The Amenity Economy


The Western Larch changed colors in time  to brighten the drive for travelers headed to the 3rd Real Estate and Development  in the Rockies Conference.  Missoula residents   know the needles will fall off these trees, and then return next spring in a lighter shade of green.  Realtors and developers attending the conference have watched the Amenity Economy of the Rockies change colors in 2008, and fall dramatically with the national housing bubble and the credit crisis.  The conference audience wanted to hear  that the real estate market will turn green again - and soon.  A panel of regional economic experts  advised the group that recovery will not take place by spring, and perhaps not for several springs.  Construction and real estate, the two largest contributors to income in the  Rocky Mountain states, officially joined the boom and bust tradition of their resource sector predecessors.  If Yogi Berra could travel through the Rocky Mountain West, he would make this observation - "When a Rocky Mountain community depends on an Amenity Economy, the outcome is not always pretty!" 

Navigating a Changing Market

The Bitterroot Valley  is an example of a changing real estate market.  Ravalli County has a reputation in the region for rapid  development of recreation  and retirement homes.  U.S. Census Bureau reports the anomaly of high unemployment rates walking hand-in-hand with high income, the result of new residents living on investment income without local employment.  A panel of local developers discussed the market for residential construction, and their efforts to navigate the changes.   

Two members of the panel  build homes in Ravalli County, south of Missoula.  Perry Ashby (Westmont Builders) reported that starter homes of decent quality, priced at $145,000 are not receiving offers.  Mid-range homes are also not selling.  Ashby advised that well capitalized builders will ride the storm, but other builders unable to service their debt will fold.  Chip Pigman (Pigman Builders) expects the market will transition to smaller homes, with local conveniences within walking distance.  Buyers want open space, but will look to buy smaller houses on smaller lots, with higher density in clusters mingled with open space. Buyers for the high-end homes are still in the market, but these shoppers expect a major price reduction, influenced by recent distressed sales.  Sima Muroff from Blackhawk (McCall, Idaho) concluded that the excess inventory in the high end segment will need to sell before his development team can justify additional construction.  

The construction and real estate trends  imply choppy sailing for the solid wood products industry and timberland investors in the region. 

Segmenting Forests on the Edge

   Plum Creek's timberlands,   8 million acres nationwide, are the largest private land holding in the United States.  Because a timberland owner is in the supply chain for both real estate and home construction, the housing bubble  impacts revenue and profits.  Rick Holley,  CEO of the Plum Creek Real Estate Investment Trust (REIT), reviewed the company's  property classification  in his keynote address to the conference.  As part of the  REIT's business strategy, planners stratify the forestlands into categories that correspond to potential markets.  Five distinct classes represent  market segments and the respective management objectives for the land.  Core forest is the largest category, a total of 6 million acres (75% of the ownership).  Plum Creek manages these acres as the productive, long-term timber producing ground for the shareholders.   Other  rural properties offer recreation development potential (13%), with a high demand for parcels adjacent to public land.  Potential conservation sales represent another 500,000 acres (6%).  The portfolio also includes 300,000 acres considered nonstrategic due to location or management considerations (4%).  Finally, 200,000 acres that were once rural but are today on the fringe of urban areas have high density development objectives (2%).

A land use strategy and stratification has become common practice for businesses with large forest ownership.  The  planners diversify their portfolio  by land use objective in order to maximize asset value.  The strategy also  benefits from counter cyclical market trends.  However, in a financial crisis, there are not many bright spots on the market horizon.  Lumber prices have dropped 30%; stumpage prices held for a time, but soon shadowed lumber.  The  surplus housing  inventory that reduced lumber prices also decreases the demand for urban land development.  For over a decade,  forest recreation property compensated when lumber markets moderated, but even that segment has ground to a halt.  Selling nonstrategic timberland is a challenge in a market of potential buyers faced with the same business conditions.  In this mix of depressed market segments, Plum Creek does have potential conservation sales, including the pending  $500 million Montana Legacy Project  partially financed by federal bonds authorized in the 2008 Farm Bill.    

The Montana Legacy Project may become an example of the innovation required for forestland owners to navigate the changing real estate market.  The sale of 312,500 acres combines conservation, timber production, recreation and mitigation/restoration.   Legacy Project Partners  will acquire land from Plum Creek.  The partners  include The Nature Conservancy, The Trust for Public Land, USDA Forest Service, the state of Montana, and private investors.  A timber supply agreement will ensure delivery of logs to Plum Creek  and jobs in the woods and mills.  Rather than a business model that depends upon real estate appreciation and the future disposition from the forest estate, the buyers combine public and private financing to invest in  natural capital: wildlife habitat, water resources, and the inherent timber productivity of the property.  Private investors will acquire a portion of the 312,500 acres with conservation easements that will "restrict undesirable development" and retain public access.

 Fueling the New West

The changing business environment for timberland owners does offer other economic development prospects to fuel growth.  In Plum Creek's search for new  opportunities, biomass for energy emerges as a new use of the forest resource.  Holley reports that nationwide the company harvests 20 million tons annually.  Fifty percent of the total harvest is considered pulpwood, with average price on the stump of $10/ton.  If this material competed in the energy market instead of raw material for paper products, the price could increase to $15/ton.  The potential for fifty percent of the resource product volume to increase price by fifty percent motivates a landowner to reexamine management strategies. 

In the short term energy outlook, wood chips are  an alternative source of energy for heat.  The Fuels for Schools Program is an example that uses residual wood material in biomass burners, lowering heating costs for public buildings.  Holley, however,  considers the conversion of wood to cellulosic ethanol as a long term prospect.  A company named Range Fuels, located in Colorado, would like to build 50 cellulosic ethanol plants across the country.  The conversion facilities  use biomass as the raw material.  The first operational plant will be constructed in Georgia; the prototype facility operates in Denver.  If the new plants were located close to timberlands, the delivery costs  of small logs and chips would compete with other biomass sources.   


Market Segments Revisited

Biomass is one of four ecosystem services

 identified by the Forest Service as emerging markets that can benefit private forests.  Three other services described in a 2006 State of the Knowledge Report are water, recreation, and carbon sequestration.     The services of Rocky Mountain landscapes extend the list of amenities that contribute to land value.    An assessment of land in an ecosystem service  context would classify land by the market segments for biomass, carbon sequestration, recreation, and watershed services in addition to alternative land uses.

Markets for ecosystem services are emerging, but not mature  enough  to generate revenue that competes with real estate development.   Innovative initiatives like The Montana Legacy Project and The Blackfoot Challenge are using pubic financing to establish proving grounds for sustainable landscapes - watersheds that will emphasize production of ecosystem goods and services  by retaining working lands.  The projects allow an amenity economy to return - with an expanded definition.  Rather than depending on viewshed and waterfront amenities to drive the economy, ecosystem markets could work to increase value of property based on new markets.  The lull in the housing market may open a window of opportunity to demonstrate feasible service based markets for natural resources.  To end these conference notes with another Yogi-like quote, "Isn't it amazing how often a pretty picture develops from a negative!"