Making the cut for a successful golf course community has become more difficult. Developers must understand real estate and golf. With more and more baby boomers moving toward retirement, a national desire for healthy outdoor activities, all the ingredients were in place for a surge in residential and resort golfing communities.
But things haven’t worked out quite as expected. For every successful luxury golfing community in Florida, several others have performed below expectations or failed – foreclosed by lenders, sold off at fire-sale prices or simply ignored by the marketplace.
What happened? Higher land costs, stricter environmental and growth management rules. But the biggest factor undoubtedly was overbuilding. Too many developers, abetted by accommodating lenders, had unrealistically high expectations and ignored the fiercely competitive nature of the marketplace. Common errors included poor location, ho-hum housing, too much dependence on high-priced golf memberships and weak marketing.
Many developers were so busy trying to build a better mousetrap that they forgot to count the mice.
Florida has two primary attractions. The first is waterfront, and the second is golf. Add in the affordability factor, because you can get more in a luxury Florida home than you can in Arizona or California, and you can see why golfing communities continue to be developed throughout the state.
Florida’s luxury golf community developers strive to attract four types of buyers: affluent business executives and professionals and their families, empty nesters seeking a different lifestyle, second-home purchasers, and retirees.
Some of those who got into the business didn’t have a strong background in real estate. Consider the case of avid golfer Gino Paulucci, who earned a fortune in frozen pizza and Chinese food. He decided to create a new golfing community called Heathrow in northeast Orlando and proceeded to make numerous housing and marketing mistakes. Finally, realizing that being a successful entrepreneur didn’t guarantee a successful golf community, Paulucci sold his troubled development to Arvida.
The overbuilding and the double whammy of a recession and the failure of numerous savings and loan institutions combined to slow the pace of golf community development.
Even the developers who did their homework and made good decisions were stung. E. Llwyd Ecclestone Jr., a highly successful community developer with many projects to his credit, brought Ibis Golf and Country Club, a 1,900-acre golfing community in West Palm Beach, into the market at the depth of the recession. After several years of slower-than-expected sales, the development was turned over to a subsidiary of his lender, Michigan National Bank, and is currently owned by Ibis West Palm Partners LP.
Soon, many developers and investors were focusing on buying bargain-priced foreclosed golf course properties from private lenders and government agencies rather than starting new projects. With banks, thrifts and the federal Resolution Trust Co. busy selling off real estate, private investors and the so-called opportunity and vulture funds could buy prime residential land or active golf communities for less than 50 cents on the dollar. This allowed them to achieve a far better rate of return than was possible under the original cost structure.
Faced with a glut of low-cost property, it is little wonder that developers and lenders were reluctant to undertake new golf communities. In fact, many of today’s new golf communities are being developed on land purchased at distress-sale prices from the RTC or lenders.
It is probably more difficult to create a new luxury golf community today than at any time in the recent past. Although capital is readily available, land costs have climbed steadily throughout the state, and a more restrictive regulatory environment has increased the cost and lengthened the time involved in bringing a new community – particularly those located on scarce waterfront land – to the market.
Luxury golf course communities carry a much higher overhead than non-golf developments, leaving developers with a smaller margin for error or for downturns in the marketplace. Ron Garl, a well-respected Lakeland golf course architect, estimates today’s developers will typically pay $300,000 per hole to build a high-quality golf course. One new project slated for the Naples market has budgeted $6.7 million for an 18-hole course, $8 million for club facilities, and another $1.5 million for design fees and equipment. A new community in Palm Beach County spent $7.5 million on 27 holes of golf and almost $15 million on a clubhouse and other recreational amenities.
Another factor affecting developers’ cost structure is that well-located land is rapidly becoming more expensive. Florida has only a limited number of prime coastal community locations, which traditionally command the highest prices and offer the most appeal to affluent buyers. Aside from the Panhandle, the Atlantic coast south of Jacksonville, Vero Beach, and the Naples-Fort Myers area, most golfing community development has moved inland. Many buyers who want both golfing and waterfront are opting to purchase resales in built-out coastal communities or closer-in locations.
Then there’s the additional acreage that must be dedicated to environmental requirements for wetlands, animal habitats, water retention and open areas. As a result, a number of the most luxurious communities that attract wealthy purchasers are, in fact, substantially in the red and are, or will be in the near future, for sale.
Faced with rising cost pressures, major developers have dramatically cut back on new golf communities. Arvada, one of the state’s leading community developers, has not launched any new golf projects in the past few years. “We didn’t find land that allowed us to get the return we needed,” says Richard L. Larsen, vice president marketing and sales, who adds: “Although we haven’t done any for several years, we’re actively looking and are considering broader areas now.”
In numerous market studies, our firm, Goodkin Research Corp., has found that only a few proposals can generate a high enough return to the developer to justify the project. Indeed, developers today are taking a more realistic view of pricing, sales volume potential, and club operations.
Now, more people are buying second homes and more are planning ahead for retirement.
Several reasons for the lower-than-expected demand:
- Consumer recognition that, with inflation in check, residential real estate is no longer the best investment vehicle, As a result, buyers are not “overbuying” or speculating that the home will double in value in a few years. They don’t ask, “Where can I make the most money?” but, “Where is my investment most secure?”
- Consumers don’t feel compelled to own a luxury golf course home. They are more selective and conservative.
- Job stability, income, bonuses and pensions concern buyers. When even senior executive positions are no longer secure, people are less eager to commit to a hefty monthly payment or an all-cash purchase.
- Increased competition is coming from other retirement destinations, particularly skiing resorts that offer golf in the non-winter months. The Carolinas, Colorado, and Arizona, in particular, are a growing competitive threat to Florida.
- Empty nesters are electing to stay in their current homes rather than move to a new community that perhaps offers smaller lots and fewer or more costly amenities in a less convenient location.
- Older, built-out golf communities are upgrading their amenities and increasing their marketing efforts to compete more effectively. More associations are seeking to improve their marketability and appreciation once the developer has sold out. This helps broaden the appeal of an older community which may have older residents – beyond one age group. “The resale market around the state is very strong,” Cope says.