December 31, 1969
March 2017 - The State of the Golf Course Investment Market
I would really like to make this sound great so that everyone was happy when they are finished reading this article, unfortunately I am not sure if that is possible in 2017.
While most of the commercial real estate world has seen values increase since 2008 the golf course industry has been stagnant. 2016 was no better than the year before and with not much hope that 2017 will improve things. A long term drop in the number of golfers with a corresponding decrease in rounds equates to a reduction in revenues and ultimately a diminished long term value. The industry continues to suffer from an imbalance in supply and demand. There are simply too many golf courses and not enough golfers to play them in order for all the courses to be financially successful. And while everyone fervently hopes for more courses to become shopping malls and houses there is no evidence to support that this is happening fast enough to equalize the supply demand imbalance.
On the daily fee side of things many courses have become commodities. Owners have found that the easiest way to increase rounds isn't through better conditions or services but through a drop in price. Once the price of a greens fee has dropped it is tremendously difficult to get it back to where it used to be. Turf conditions have dramatically improved over the last 20 years which has made it even more difficult for a course to differentiate itself from the competition. When I was growing up int he 70’s and 80’s, munis were munis and conditions were often substantially inferior to higher end daily fee courses and private clubs. Today, a whole new generation of superintendents have degrees in turf management and have learned how to do more with less. Courses are greener and t weed free. Today, it is a rarity to play a course that would be considered a goat ranch.
Private clubs face their own separate set of issues. The Private Club lifestyle that existed in the 70’s and 80’s only exists in the imagination of the oldest members sitting at the bar drinking their Manhattans. Today’s private club members are looking for fitness and spa services along with golf and dining. The proliferation of great dining across the country has given member too many choices to eat out and led them away from eating at the club every Saturday night. The harsh reality of stricter DUI laws nationally has led many members to think twice about having one for the road. Both of these trends have led to a reduction in F&B revenues at many clubs. The days of a man golfing all day on Saturday and Sunday while their wife stays with the kids at the pool are long over. Travel soccer, baseball etc have taken away the time we used to spend playing golf all day.
So what does all of this mean for the valuation of golf courses. The math is pretty simple. Most courses are worth 1 x Gross Revenues. The number can fluctuate as low as .75 or as high as 1.5 times depending on the location but overall a good place to start with a valuation metric is 1x. This metric is particularly useful when valuing underperforming assets or ones that have negative cash flow. Private clubs with negative cash flow and big clubhouses are typically on the lower end of the value range while a high end daily fee course in a good location with positive cash flow and a great reputation can get all the way to 1.5. That does not mean that every sale falls in this range. Buyers may end up paying more than 1.5 times if they have other motivations aside from pure profit. Those sales have less to do with economics and more to do with emotions.
One of the top problems facing golf course sellers is that there is no one out there that needs to buy a golf course. In every other commercial real estate market there are a multitude of buyers sitting on funds that they need to deploy. Most golf course buyers are not motivated by need but by greed. They see a deal and look for an opportunity to buy at the bottom of the market. As a broker I often refer to asset value vs financial value. Asset value is closer to replacement cost where the buyer looks at the land and the buildings and the equipment and thinks to himself or herself that it must have cost $8 million to build all of this and I can buy it for $1.5 million, there must be a deal in there somewhere.
At the end of the day, it is a great time to be a golfer. For many owners the pressures of supply and demand inherent in the industry create daily challenges that are being met with hard work and creativity. Real estate by nature swings through phases of supply and demand imbalance, the golf business seems to be stuck with the pendulum permanently stuck with an over supply of quality facilities. Hopefully, someday soon we will see an increase in demand to meet the supply that currently exists. Until then go sign on to your GolfNow account and sign up for a tee time at your favorite course.