The most common question I’m asked lately (in addition to “can you take out the trash?”) is what will happen to the market values of golf properties in the wake of the Coronoavirus pandemic.
Needless to say, I’ve given this issue considerable thought.
Last week we examined how golf after Coronavirus might look and asked several questions. This week, we examine the economics and possible impact on market value of a golf club after Coronavirus.
We examined the pro-forma from an actual appraisal assignment and adjusted on the basis of how the pandemic might affect the club moving forward.
In the area of revenues, we adjusted estimates on the basis of 6 elements. These were as follows:
- Golf Rounds: down 10% (due to decline in members)
- Cart Rounds: down 50% (due to social distancing guidelines and encouragement of walking)
- Total Memberships: down 10%
- Golf & Social Memberships: down 10%
- Food & Beverage Revenue: down 33% per member, based on reduced capacity/social distancing
The results were dramatic, and are shown in the adjacent chart:
Of particular interest in this instance is that revenues are projected to fall about 22% with Net Operating Income declining by 50%. Not unexpected.
While each case will be different, what this exercise shows is how one (actual) randomly selected property’s value can be impacted by the effect of the pandemic.
Numerous surveys and articles have been published already about the projected impact of Coronavirus on property values. In each of those that I’ve seen, the impact on leisure properties (hotels, restaurants, golf courses, etc.) has been most significant. This stands to reason because leisure properties represent spending of disposable income and people are likely to have limited disposable income to spend. How deeply that impacts golf facilities and private clubs remains to be seen.
The purpose of this exercise is to demonstrate that the impact can be significant. Golf and club properties are perceived as high risk to begin with and those buying and selling golf courses often look only at the previous year or projected first year forward in calculating their purchase decisions. Unlike other types of investment real estate with leases, long term projected future cash flows are discounted, in favor of a more recent shorter (12 month) history.
Since many golf and club properties experience deferred maintenance, this will also be used by purchasers to their advantage, especially in a tumultuous economic environment like we have now. The bright side for clubs and golf course owners, is that this may present an opportunity to reduce real estate tax assessments.
In speaking with many golf industry veterans over the past few weeks, I’ve learned that those courses that are open are seeing fully booked tee sheets, albeit sometimes with more widely spaced intervals. In Illinois, groups will be limited to twosomes with 15 minute tee time intervals to achieve social distancing.
These practices, if implemented elsewhere and if enduring, will impact golf property revenues, along with a likely impact on food and beverage revenues from reduced capacities and fewer large events as people practice physical distancing. It is also likely that pro shop merchandise revenues will be impacted as golfers purchase gear online and pay green fees electronically, eliminating the need for a visit to the pro shop.
Golf courses and clubs will need to adjust. It might take some time but I expect they will.
Like other types of commercial real estate, usage will change. Could there be a retail/office segment real estate recession/depression as more people shop online and work from home? Could this in turn enhance the performance of warehouse and storage facilities as businesses possibly use less retail/office space?
Golf is different, While participation may decline temporarily, it is not likely to decline (from Coronavirus) long term. In those areas where golf is being played right now, tee sheets are full, so there is no decline in interest. However, with the possibility that density of use, especially in the food & beverage and retail areas is restricted and cart revenues decline, golf courses and clubs will need to develop replacements for those revenues to counteract the fixed nature of most operating expenses. What will this look like?
Golf has always represented a very inefficient use of real estate assets (land and buildings). Accordingly, it’s not out of the question to envision more golf properties creating winter uses in northern climates, presenting outdoor fitness and other sporting options and nighttime use for events like concerts, fireworks and cookouts, of course while maintaining whatever social distancing practices endure. I expect that many clubs will utilize, rent, sell or develop any excess property that can enhance the club’s economic fortunes. Clubhouses and other buildings can be used more efficiently, as office space, residential units and indoor recreational facilities, again in compliance with social distancing. There are already numerous examples of indoor golf simulators that can become revenue generators for clubs. Will golf facilities create a nighttime TopGolf-like experience for members and patrons? Of course, these are only my opinions and much smarter and more creative folks than me will envision better and more efficient uses for the real estate while maintaining our beloved golf and club facilities in an economically feasible manner.
In the short term, values are likely to take a hit. Sellers, bankers and taxing authorities won’t like it. Buyers and taxpayers will take advantage of it. The long term is more difficult to predict. Until we know what “new normal” is, it’s difficult to say. In golf, old traditions die hard, but the choice between survival and extinction for some facilities will make that an easy choice. Golf isn’t about to die, but in order to thrive into the future, it will likely look a bit different. Some of golf’s traditions are part of the allure of the game. For others, economics have already indicated they’ve exceeded their useful life. Now, the very future of the golf economy is at stake. Change is on the way.