There Goes The Neighborhood

On today’s show we’re talking about what happens when a neighborhood goes downhill. As real estate developers we’re always thinking about improving things. But what happens when things go bad in a neighborhood, and quickly? When you hear something like, there goes the neighborhood, many people think that some undesirable people have moved in. That’s not what we’re talking about. People are people, and they all have the right to live on this planet.

We are talking about the abrupt destruction of property value with the death of area amenities. There is actually an extremely common case of a neighborhood taking a significant hit. 

Throughout the 1970’s, 1980’s and 1990’s, there were many residential communities planned around a golf course. 

The residential properties backing onto the golf course were sold at a premium. They had large back yards and the large open spaces behind those homes were a beautiful thing to look at. Golf courses were being built at a feverish pace. We now have an oversupply of courses fueled by the infamous National Golf Foundation’s edict to “Build a course a day to keep up with demand.” Fast forward to today, and that demand isn’t there. Oversupply causes price drops and business failures in any industry. Golf is no exception.

As some private clubs have faced declining membership,  many started opening their door to daily play some changing entirely to a semi-private model. This has had the effect of increasing golf course availability 20-30% overnight. Much of that latent over-supply was hidden behind private memberships. 

As we’ve talked about on the show previously, some courses are being sold and redeveloped as development land. But in reality, many golf courses go through a period of decline, long before being redeveloped. How many? 

About 2,000 golf courses across North America have closed down in the past 12 years to put a number on it. That’s a lot of golf courses. In fact, with that many closures, these courses fall quickly into disrepair. The once beautiful view out your back window is now replaced by a weed infested, swampy mosquito pit. 

The impact to your property value is swift and steep. Any buyer for your home will want to know what’s going to happen to the golf course. In the meantime, if there’s uncertainty, the resale value of your property is impacted. If the golf course is sold for redevelopment, then your property is going to be negatively impacted. Some of these courses are very large and span hundreds of acres. 

When you’re looking out your back window at the beautiful green fairways, it’s easy to think it would be great to get outdoors and take a nature walk. But the business of golf is not very environmentally friendly. The perfectly green short cut fairways are the result of some pretty harsh and toxic chemistry. 

New environmental regulations have also increased costs for some operators. Some chemical treatments have been outright banned, leaving only costlier and sometimes less effect alternatives. 

Let’s be clear, I’m in favour of a clean environment. The point of this, is that if you’re in the business of golf, your job just got harder and more expensive at a time when you are experiencing falling revenue. 

So what does this mean for you as an investor? It means that buying an operating golf course for its value as a golf business could represent a very low cost land bank. You would be buying development land with a modest income stream to carry the land during the entitlement process. 

Once your project is entitled, you can build the infrastructure including roads, and utilities. From there you can sell the parcels of entitled land to home builders who will do the heavy lifting.