Future Developers will Build Fewer Golf-centered Communities
The real estate bust and financial markets crisis exposed weaknesses in builders’ golf community development model. Inelastic supply meets elastic demand.
Palm Coast, FL – August 6, 2009 – Since the 90s, upscale developers built their communities around golf courses and other pricy amenities. Rising property values expanded home equity as rising equities markets expanded portfolios and retirement accounts. Baby boomers, the richest generation ever to approach retirement age was knocking at the door with the accumulated net worth of a two-wage earner family supplemented with the greatest wealth transfer in history; inherited from their frugal, depression-scarred parents. The simultaneous and precipitous decline in the housing and financial markets has altered that picture, perhaps for a very long time.
Over the past two decades, nearly two thirds of all new golf course construction was tied to real estate development. The courses and associated amenities were used as marketing tools to attract upscale buyers and raise the value of home sites. That strategy is being tested by today’s reality. Future developers will need to find more practical ways to provide sustainable lifestyle choices for potential buyers.
Signs of trouble
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Over the past three years, more golf courses were closed than opened. Some great courses like Palm Coast’s Matanzas Woods course have been mothballed by financial troubled developers with uncertain futures.
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The number of rounds played nationally has dropped significantly over the past year. Golf expenses are purely discretionary. When the going gets tough, golfers find less expensive recreational alternatives.
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Golf clubs are losing money. The high fixed cost of club maintenance and operation cannot be easily shrunk to meet declining membership and play revenue. Inelastic supply meets elastic demand.
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Resigning members were surprised that their "refundable deposit" was not so refundable after all. During the heydays, many developers used one-sided contracts that can tie up member deposit refunds for months or years. When a club enters bankruptcy, members find themselves unsecured creditors with respect to their deposits.
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Developers discovered that once the development wassold out, courses no longer played a meaningful role in the typical developer’s business model.
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Investors found that club dues, stacked upon Property Owners Association assessments, taxes, and interest made owning property in amenity rich private communities a challenging business proposition.
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To some as yet unmeasured extent, today’s population incurred its own depression scars. The recent recession has been the deepest since the great depression. For some, wealth was wiped out; for most, greatly reduced. Those able to recover fully will forever be more prudent, less likely to use their home’s rising equity as an ATM machine.
The recent Golf Channel segment on Bobby Ginn’s Bella Collina, a lavish Florida development vision turned ghost town, illustrated an extreme example of the results of developer folly. Even if someone acquired the fantastic course and elegant Tuscan-style clubhouse without debt, they could not achieve positive cash flow under today’s market conditions.
As the real estate and financial markets recover, so too will most golf courses but new developments marketed primarily as golfing communities will no longer generate most new golf construction.
Outcome (future trends)
Golfing communities have a future. In the near term, I predict a turnover of capital. Present course club owners burdened with high debt service will be forced to divest – voluntarily or otherwise. New owners will enter at distressed price levels, hopefully low enough to handle today’s reduced revenue stream. During the transition, some members will lose their deposits. Some will drop out of the game, but the population in southern states will continue to grow, bringing in a new crop of golfers on a steady basis.
In the future, clubs will offer more flexible membership options, but there will always be a place for equity clubs and private, luxury communities.
What kinds of communities will developers build over the next quarter century? Look for a trend towards "green" communities characterized by:
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Smaller homes constructed according to green standards; low energy consumption, storm resistance, solar and/or geothermal heat sources, and landscaping that demands little water.
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Home offices will be a design feature rather than an afterthought.
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Storm water management systems (lakes) will be connected forming canoeing and kayaking options for residents.
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Residential units will be clustered, allowing broad areas for wildlife corridors and extensive walking and biking trail systems.
The bottom of the next economic cycle will catch fewer developers with high-maintenance, high fixed-cost amenities or residents with long-term commitments to club dues they are unable to pay.
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