Making Bubbles

In a great article in Golf Business magazine, author Ray Tennenbaum examines the decline of golf-course-based residential developments from a peak in the 1990s. ("On the Rocks," Golf Business, July 2007, 38.) It's a complementary economic arrangement, where rising land values often make golf courses susceptible to becoming converted to tracts of single-family housing. However, housing on a golf course still grabs a market premium of 9% due to retirement dreams and baby boomer aspirations.

That 9% figure is according to a VP at Pulte Homes. Incidentally, this VP goes on to say that since he is "a golf course buyer, it's kind of in my business interest to cause a sense of panic in the marketplace." Touche. Pulte Homes built over 41,000 homes and had $14.3 billion in revenue in 2006. The Pulte brand, Del Webb, is the U.S.'s largest builder of "active adult communities for people age 55 or better."

Basically, here's the way it seems to work: a golf course is built for $10 million. Homes are built around it for $20 million. The homes are sold for a premium, say $30 million. The course is sold to an operator for $7.5 million dollars. The developer makes a profit overall, even though he might sell the course for a loss. Now, the new owner of the course has to try to sell golf rounds at a price and volume that can satisfy the lender that the property is making the expected income stream for a $7.5 million dollar course.

Due to market saturation of golf course developments and due to lower demand from new golfer populations, the course cannot possibly sell tee times at high enough prices to maintain operations. The $7.5 million dollar course is sold at a loss to someone else for $6 million. That owner, if he cannot sell tee times at high enough prices, sells the course for $5 million. And so down the line the sales go until eventually the price of a tee time at the course supports the value that lenders and other business interests place on the property.

The article states that the struggling golf courses located in over-developed markets are seeking—in extreme cases—municipal government bailouts. In effect, public bailouts are sought for failed private "enterprises" after the profit is long gone from the equation. Presumably, this bottoming out of golf course value would drive prices so low that golf developers could again step in ("it's kind of in my business interest"), buy it at fire sale, and turn a profit on the course again or build more homes on top of it and take out the premium value of the homes that formerly backed up to fairway #5. Business cycle, it's called, though I don't see the cycle part of it. When would all of the homes be torn down to build a golf course anew, for example? It seems that the golf course is just a place holder for land development, an artifice to prop up price: refrigeration for the low-hanging fruit.

Anyway, a worthwhile article to think about. Never has there been such a premium on golf course management. And with the coming boom in retirement numbers, never has there been more pressure to position golf courses based on tee time price. Perhaps many more courses will be returning to what's been called the "charter" of municipal courses: to provide affordable golf. But what is the price of an "affordable" round? That's the real question, beyond all the McMansion speculation.