Golf market beginning to ‘correct’ at mid-year

These are interesting times in the golf course business. Earlier this year the biggest portfolio in the business (National Golf Properties) was sold to investors. However, this has not started a flurry of transactions. Golf courses are still a challenge to sell and I still observe a gap between buyers and sellers based on acceptable capitalization rates. Buyers are looking for bargains (cap rates of 12 percent or more) and sellers are still hopeful of selling for top dollar (10 percent cap rates).

This being said, I do sense increased activity in the marketplace which should settle somewhere in between the above mentioned rates.

One of the most significant things I’ve seen is that some courses are considering alternative uses (other than golf) for their properties. A look back into history shows that many golf courses have been redeveloped through the years, as their locations become too valuable for golf. Some become shopping centers, some become housing developments and we have just received an assignment for one that has the ability to be redeveloped into a large office complex.

There are several considerations that go into such a decision:

• Competitive golf market – This is the primary motivation for any decision by a golf course to close up shop. With the addition of much competition in the recent past, some courses are forced to consider lowering prices, repositioning themselves in the market, making expensive improvements or even going out of business. The glut of competitive courses in some markets combined with limited additional players has caused rounds to decline for most courses.

• Evolution of community development – One of the fundamental concepts for golf development through the years has been to identify and locate sites that are not only large enough with adequate resources and physical characteristics but are also located with adequate proximity to players. Accordingly, many courses were built on the perimeter of then existing community boundaries. As population has grown and communities have spread outward land has become more scarce and thus more valuable. In many communities, the golf courses represent the last large parcels of open space. As a result, they become too valuable for golf (especially in a down golf market) and may be sold to developers of other property types. This has occurred for years in the golf course industry and I sense that it is occurring again. Just in recent months, we have had several inquiries of this type and have performed consulting or appraisal assignments on several.

• Development rights and zoning – One of the key elements of this equation is whether a golf course can be developed for an alternative use. Many projects (especially those designed as an amenity for housing) gave up such rights in the entitlement process and must remain as open space if not continue to be operated as a golf course. Other courses have conveyed open space conservation easements to take advantage of the tax benefits therein and later found that through increased competition or some other reason that they might not prefer to stay in the golf business.

What does all this mean? I sense that this trend is part of the “correction” that we’re now seeing in the golf course industry in those markets that are oversupplied. It is only to be expected that more desirable courses will be stronger competitors and that the less attractive ones (although not always) will be candidates for alternative uses. Such courses (especially if older without restrictive covenants) are targets for developers. This can include both daily fee and private club facilities.

One area of great concern that we see right now is that of “middle market” private clubs. Many of these facilities are experiencing declining membership because their initiation fees are low (and easy to walk away from) and their members are often marginally able to afford the private club lifestyle. Many of these clubs are considering market repositioning which then could add to their problems if they have to compete head-to-head with upscale daily fee or semi-private courses. Also, finding ways to pay for any potential improvements causes additional membership exits from assessments.

In general, I do sense that the market is beginning to correct. There is considerable interest in buying golf courses (at the right price) and fewer are being developed. Given this generalization, let me be the first to caution that we are talking about a series of markets (not one) and that all have different characteristics. Does this mean values are stabilized or back on the way up? I don’t think so. That will take some time but all industries have cycles and we are no exception.

Laurence Hirsh is president of Harrisburg, Pa.-based Golf Property Analysts.