Hitting Out of the Rough
Golf Course Openings Have Slowed, but Developers Remain Optimistic.
Like most commercial real estate property types, golf course development is cyclical. From 1986 to 1990, demand (measured in rounds) for new courses outpaced development, according to the National Golf Foundation. But by 1991, golf course developers had caught onto the sport's growth potential.
In the early 1990s, the NGF proclaimed the need to “build a course a day” through the decade to meet the nation's demand for more golf courses. With this battle cry ringing in their ears, developers no longer were satisfied constructing 200 facilities per year, the historical par for U.S. course development. The new course supply in the 1990s quickly surpassed demand, and development peaked at a record 524 new courses in 2000, which includes nine- and 18-hole courses.
“Everyone believed there was a dire need for more courses,” says Bill Kubly, owner and chief executive officer of Lincoln, Neb.-based Landscapes Unlimited, a major golf course builder with ownership interests in 22 courses in 10 states. “Money was readily available, although many lenders didn't understand the ebbs and flows of the golf business. … By the 1990s, the supply-and-demand curves had already started to reverse themselves.”
“Underwriters became lazy, and [developers] became aggressive,” says George Marderosian, president of Clubhouse Capital, a Providence, R.I.-based company that underwrites $50 million to $60 million in golf loans annually. “As rates came down and money became plentiful, there was pressure to put money out for loans. [Lenders] ignored some long-standing underwriting rules.”
With so many new courses and little growth in rounds, something had to give — and it has. The number of new courses plummeted to 377 in 2001 and 292 last year.
What happened to golf courses is no different than what happens in other types of commercial real estate. “There was a lot of demand [and] people built a lot of courses. When that happens people always build too many,” says Laurence A. Hirsh, CRE, MAI, president of Golf Property Analysts in Harrisburg, Pa., and a member of the Society of Golf Appraisers.
Golf remains a popular sport, but it hasn't experienced the growth in rounds many predicted for a variety of reasons, including the sluggish economy, bad weather in many parts of the country, competing alternatives for discretionary dollars, and the perception that the game is too expensive or takes too long to play.
“I thought the slowdown would happen a lot sooner,” Kubly says. “Everyone is finishing up projects that were in the works three to four years ago. Things will probably level off at 200 to 225 new courses a year and stay there for awhile.”
NGF predicts development will stabilize this year based on current course construction rates. Today's ratio of golfers to courses is at a level last seen in 1986 — about 1,900 golfers per 18 holes.
A tight lending market also has hurt golf course development. Marderosian estimates annual golf loans total roughly $1 billion. “I'd be surprised if new-construction [loan] volume today is 25 percent of what it was in 1998,” he says. A handful of large national lenders dominate the golf market, primarily Textron Financial Corp. and Pacific Life, with CitiCapital and GMAC also providing funds, he says. They mainly deal with existing, multicourse operators to mitigate risk. Banks occasionally lend on regional deals and smaller lenders typically work with single-course operators.
Instead of the high-end, stand-alone daily-fee courses that were the rage in the 1990s, many of today's new developments are driven by the strong housing market. About 48 percent of golf course construction is part of residential community development, according to NGF. But too many developers build upscale courses with high-priced greens fees designed to sell house lots rather than more economical courses with lower greens fees that provide both an attractive amenity for homeowners and an affordable facility that entices people to the game, Kubly says.
Many golf communities also prosper as baby boomers retire. Private-club development is steady, averaging about 59 18-hole equivalents per year, according to NGF. However, private course supply is expected to decline from 30 percent to 25 percent due to more public course construction and private-club conversion to daily-fee courses.
Public courses have suffered the most, particularly upscale, daily-fee facilities. The few successful stand-alone public courses are near metropolitan areas. For example, Landscapes Unlimited's Renditions replica course in Washington, D.C., which is based on famous holes from other facilities, averages more than $500,000 revenue per month, Kubly says.
Development currently is most active in underserved Northeast regions, such as Rhode Island, Philadelphia, Washington, D.C., Baltimore, and upstate New York. Florida, Arizona, Texas, and other overbuilt markets are slow, he says.
Even though new urban courses generally fare better than rural ones, some metropolitan areas are overbuilt. “Here in Dallas, we probably have two or three more public courses than we should have,” says Jay Morrish, president of the American Society of Golf Course Architects.
Appraisers can conduct market studies for around $15,000, but they may overlook many factors particular to golf course development, Marderosian says. “For example, maybe there's no daily-fee course within 10 to 15 miles, but how many private courses are within 25 to 30 miles? Can you identify if each one of those private courses is healthy? If there are one or two unhealthy courses, they may eventually convert to daily-fee or semi-private to make ends meet. So even if someone wants to build or buy a daily-fee course in an area where daily-fee courses are scarce, that doesn't necessarily mean there may not be some competition coming online,” he says.
The cost to build an 18-hole course varies greatly — typically from $3 million to $10 million — depending on a host of factors such as land prices, earthmoving, and irrigation systems.
“The cost to build courses over the past 10 years has increased substantially,” says Walt Lankau Jr., president of the National Golf Course Owners Association and owner of Stow Acres Country Club in Stow, Mass. “The permitting process takes longer, which means more studies and increased costs.” However, stiff competition among architects and builders for fewer jobs recently has lowered prices for those services.
Yet economical alternatives are available. “You can build a nice-looking course for $2 million to $3 million, but you have to reduce your expectations a little bit,” Kubly says. Reducing expectations may mean building a 6,000-yard course requiring less maintenance than the 7,200-yard layouts most developers want today. Or, it might mean installing a single-row rather than a multirow irrigation system, which waters less turf and decreases maintenance costs.
Kubly's company has developed several lower-priced courses, including the Pacific Springs golf course in Omaha, Neb., for $3 million, the ArborLinks course in Nebraska City, Neb., in cooperation with the National Arbor Day Foundation for $4 million, and courses in traditionally expensive development locales such as Dallas for less than $5 million.
To build a residential course for $5 million or more, Kubly generally requires the developer to buy down the course cost by at least $2 million, “to the point where we know it can be a profit center,” he says. “I'd like to hold my total out-of-pocket expense down to $3 million to $3.5 million or maybe less.”
A project's duration is more difficult to determine. Golf course developments typically require up to five years, Hirsh says. “You have to acquire the site, plan, design, and engineer, build the infrastructure, obtain [zoning] and environmental approvals, mobilize the construction crew, build the course, worry about the weather during construction, grow it in, and finally play golf. The reason golf booms and busts seem so pronounced is that golf development is not as easy to turn on and off as other projects that take 12 to 18 months to complete.”
Many courses for sale today were developed or purchased between 1998 and 2000, according to Marderosian. “The builders spent too much or purchasers paid too much back then,” he says. “But owners don't want to get out if they just sell the course, pay off the lender, and don't make a profit. As for buyers, many are still willing to take a risk and try to make the asset perform better than it has in the past two to three years. Sometimes that works because the operator may have made some mistakes. But most of the time it doesn't. The market usually speaks pretty clearly. If a course hasn't been making it, you need to look closely and find some identifiable areas of the operation that can be improved before you try to turn it around.”
Few transactions currently are taking place due to the large gap between the prices sellers are seeking and what buyers are willing to pay, Lankau says. Yet Kubly believes asking prices are close to bottoming out and more courses will start turning over. Goldman Sachs' recent purchase of American Golf Corp.'s more than 250 courses is a sign some big players are getting back into the business. “Golf will be a positive investment again very soon,” he says.
The land under a course may be worth a lot more 10 or 15 years from now, even if it currently is underperforming as a golf course, Lankau notes. But an increasing number of municipalities are approving course construction with the limitation that the land remain open space. “Years ago, if the market changed, it made sense to tell your members good-bye and convert the land to house lots,” Marderosian says. “Starting 10 to 15 years ago, many municipalities began limiting what could be done on golf course land. Now banks holding mortgages have golf courses that can't be converted into much of anything else.”
The construction slowdown is good news for many existing course operators who were forced to hold or drop greens fees and membership dues due to added competition from new courses.
“I've been through a few of these recessions,” Morrish says. “I've always maintained that if you are a bright developer who can foresee when the economy is turning around and can be the first kid on the block, you can do very well.”
It is that kind of optimism that keeps golf course developers and owners excited about the future of their industry, even during lean economic times.