The Real Estate Boom which gained steam after 9/11 was the high-water mark for gated, amenity-rich McMansion communities. Developers bulldozed acres of open space to create enclaves where, for the right price, you could live on a private golf course, eat at your private club, exercise at your private gym and relax at your private spa. Property values were skyrocketing; everyone was fat and happy. Then, a funny thing happened on the way to the bank…
It may seem like a fundamentally sound model, but there were some serious problems with the concept of these gated communities from both the supply and demand sides. While the current economic climate means the model is on the shelf for now, this article suggests that for the wise developer it should stay there – forever – even when real estate finally turns around.
In today’s world, a highly-amenitized community faces dual challenges. First, too many communities vying for too few members which requires they must offer ever better and better amenities and services at ever-lower price points. Second, the internet and commonplace jet travel are taking their toll on the traditional country club model.
Supply
Even before the absolute and utter disaster of the real estate crash, the amenity-rich gated community was an unsustainable model. It was a cash generator for the developer in that it helped to sell lots of rooftops. The problem came once once the developer turned the community over to the homeowner’s association (HOA) 5-7 years later. The HOA received a rude awakening to how much the community really cost to operate.
Often, in the very amenity-rich communities, those attractions were loss-leaders for the developers who kept them afloat using profits from the sale of homes and memberships. While it was feasible for the HOA to continue to operate post-turnover, it was often only at diminished service levels from those provided when the developer ran it. Alternately, it required the HOA to jack up annual dues and fees.
Adding fuel to the fire was the problem that the developers’ pro forma models were based on a certain absorption rate of homebuyers opting to buy a club membership. However, the rampant level of speculation during the Boom threw that model out the window as speculators typically do not buy memberships. So, operations that run in the red by nature and only show in the black due to membership sales and dues are seriously behind the eight ball from the get-go.
Why do they run in the red? Because the quality and level of goods and services that members expect is expensive, especially when combined with the low membership levels you have to have (even with a full roster) to provide that personalized service. Moreover, in order to attract good staff members capable of high-end service you have to pay well and provide excellent benefits in order to make up the difference from what they can make at a commercial restaurant or public golf course with high volume. Finally, the volume at most clubs is simply not that high with respect to both the variable and (especially) fixed costs.
Compounding the problem is that many of the “hard amenities” – golf courses, clubhouses, fitness centers, restaurants, and spas – are too specialized in their construction and use to be easily adaptable should the winds of change blow in terms of what activities the members want. Offering a community based almost entirely on these hard amenities, instead of one focused more on “soft amenities” (travel clubs, programs, classes, etc) requires a tremendous amount of up-front capital investment that may or may not provide a suitable ROI. It is not unheard of for a developer to spend $20, $30 or even more than $40 million on a clubhouse…and maybe double that if you add a high-end golf course.
The gated golf course community so prevalent during the boom is essentially based on the country club model of a generation or two ago when there were only one or two clubs in town that anyone of means belonged to, and this was pretty much the extent of your social life and spending of discretionary income [You didn't live there - you joined and then played golf every weekend and ate dinner there a couple times a week]. During that era, there were not as many luxuries competing for your dollars or other places to spend your free time.
Financial models for recent gated communities were based on residents acting like those club members of 40 years ago. However, most people today are not willing to eat and spend that much time at their club given the choices they have outside the gates. Yet members still expect the same level of personalized service even if they only eat there once a fortnight instead of twice a week. Unfortunately, the club has a legal obligation to
provide that service because of what was marketed and sold. This is compounded by the fact that many members bought homes in the community based on the “lifestyle” and not just the house.
The other challenge is that with the old country club model, membership was somewhat fungible in that anyone could join. It was a simple decision to make – you paid your dues and joined. Alternately, you could decide not to renew your membership and leave. In today’s gated community, you first have to buy a house before you can even decide to become a member or not. That’s a really strong barrier-to-entry…in reverse. Or, God forbid you want to sell your house, you have to put your name at the bottom of an often long resignation list.
For some reason, it was thought the old country club model would be just dandy when mixed it with actual real estate sales. What they were marketing was a “lifestyle”, not just homes. This is not terribly different from how many companies pitch their products – they sell the benefit not the product – but an odd pairing when combined with someone’s home, especially the added cost associated with it. (The business model was not merged into the marketing of a comprehensive lifestyle product. Home development plus country club management does not easily add up to twice the profit. Residential for-sale development is based on one-time, fast and high profits, while successful country clubs and other hospitality ventures are typically mid- to long-terms holds with steady returns based on superior customer service.)
Compare it, for example, with Coke™ whose marketing rarely pushes the actual product. Instead, you see advertising showing youth, action, and good times while drinking their product. Therefore, by extension, if you buy Coke™ you might somehow enjoy those things too (although it is never implicitly said you will). The Coca-Cola Company does not offer the option of adding an extra $0.50 to your purchase of a bottle of Coke™ to gain entry to this non-existent clubhouse of eternal youth and vitality. Pretty absurd when
you think about it – but this is exactly what real estate developers did when selling a lifestyle…except they spent real money building that good-times clubhouse. A lot of them in fact.
In Part 2....Demand
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