Some of the Central Valley's farm fields come with spectacular views, but values are on a downswing as inventory expands, including distressed properties in bankruptcy. Photo by Samuel Marshall, Schuil Ag Real Estate

It was a turbulent 2023 for the commercial real estate market, and Central Valley farmland was no exception.

And 2024 is starting off with an offering prompted by a company failure described as “once in a lifetime.”

Scott Schuil, vice president of Schuil Ag Real Estate in Visalia,  said implementation of the Sustainable Groundwater Management Act (SGMA) has sparked significant change in the market. SGMA introduced new rules and regulations to limit groundwater pumping, creating Groundwater Sustainability Agencies (GSA) that have become a new way to evaluate farm properties.

The market is also grappling with higher interest rates, making financing more challenging. Additionally, there was a notable downturn in commodity pricing, particularly affecting high-value, permanent crops such as almonds and walnuts.

“The implementation of SGMA has fundamentally altered the dynamics of water usage in the Central Valley,” said Shuil. “Previously, farmers had more flexibility in groundwater pumping, but with SGMA, variations in pumping allowances among different GSAs influence land prices. Water security has become a crucial factor, and this regulatory shift is reshaping the valuation of agricultural properties.”

Over the past ten years, one popular strategy has been for buyers to acquire properties at the end of their useful life and redevelop them for nut crops. However, this trend has slowed down due to SGMA and other factors.

Buyers have grown more cautious as the number of listed properties increases as redevelopment plans become less prevalent.

Another challenge this year was low almond prices. In 2022, tree nut prices fell to their lowest levels in at least two decades, according to the U.S. Department of Agriculture. Almonds sold for $1.10 per pound that year, down from a peak of $4 in 2014.

But there might be some optimism for a turnaround. Since high interest rates have led to more inquiries for seller financing and assumable loans, there is hope rates will fall this year and usher in new buyers. Higher input costs, influenced by supply chain issues and inflation, have also made farming more expensive.

Global conflict, including the war in Ukraine, have influenced commodity prices.

For the Central Valley, the surge in available properties and buyer headwinds have softened California agricultural land values.

“We anticipate that this trend will persist through 2024. Farmers are eager for an increase in commodity prices, an increase in foreign exchange rates compared to the U.S. Dollar, and abundant snowfall in the mountains this winter,” said Sullivan Grosz, ag division president for Pearson Realty in Fresno.

Grosz noted a significant influx last year of distressed sales across various commodities. Large properties — including nuts, table grapes and stone fruit — hit the market, signaling a shift from previous years.

One particular portfolio of note has hit the market with the collapse of bankrupt stone fruit giant Prima Wawona. Pearson Realty is marketing nearly 14,000 acres of land with a total list price of $370 million in southeastern and west Fresno County — an offering Pearson Realty Senior Vice Presiden Dan Kevorkian said was “once in a lifetime.”

Just this week, private equity-owned almond grower Trinitas Farming filed for Chapter 11 bankruptcy protection with about $188 million in debt and 17 ranches covering 7,856 acres including Fresno and Tulare counties.

Despite softer prices, crop forecasts pointed to a stronger crop for 2023. In July, the USDA’s forecast estimating 2.6 billion pounds debunked coffee shop chatter about a light crop and further exacerbated almond grower concerns of continued low prices through Q3 and Q4 of 2023.

In August, pistachio estimates showed a huge record crop going into harvest, and reports from large marketing agencies revealed prices had dropped.

Situations such as what happened to Prima Wawona, with the giant collapsing under the leadership of a private equity fund, have revealed weaknesses in long-term holding capability.

Despite financing challenges, Grosz said banks are still active and willing to lend on agriculture properties if the borrower clearly understands what they are purchasing and has a farming plan to be economically sustainable.

“Changes in lending may depend on economic conditions. If interest rates stabilize or decrease, it could ease the financial burden on buyers, potentially revitalizing the market,” said Schuil.

Factors such as weather conditions, consumer spending, the U.S. economy and global conflicts indirectly influence farmland values and profitability. While predicting the exact factors is challenging, the outlook suggests an anticipated softening in the agricultural market.

Land values are expected to fall, with some areas witnessing a slight decline and others facing more significant decreases. The extent of these changes will depend on the water situation and specific farming regions. With the current surplus of available properties and existing capital constraints, Realtors anticipate a challenging year. Schuil expects a significant rebound shortly if the almond price rallies and interest rates are lowered.

“Despite all the market factors, we are still transacting a significant amount of property, and buyers still see opportunity in specific areas and commodities,” said Grosz.