California's thriving vineyard market

Wines & Vines, Oct, 2005 by Tony Correia

Pinot Noir is recognized as the most challenging grape to grow, and wine to make, of all premium varieties. But recently, riding on the shirttails of the film "Sideways," Pinot has become the darling of the wine industry, as sales have skyrocketed.

April may be the cruelest month, but in 2005, May and June were crueler still, breeding storms out of the Pacific, mixing cold rains with the blooming, pregnant promise of fruit. The endless spring wrought havoc on the 2005 Pinot crop in the cool climates, and growers suffered the unkindest cut of all, a short crop in the midst of strong market demand for their scarce fruit.

Today, the coast of California is aswarm with buyers and vintners in search of the fickle fruit of Pinot Noir, the sublime seductress of the wine game. And not only Pinot; many acres of vineyards of all varieties have been acquired so far in 2005.

We have seen more vineyard sales this year than in many prior years combined. But the buyers are fickle, seeking out jewels, but often settling for any properties that can, at least, create the illusion of value.

The 2005 Turn-Around

The vineyard market in California experienced a dramatic turnaround in 2005. Many properties that had languished on the market, shopworn after many years of window-dressing, were gobbled up by a surge of new buyers in the market. What caused this rush to the market? Who are these buyers, and what effect have they created on the real estate markets in the grape-producing areas of California?

Smaller vineyard "estates" have enjoyed robust, or perhaps even "frothy" demand these past few years, as buyers sought their homes in the country. This phenomenon has been driven by the recent real estate craze, the "housing bubble," which in turn was driven by the availability of cheap money--readily available mortgage debt--at the lowest interest rates in decades.

This flight to the country has occurred throughout the developed world, partly fueled by fear, as citizens flee the trauma of city life in pursuit of a return to the simpler, pastoral life of the farmer on his own land. Of course, the role of a farmer on his own land is anything but simple these days, but the perception of a better life in rural America has continued to fuel rural markets throughout the nation, and the grapegrowing regions of California have proven no exception.

Small estate buyers are often uninterested in the quality of the vineyards they buy, and may not even know what varieties of grapes they have purchased. These smaller buyers are seeking rural homesites, and vineyards just happen to be a convenient (and tax-friendly) commodity to occupy the extra space on their 10 or 20 acres.

An old saying in real estate was that your most probable buyer was your neighbor next door, but today exactly the opposite is true. Vineyard estate buyers are coming from all over the United States and even offshore. In this respect, the world has truly become smaller, and folks seeking a second home may find one halfway across the continent or the world.

Larger, commercial vineyard properties, however, face an entirely different market. Many buyers exist for these properties also, but these buyers are savvy industry players who will explore in tedious detail the vineyards, varieties, clones, rootstocks, soils, water, etc., etc., etc. Strong demand exists for high quality vineyards in the prime production areas, but these are increasingly difficult to find.

New Players

Some interesting new players have stepped into this market in recent years. A few years ago, Premier Pacific Vineyards, LLC, a vineyard investment vehicle headed by William Hill and Richard Wollack, entered the game with a rather dramatic splash. The giant CALPERS pension fund had originally contributed $100 million to PPV, and followed with another $100 million early in 2005. PPV's concept is to buy land in premium production areas and develop ultra-premium vineyards. However, contrary to conventional wisdom, it is doing so without any contracts for the purchase of grapes. The operative theory is that by the time these vineyards come into production, the market will be on another upswing, and demand for those grapes, and those vineyards, will once again be strong. PPV would then be poised to sell (or lease?) its vineyard portfolio. But perhaps the most intriguing recent event may be the emergence of wine related REITs (Real Estate Investment Trusts), with two such entities already active in this market. In March 2005, Vintage Wine Trust (VWT) announced completion of the formation of its REIT, led by Joseph Ciatti, with buying power of up to $425 million worth of vineyards. VWT announced its first acquisitions of three vineyard properties in Napa, Sonoma, Monterey and Madera counties, at a total price of $73 million. VWT has since followed with several other significant acquisitions, including the $16.5 million purchase of Beringer's Iron Corral vineyard, and the Central Valley Gravelly Ford vineyard in July. VWT continues in its acquisition mode, and can be expected to assemble a sizable portfolio of vineyard properties by year-end.