If You Build It, They Won't Necessarily Come

? In Phoenix, another overbuilt market, the venerable Thunderbirds Golf Club was refurbished for nearly $15 million to compete with the new courses springing up around it. Even that didn't help the course turn the corner. The club's owners were foreclosed on, and in 2003 the place was bought by a group of local investors for $4.8 million--less than a third of the amount that had been poured into it a few years earlier.

? Faced with a steady decline in membership, the board of Chemung Hills Golf Course, a private club that was built outside Detroit in 1923, sold out to a housing developer to meet operating expenses. "The simple truth is that the land was worth more than the course," says Dewling. "This is the next trend: courses being bought as real estate speculation. It's happened to six courses in the Detroit suburban market that I know of, and as many as 30 may be in play."

But for every course that's plowed under to make way for houses, four to five continue to be built. According to the NGF, 90 18-hole courses were decommissioned in 2002 and '03, while 391 new courses opened. Of those, about 48% were attached to a real estate project. "Residential development is what's strangling the industry right now," says Jim Dunlap, an editor at Golf Inc., which covers the business side of golf. "What better way to get people to move into your community than to have a beautiful golf course outside your window?"

According to Gregg Logan of Robert Charles Lesser & Co., a real estate advisory service in Atlanta, the premium a developer can demand for a lot on a golf course ranges from 30% to 200%, depending on the course. "The fancier the course, the higher the premium," Logan says, "and only 30 to 35 percent of those who buy in a development with a course play golf. They're attracted by the social implications, the prestige and because your house is sitting on something pretty and green. It doesn't matter if there's an excess supply of courses. Courses are being built today to sell real estate, not because of a demand for rounds."

As each new course opens, it steals golfers from existing tracks. Price wars are waged, deals are cut, revenue sags and owners bleed. "Look out for round 2," Dewling warns, predicting that times may get tougher for course owners before they get better. "When interest rates go up, it could trigger a whole new round of bankruptcies. A lot of operators are carrying too much debt, and more courses are going to disappear."

That can't happen soon enough to suit independent operators like Walt Lankau, who has owned Stow Acres, a 36-hole facility in Stow, Mass., for 18 years. "In eastern Massachusetts we've had somewhere between 55 and 58 courses open since 1991, 12 to 15 in my immediate market," says Lankau, whose term as president of the National Golf Course Owners Association expired last January. "I guarantee you my land is much more valuable as building lots than as a golf course. The NGF used to talk about the need to add a course a day until the year 2000 to keep up with demand. At our last meeting an industry veteran told me we should be closing a course a day for the next 10 years. He was trying to be funny, but it's not that much of a joke."

A course a day for the next 10 years: That was the battle cry of the National Golf Foundation in 1988, when it published its strategic plan for managing the growth of the game. "Golfers were increasing at a rate of three to four percent a year, and we said if it continued, to maintain the balance of supply and demand, we needed to add 350 to 400 courses a year for a long time," says Joe Beditz, president of the NGF. "In metropolitan areas the supply gap was particularly acute. People were spending the night in their cars to get on a course like Bethpage. So people took our information to the banks and started building. What no one remembers is that 10 years later, in 1999, we issued a second report saying our assumption of three- to four-percent growth wasn't happening. Baby boomers were working more, not less, than their parents. Supply was outpacing demand by a considerable amount. We said, 'Stop!' But the developers went ahead and built another 1,500 courses anyway. They saw gold in them thar fairways. Instead of a golf boom we had a construction boom, and everyone built in the same markets at the same price points. The only way to win was to hurt your competitor. People built irrationally, and now they're blaming us."

"Somewhere between 1993 and '95, the industry passed through equilibrium," says Jim Koppenhaver, president of Pellucid Corp., a market-research company that helps course owners track customer trends. "But an additional 300 to 400 facilities a year continued to pass through the pipeline--several hundred more than the market could accommodate. The banks figured it out and began shutting down the cash flow."

"It's cyclical, like any other business," says Larry Hirsh, president of Golf Property Analysts Inc., a real estate appraisal firm in Harrisburg, Pa., that specializes in golf course properties. "You have a boom, and everyone goes out and starts building to satisfy the demand. The height of the boom was in 1998 and '99. In 2000 bad things started to happen. Bank of America, which was the industry's biggest lender, shut the doors of its golf lending unit. Golf Trust of America, a real estate investment trust that owned 47 courses, began to liquidate its portfolio. Then business publications started trashing the industry."

Particularly damaging was a front page story on July 22, 2001, in The New York Times that chronicled the flood of course bankruptcies in Myrtle Beach, S.C., with its 123 courses in a 60-mile strip. The stock market, meanwhile, was reeling, and the U.S. economy was mired in a recession. Corporations began slashing expense accounts. The business outings of the '90s became a pleasant memory. People began working longer hours if they were lucky enough to keep their jobs. Then came 9/11.