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Market Update - Spring 2010

Market Study July 21, 2010

As we move into the latter part of the third quarter of 2010, the land market continues to illustrate new information relative to the ever-changing matrix of the market. As noted previously, sales volume between 2008 and 2009 exhibited about a 50% decrease and volume in 2009 as compared to the peak years of 2006 and 2007 had fallen off nearly 70 to 80%. As we move into the latter part of August, sales through 2010 at this point illustrate a considerable uptake in volume.

While the number of transactions remains low, the overall size associated with transactions has increased and large transactions related to landscape purchases by the State of Montana continue. Through August of 2010, the recreational ranch market under study in western Montana has illustrated a volume approaching 166,000 acres. Based on pending sales at this time, I anticipate that by year end we’ll see in excess of a total of 210,000 acres moving in the market. Based on approximately 66,000 acres sold in 2009, this represents an increase in overall acreage volume of more than 200%.

This must be weighted against the fact that by the end of the 2010, we expect that nearly half the total volume of the market will be comprised of sales being made to the State of Montana as they continue to purchase large blocks associated with the Plum Creek selloff in 2007 and other purchases directed by the Governor.

In mid 2010, we projected that the overall average price associated with lands in the rural land market was running at $868 per acre. That was based on a volume of less than 78,000 acres. Now with a volume of approximately 160,000 acres in the market, it would appear that the overall average associated with land values has fallen to $787 per acre. However, the overall average associated with lands has been skewed by the large landscape purchases which are being made by the State of Montana.

If one bifurcates the private sales from the state sales what is indicated is that on average the State will or has paid on average approximately $530 per acre for 107,000 acres of land in western Montana. The remaining portion of the market which will constitute over 100,000 acres anticipated by year end indicates an average land value at this time of about $1,248 per acre. This is down only 3% from final numbers in 2009 which fell out at $1,290 per acre.

Based on projected or anticipated closings by the end of the year, we expect the overall price associated with the private land market will fall to about $1,160 per acre. This would reflect about a 10% decrease from overall land values seen at the end of 2009.

When the overall average associated with the land market is calculated with state transactions, the indicated per acre price for over 200,000 acres moved or sold will be approximately $850 per acre.

The higher amenity sale data indicates that the market may have shifted downward only 10% over the past nine months which indicates a slowing of value loss related to large parcels. Between 2007, the peak year, and the end of 2009, values associated with the rural land market fell by approximately 35%. By the end of this year, comparing values in 2007 to 2010, it appears that the overall decrease that will be evidenced in the market will be about 42%. The apparent stabilization or lessening of loss associated with the market must also be weighted carefully against the quality of the properties which are moving within the context of the market in 2010.

The majority of the properties which moved in the market in 2009 were selloffs of larger properties which had experienced problematic listings or other development issues. In 2010, what is being seen is that primarily the sales of private land are related to fairly high amenity properties which have good underlying characteristics. This also must be considered against the fact that the properties which were selling in 2007 were based on a limited amount of market activity and were related to hyper-inflated listings and prices which peaked out in 2007.

What is being seen in the market at this time is that buyers appear to be purchasing quality properties at values which are not substantially below the values which were associated with these properties several years ago, based on their actual trading values. However, they are buying them at 50% to 60% of what they were listed at.

It appears long-term players in the market are beginning to make moves on properties which have the best characteristics and not necessarily based on a market documented price, but rather a value perception resulting from substantially reduced list prices.

The information continues to indicate that the market is volatile but it is apparent that there is segmentation in the market with most sales being related to higher amenity properties. Segments of the market which are populated by average properties or properties with limited aesthetic characteristics are exhibiting very limited or low sale volumes and softening value. Agricultural markets appear more stable and croplands in the major dry farm areas are up slightly, again based on limited sales. Absent the State’s purchases of the large landscapes referenced herein, it is not apparent that there would be equity buyers looking at these properties. However, within the context of the current market it does appear that the State is making excellent buys on these large landscapes. These lands will further decrease the amount of private land available in the market, and as stated before, a limited supply in the high amenity recreational market is anticipated to increase values over the next several years in specific segments of the higher amenity market.

NOTABLE REAL ESTATE TRANSACTIONS:

Gallatin County Pending Sale

A current sale in Gallatin County that is pending on a parcel in the 700 to 900 acre range is under contract at a value indicative of 2002 or 2003 land values in the direct area of the pending sale. The land was bought in 1995 and will show a return to the owner of about 5% a year over the last 15 years based on the current sale. Based on 2006 and 2007 sales in the area of this property it is 60% below what larger parcels were selling for before the market faltered and declined. The sale value of the pending transaction will still reflect speculative investment. A cash lease of the property would gross less than 2% and after costs it would be a break even proposition. The property has good agricultural attributes and good recreational features and is a primary valley unit. This unit would not have been in direct development play in 2007 but would have been influenced by large tract investment reflective of different market considerations.

Beaverhead County Sale

Another interesting sale which occurred in late 2009 was the sale of what was referred to as the High Mountain Ranch property located near Dell, Montana. That property was comprised of approximately 7,000 acres and reportedly sold in the area of $12-$13 million. The property included a custom home which had a reported construction cost in excess of $14 million. Again, as noted, this sale is reflective of specific sale circumstances or conditions related to this property, and an analysis of this sale relative to the overall market is difficult to make.

Paul Allen Montana Ranch

Another sale which closed in late 2009 was the sale of a rural retreat owned by Paul Allen. That property was located in the Centennial Valley and was comprised of approximately 2,400 acres. It traded to several local ranchers at a value reported to be in excess of $5 million. It also included personal property and custom buildings which make the overall indication of this property relative to the market difficult to ascertain. However, it is notable as a sale to area ranchers.

Schroeder Ranch

Perhaps one of the most interesting transactions which occurred in the market in the last six months was the November sale of the Schroeder Ranch. This property is comprised of approximately 6,200 acres, and is located south of Missoula, Montana, along the Bitterroot River. The property reportedly sold in late 2007 for a value in the range of $26 million. It was purchased for development as a partnership property for rural ranchettes. This property re-traded in the open market in November of 2009 for a price reported to be less than $15 million. This is indicative of the transitioning highest and best use as the property moving away from probable development to a more recreationally based value.

Sun Ranch located in the southern Madison Valley

This ranch, comprised of approximately 18,000 acres, reportedly traded in the range of $28-$30 million and it was well improved. The majority of the ranch was subject to conservation easements which restricted development. The sale included some lands which had been added to the main ranch over the past ten years. The main ranch sold in 1998 for $28 million. Ostensibly, the current sale suggests no appreciation, but as noted earlier, one must take into consideration the changes since 1998, which includes the majority of the property being placed under conservation easement since the purchase in 1998. Also, one must take into consideration the river properties which were added and included in the sale, as well as improvements which were made to the property since 1998. It previously sold in 1993 for $10,500,000.

The following map of the Sun Ranch is an example of our interactive mapping capabilities and is based on information provided by the State of Montana. This map is for illustrative purposes only and the information is not warranted by Norman C. Wheeler & Associates.

Thank you for your interest -- Clark Wheeler