A recent article in “Counselor”, the newsletter of the Counselors of Real Estate got my attention. The article, by Deborah Cloutier, CRE addresses the risks of climate change for real estate. Weather and Climate-Related Risk was ranked #3 among the top 10 issues affecting real estate for 2019-2020. Given the golf industry’s already high level of sensitivity to weather, it seems only reasonable to explore the risks extreme weather and climate change present to the golf industry.
According to the National Center for Environmental Information (NCEI), 2017 saw 16 separate $1 Billion plus weather events resulting in losses of more than $300 Billion. 2018 saw losses of $91 Billion. 2017 saw $312.7 Billion in losses. 2005 ad 2012 saw $220.8 Billion and $128.6 Billion, respectively. These compare to an average from 1980 to 2018 of $19.3 Billion per year. Accordingly, property and casualty insurance premiums have increased more than 33%. As the frequency and intensity of extreme weather events increases, not only does the cost of insurance rise but compliance with ever evolving (and probably necessary) regulation increases annual operating costs as well.
While neither a golf course superintendent or meteorologist, it doesn’t take much more than common sense to identify the following areas of specific risk to golf courses from extreme weather:
- Turfgrass Cultivation and Maintenance Cost
- Cleanup and Damage Repair
- Loss of Business
- Insurance Expense
The politics of climate change are diverse. It promises to be a hotly debated issue in the 2020 Presidential election. While scientists tell us (and progressives agree) that climate change is real, present and getting worse, political conservatives dispute that position and resist regulation, conservation and fuel alternatives aimed at slowing climate change. To paraphrase one of my CRE colleagues, Golf will survive Trump, Brexit and even another economic downturn, but we can’t continue to experience Hurricane Katrina, Maria and SuperStorm Sandy-like events and pretend it won’t impact our industry. The debate over whether climate change is natural or influenced by humans is irrelevant. Anything we can do to mitigate its impact and slow its progress is essential.
Golf is already dealing with a sustainability crisis. In many instances the cost of providing the quality of golf modern consumers expect is more than they are willing to pay for it. The cost of golf course maintenance in the US far exceeds that in, for instance the UK because of the varying levels of expectations. Irrigation water is a huge issue already in more arid areas of the country. Water usage will eventually become an issue for all golf courses and the cost will become significant everywhere. We’ve analyzed courses with annual water costs approaching $1 Million – no small issue. Add the impact of more extreme weather events on top of that – that aren’t budgeted for – and you see the problem.
Just one extreme weather event, depending on location can drop a financial bomb on golf courses that includes flooding and/or saltwater damage to the turf that has to be cleaned up and revitalized. Trees are often uprooted and require cleanup, damage repair and sometimes replacement. And, of course there’s the issue of damage to clubhouses, maintenance facilities, equipment and all the other personal property that makeup golf and club operations. Buildings are typically prohibited from being built in flood prone areas, but golf course improvements are often in harm’s way and greens and bunkers cost time and money to return to service.
During and for sometime after the event, the course is closed with an associated loss of business. Cleanup and necessary repairs can often take weeks or months, which often doesn’t include rebuilding of facilities that may have been destroyed or demolished. How does this all impact value?
Let’s assume that on average a golf course or club has an extreme weather event every 20 years. Let’s assume that it happens in mid-season and results in loss of business of $1 million (an average of $50,000/yr.). Let’s further assume that as a result of the insured loss of $1 Million every 20 years, the cost of insurance increases $25,000 per year. Assuming that there would be deductibles and out of pocket costs of $50,000 ($2,500 per year) and the possibly of increased regulatory compliance of $5,000 per year the average annual cost of more frequent extreme weather would be $82,500 per year. All other things being equal, at a cap rate of 10%, climate change could reduce the value of the club by $825,000. While these costs would vary from club to club, it’s easy to see that the impact is significant.
When “100-year” events occur more frequently, the question is raised as to whether they should be re-categorized (“10-year, 25-year?) and how much more per year it will cost to be in business. Whether you’re a climate change advocate, climate change denier or somewhere in between if you own a course, manage or lead a club or are responsible for maintaining a golf course, acknowledging the impact of a changing climate is simply good business, regardless of the cause.