Golf courses and clubs are a unique animal in the investment community. Not so long ago, golf properties were frowned upon by investors as too risky. We’re now seeing players from other market segments (multi-family, retail, office) looking at golf courses as a place to invest as golf has experienced the COVID induced surge and participation is up, along with rounds and membership.
Why is this?
Just last night, I read a most interesting article on WeWork, the shared office space company and their bankruptcy filing. According to Fortune Magazine, WeWork has leases on nearly 7 million square feet of office space in New York, representing 61.4% of their competitive market. Moody’s Analytics pegged the national office market vacancy for 2023 Q3 at 19.2%, nearing the record of 19.3% observed in 1986 and 1991. While not having studied the market, I observe significant vacancies in some of the retail centers and malls I visit that seem excessive. I’m told that neighborhood and community centers are holding their own while malls are struggling the most. This makes sense given society’s infatuation with online shopping and easy delivery of products. RealtyRates.com indicates cap rates for office space averaging 9.22% and for retail space at 9.77%. Each is considered to have more risk than in the past.
The multi-family market segment is generally strong, which nationally had a vacancy rate of 6.6% (according to the St. Louis FRED) at the end of Q3 2023 and demonstrated capitalization rates of just under 9%, according to RealtyRates.com for Q4, 2023.
According to RealtyRates.com, “all golf courses and country clubs” have been surveyed at an average cap rate of 12.14%. Despite considerably higher interest rates, this is not much different than Q2 of 2020 (the beginning of the pandemic) when the average cap rate for golf courses was 12.07%. This stability exists despite the prime rate increasing from 3.55% in 2020 to the current measure of 8.5%.
More traditional real estate investments not only have become considered as higher risk than before, but with the stability in cap rates for golf course properties, even though other market segments cap rates have increased, the returns (still higher cap rates) on golf properties are still superior, even with higher interest rates.
So, are golf courses good investments? Some are and some aren’t. The golf business has most certainly thrived during the COVID era and it remains to be seen how much of the surge is sustainable in the long term. The good signs are that people working from home can play more golf and that golf continues to be popular. The challenges are that golf is becoming more and more expensive and it remains to be seen if the culture of the game will expand to include the next generation and more interest from minorities and women.
To some, golf courses represent a land banking opportunity for future development. With the loss of nearly 2,000 golf courses nationwide since 2006, many have been repurposed for alternative uses, often residential development. With more of the remaining supply currently thriving, those opportunities are more scarce now, but it’s likely that golf courses will continue to be a target of residential developers into the future, if for no other reason than because golf courses represent a relatively inefficient use of land and a way to generate revenue while going through the entitlement process. In some cases, those currently seeking to purchase golf properties are doing so with the “safety net” of potential development should golf participation decline.
The high ROI potentially available with golf courses as compared to other property types, along with the possibility of future alternative uses have made golf courses an investment that some who used to ignore the segment now seek. It’s an interesting dynamic in an ever evolving market environment. Stay tuned.