the current real estate environment. Following a series of hikes between 2022 and 2023, the Federal Reserve reduced rates by half a point in September 2024. While this reduction has eased some of the pressure on borrowers, mortgage rates remain higher than pre-pandemic lows. The current average of 6% still makes homeownership a challenge for many buyers, compared to the sub-4% rates seen before 2020.

In the commercial sector, uncertainty around future rate movements continues to weigh on market sentiment. With approximately $1.2 trillion in commercial real estate debt maturing by 2025, office properties, particularly those in lower-tier markets, face significant refinancing risks. The combination of higher refinancing costs and declining property values creates added pressure on the office sector. Moreover, nearly half of the real estate firms surveyed in Deloitte's 2025 Commercial Real Estate Outlook expect capital availability to worsen through 2024, further straining investment and refinancing prospects.

Outlook for 2025 and Beyond

Looking forward, the multifamily, industrial, and neighborhood retail sectors are expected to maintain their strength over the next 12-18 months, supported by demand for rental properties, e-commerce logistics, and local shopping centers. However, the office sector will likely continue to struggle as hybrid work arrangements persist, limiting demand for traditional office spaces. Premium office properties may retain value, but secondary and lower-tier office buildings face long-term challenges, particularly in an environment of rising interest rates and refinancing difficulties.

As we look beyond 2030, the future of the real estate market remains uncertain. Factors such as elevated borrowing costs, economic volatility, geopolitical risks, and potential sectoral disruptions could destabilize long-term market performance. In particular, the office sector’s recovery may hinge on broader structural changes, while the retail and industrial sectors will likely be shaped by shifting consumer behavior and technological advances.

Farmland: An Emerging Real Estate Sector

Farmland, historically overlooked in favor of other real estate sectors, has recently emerged as a valuable addition for those seeking diversification beyond traditional sectors. Previously accessible primarily to large institutions and ultra-high-net-worth individuals, farmland is now attracting a wider range of investors. The growing demand for farmland is bolstered by its historical stability, long-term appreciation, and low correlation with other asset classes.

As challenges persist in sectors like commercial real estate—especially office space—farmland may act as a complementary asset, offering both income potential and capital preservation in times of market volatility.

U.S. Farmland Market Size & Value

The U.S. farmland market is vast, spanning over 879 million acres across more than 1.8 million farms, with an average farm size of 464 acres. In 2023, the total value of U.S. farmland reached approximately $3.3 trillion. Cropland values have appreciated significantly, as reflected by the NCREIF Farmland Property Index, which tracks both the appreciation and income of U.S. row and permanent cropland. Since 2000, the NCREIF Farmland Property Index has more than tripled, driven by strong appreciation and income generation. Cropland values, in particular, experienced significant growth from 2010 to 2014, fueled by favorable market conditions. More recently, cropland values surged again following the COVID-19 pandemic, driven by rising commodity prices and inflationary pressures. In 2024, the average cropland value reached a record $5,570 per acre, up 4.7% from the prior year. Looking ahead, fundamentals such as increasing global food demand and constrained supply are expected to continue supporting farmland value growth.

Historical Benefits

Driven, in large part, by historically attractive land values, farmland has provided investors with many characteristics that can be attractive to investors:

• Historically Competitive Risk-Adjusted Returns: Since 1992, farmland has experienced net positive growth each year, averaging 10.52% in total average annual returns. This performance has outpaced several other asset classes, including real estate (7.84%), equities (10.07%), bonds (4.67%), REITs (9.21%), timberland (8.72%), and gold (5.67%).
• Low Volatility: Farmland’s performance is particularly compelling on a risk-adjusted basis, with returns exhibiting a standard deviation of just 6.61% over the same period. This relatively low volatility is largely driven by the intrinsic demand for food and other agricultural products, making farmland less susceptible to short-term market fluctuations.
• Historical Resilience Across Economic Cycles: Farmland has consistently demonstrated stability, even during economic downturns. During the dot-com bust, the 2008 financial crisis, and the 2018 slowdown, farmland returned 5.3%, 15.8%, and 6.7%, respectively. Additionally, in 2022, while traditional 60/40 portfolios faltered, farmland posted gains of 9.6%.
• Low Correlation with Other Assets: Since 1992, average annual returns for farmland have shown a negative correlation with both stocks (-0.07) and bonds (-0.17), indicating that farmland tends to perform independently of these markets. This diversification benefit can help mitigate overall portfolio risk, particularly during periods of market stress.
• Historical Inflation Hedge: Farmland has historically served as a reliable hedge against inflation due to its intrinsic link to agricultural commodity prices. From 1992 to 2023, farmland returns have outperformed the Consumer Price Index (CPI) by an average of 8.14%.

Historical Barriers to Farmland Investment

Despite its strong long-term performance, farmland has historically been overlooked by many investors. A key factor is that 98% of U.S. farmland is family-owned, limiting the availability of on-market deals and making it harder for broader investors to access opportunities. Additionally, the complexities of valuing farmland—accounting for variables like soil quality, weather conditions, field size, and cropping history—have posed challenges for potential investors. Accurately assessing these factors, as well as estimating rental income potential has traditionally required specialized knowledge, further narrowing the pool of investors.

However, this landscape is changing. New investment structures, including fractional ownership models and farmland REITs, have begun to democratize access to farmland. As these platforms expand and investors gain a clearer understanding of farmland’s benefits, demand has grown—especially from institutional investors seeking portfolio diversification.

The Strategic Role of Farmland in Diversified Portfolios

In today’s uncertain economic climate, farmland can provide a compelling strategy for portfolio protection. With its track record of stability, inflation resistance, and dual benefits of income generation and capital appreciation, farmland can help enhance the resilience of a well-rounded real estate portfolio.