California farmland produced a negative net return in 2023 for the first time since at least 2009, according to the National Committee for Real Estate Investment Fiduciaries.

NCREIF’s data for the Pacific West region, which contains California, registered a negative return of -3.6 percent for the calendar year, comprised of a -6.16 percent appreciation that counteracted income of 3.22 percent.

Appreciation returns were also faced by permanent croplands across the US, which registered returns of -2.88 percent that trailed the 10.21 percent growth achieved in annual crops during the 2023 calendar year.

Headwinds in almond and pistachio markets were highlighted in a panel session focused on California farmland at Peoples Company’s Land Investment Expo in January.

Peoples Company Pacific West managing partner Curtis Buono, who moderated the panel, said 2023 was marked by oversupply in key commodity markets and slower sales volume for many property categories.

“Overall, the year was kind of funky. We had some larger institutional-scale deals in the beginning of the year and then, it was really a year of two halves. The second half of the year, most things that sold were less than 160 acres and in some markets less than 50 acres,” said Buono, who leads Peoples Company’s brokerage services in Arizona, Nevada, Hawaii and California.

“A lot of investors were on the sidelines, and they had a lot of capital to deploy, so we saw a decent amount of institutional re-investment in assets; solar projects, water infrastructure projects, things like that,” added Buono.

Overall, professionally managed farmland produced a cumulative return of 4.96 percent in 2023, across the 1,339 properties the NCREIF index tracks.

Cumulative returns for annual cropland in the index in 2023 was 10.21 percent, comprised of 6.54 percent appreciation and 3.51 percent income earnings. Permanent cropland produced a negative cumulative return of -2.88 percent during 2023, when properties in the index secured 3.09 percent of income growth that was counteracted by a -5.85 percent appreciation.

Income accounted for 3.4 percent of total return over the trailing year, while appreciation contributed approximately 1.58 percent growth, according to the Q4 NCREIF index.

For the fourth quarter itself, NCREIF reported total cumulative returns of 2.27 percent, comprised of 1.52 percent income and appreciation of 0.75 percent. It also reported that permanent cropland produced a -0.36 percent total return during the quarter that ended on December 31st, while annual cropland in the index produced 3.92 percent returns in the same period.

During a separate farmland panel at the Land Investment Expo, Peoples Company Capital Markets managing director Dave Muth described 2023 as a year when a degree of “friction” that had been largely absent from farmland markets in recent years was gradually re-introduced as other alternatives become more attractive.

“It’s pretty hard to ramp up an LTV [loan-to-value] on farmland right now. It’s a low cap-rate asset and you can pretty quickly get to LTVs where your debt service is going to be two to three times what your actual return from the land is going to be,” he said.

“You started to see some of the cash buyers get interested in other fixed incomes. That three cap rate, or three and a half cap rate is not as attractive when I’ve got other income options that can get me 5.5, maybe 6 [percent income].”

There are encouraging signs of recovery for California almond producers, Buono said, in the form of orchard prices that are starting to become attractive and improving prospects for a recovery in prices over the next few years.

“There’s going to be some pain first, but with that there’s going to be some opportunities. We’re going to see some meaningful rightsizing in almonds and wine grapes, hopefully. It always goes slower than you want it to,” he said. “There’s going to be a lot of eyes on pistachios and concerns on that cruising towards an oversupply situation.”

Sixth Street Agriculture managing director Max Nightingale stressed that California’s advantages include its well-developed infrastructure and established presence of institutional investors in the market. He added that in his view, the current conditions in California are the most favorable for investors for at least the past 10 years.

“It’s been a seller’s market for the last few years and I think that definitely flipped last year. From an investment standpoint, finding high-quality assets at pretty attractive prices gives you downside protection and what’s really interesting is you are seeing some high-quality, marquee assets that would have never been in the market before,” Nightingale said.

“There’s always going to be pockets of opportunity and in California you have a lot of diversification of investment-grade assets that are really attractive.”