Formula for Feasibility
Mike Ditka once said, “Success isn't permanent and failure isn't fatal.” This theory spans across virtually all known vectors, including athletics, business, life…even science and real estate.
Scientists of physics describe the phenomenon of critical mass as the minimum amount of matter required to generate a cycle or sustainable chain reaction. It is a delicate exercise of balancing the right amount on two sides of an equation so that a tremendous amount of energy is generated virtually into perpetuity… either that, or an incredible and destructive explosion occurs.
In the real estate world, this very concept is commonly prescribed. That is, we see it in the development of towns and communities around the world. Most of the time, though, the successful achievement of critical mass is due to the interpolation of thousands or even millions of input elements (we can call them “people” in this briefing). The coordination of so many levels of intelligence allows for a chain reaction of real property development to continue seemingly into perpetuity. In fact, success is almost guaranteed, notwithstanding a major influence or catastrophic barrier getting in the way. (In theory, that is.)
What is not so simple is a single developer (input element) pulling together a plausible project to achieve critical mass, and for the universal value of the project to bust through the barriers of a cost box. In most instances, commercial real estate relies on external forces and peripheral projects to contribute to the generation of demand to itself.
Enter sports and entertainment megaplexes — a fairly massive concept by the standards of a single or joint development party, but one which can be financed and supported within a handful of phases. Yes, it is true that the United States is riddled with thousands of single or dual-use sport or entertainment-oriented facilities (fieldhouses, tennis clubs, soccer facilities, ice arenas, service cinemas…etc.) many of which ended up being unsuccessful efforts from the early stages of operation. The idea may have been sound at some point prior to construction of these projects, and they may have even been operating at near-capacity levels for some time. As stand-alone going concerns, each of these facilities often stands a far less convincing chance at achieving sustainability. But in an increasing number of circumstances, it is the larger, expansive and more diverse projects (namely those that are eventually improved with lodging elements) that have yielded returns to not only investors, but also tax jurisdictions through ripple spending by the patrons.
Bigger can be Better
At this point in the nation’s economic cycle, consumer spending in the U.S. is projected by Claritas, Inc. to increase by about two percent annually through 2018. Looking back just four years, these growth figures were bleak and did not lend credence to the possibility of developing large-scale discretionary income-supported projects like sportsplexes. If a development plan was ever to come to fruition, the chances are that the scope had been reduced, thereby narrowing the opportunity for the project to attract from a larger feeder market. Much like a regional shopping mall, sportsplexes and entertainment venues exhibit significant flex in the trade areas they draw from as the magnitude of the project increases or decreases. As additional phases are implemented, those concentric rings swell rapidly. When phases are removed, patrons will not travel large distances to pay for the experience.
One project in particular that has garnered regional attention is Grand Park, a sportsplex and entertainment venue under construction in Westfield, Indiana (just north of Indy). The first phase is slated for completion early this year. The attractiveness of the development enabled it to be almost entirely funded from the city’s own coffers. According to Westfield’s mayor, this project had been in the works for several years. The extensiveness of the plans fluctuated in the early stages but ended up growing to its current version which includes 31 outdoor multi-purposes fields as well as a fieldhouse that shelters three professional-sized soccer fields and various supporting amenities. The park’s size initially sputtered because the projected economic impact was not sufficient to justify the risk of spending tax dollars; the larger scope was envisioned to be a more likely success for achieving critical mass.
This approach seems to be working, because since ground breaking, a significant influx of permit applications to build various supporting businesses and amenities (restaurants, fuel stations, retail centers, even a senior-living facility, and…of course…hotels) have been filed. “We didn’t set out to build the largest sports park in America, but that’s what it ends up being. It’s what we’re trying to do, and that is, to diversify our tax base and to build on a $7.5 billion industry of family travel team sports,” said Westfield Mayor Andy Cook. It is the tax revenues from these operations that will ultimately generate a return to Westfield’s grand vision. Now that hotels are proposed for development within the planned-use district, the likelihood of further expansion is substantially higher.
Of course, sportsplexes are not the only anchor ventures that drive diverse planned-use projects. Motorsport parks also call on large trade areas (several hundred miles) to support their events. These facilities have been proliferating of late, and have begun to extend well beyond the turns and straightaways of the tracks to generate race business. An example is the Motorsports Park at the National Corvette Museum in Bowling Green, Kentucky. This project is feverishly moving forward as a 184-acre dual race track that was originally scheduled to be built over a number of phases and, earlier on, over a number of years. But the developers have been successful at attracting sponsors and equity in the deal and expedited the delivery of later phases with the first one.
Once the operations gain traction (pun intended), NCM also plans on building at least one control building, a massive parking garage and about 80,000 square feet of retail space. On an adjacent tract, plans are also being considered for various commercial uses with hotels being a constant for one of those options. According to NCM’s Executive Director Wendell Strode, the tract’s ability to accommodate a substantially larger spectrum of development opportunities surrounding the racetrack anchor element—namely hotels—has contributed to the success of fundraising and partnerships. Such projects imply that a larger and grander plan is being cultivated, with additional economic benefits for all of the tract’s elements being secured. Contrary to the Westfield sportsplex project, this facility is entirely privately funded; likewise, it will generate substantial direct revenue to itself as well as indirect economic activity to the community…two essential variables in a formula of self-sustaining critical mass. The development of lodging assets will sustain the expansion of the area and promote higher levels of revenue extraction from each visitor.
Cycles in Physics and Economics
Cycles: What goes around, comes around, right? Take a wheel. This wheel would need to be circular, have sturdy spokes and either be propelled down a hill by the assistance of gravity or by someone or something thrusting it. Nothing other than force in the opposite direction will be able to stop it or slow it down. Now, if suddenly thousands of wheels were introduced at the same place on a hillside at the same point in time, it is likely that they would all begin to roll down the slope in relative unison, but eventually the wheels would collide and cause many of the others to come to a disorganized halt. But if all of the wheels were aligned in the same direction and afforded similar rates of acceleration, it would take an enormous amount of force to stop them all. On an atomic level, fission is just like this; critical mass of the substance used is achieved when neutrons are shot at atoms causing them to separate, which actually requires very little energy. The chain reaction continues into perpetuity until input elements, such as fuel, are removed or fully depleted.
Real property can be compared to a wheel and fission, particularly when large-scale projects are undertaken near a stable feeder market (people: fuel, gravity) and those which are developed using sound-minded economics at play. When mega sportsplexes and other sports & entertainment-related endeavors are spawned, they are oftentimes thumbed by governmental agencies seeking ways to expand its own tax base (see first phase in graphic below). As in all capitalist environments in the world, the communities that enjoy healthy tax revenue levels tend to be those with more diverse arrays of businesses. These businesses depend on the presence of ancillary amenities (namely lodging facilities) to support the workforce, its dependents and the consumers. But at some point, the fiscal performance of the area’s hotels, retail centers and other amenities will plateau either because of capacity constraints, oversupply or a depletion of demand.
Lodging facilities often suffer from the opportunity cost behind displaced demand, or when they turn guests away during certain days during the week because occupancy levels approach or even exceed 100 percent. Most markets with a saturation of branded lodging facilities are primarily supported by area corporations, and they try to smooth dips in weekend occupancy levels by dropping rates or offering other incentives. But when weekend room rates at hotels are substantially lower than those that are commanded mid-week, it is a signal that the market has a deficiency in leisure and tourism-related demand which has a propensity to peak during weekends.
Sports and entertainment venues are increasingly becoming the go-to property type for municipalities that are seeking to fill in these weekend gaps. Attracting developers of sportsplex properties by offering financing assistance or incentives to help these projects come to fruition is an early and important step towards spurring the generation of a self-sustaining micro economy. It is an important signal to many that the particular jurisdiction is willing to take risks to establish a pro-growth demeanor of a particular market area. It is also an initiative that government entities can “sell” the idea to the taxpayers because sports and entertainment facilities are not only attractive for businesses considering relocating to the area, but they are also directly appreciated by the local community.
Once this attitude by the taxing authority is adopted and steps are taken to work alongside private entities to put a shovel in the ground for one of these large-scale projects, it is not long before other ancillary businesses begin to germinate. The absorption of developable land in the area for these projects, in turn, reduces the amount of available parcels in the vicinity to support future property improvement. More pronounced than typical appreciation, this compression phenomenon prompts land values to rapidly increase in the immediate area, along with the prices of some of the local goods and services. And when this happens, fission within the economic impact cycle is imminent.
Compression might be followed by an expansion of the highest and best use options of real property in the vicinity of the anchor development. Since we are considering a sportsplex property playing the role of the anchor nucleus, we can expect that a wider array of property types would be feasible compared to those surrounding a commercial-oriented anchor. Although increasing land values are challenging the feasibility of these projects at this stage, the prices for certain goods and services will increase and offset enough of the loss so that a positive ROI can be enjoyed by the developer. Tournaments and events at the sportsplex, once constructed, bring all sorts of travelers to the area from relatively large distances. Accordingly, lodging facilities would then be able to fill those weekend gaps and generate pressure behind their room rates. Higher room rates mean more direct tax revenues, and added stability for a community’s growth prospects.
In the event that the success of the sportsplex anchor and its surrounding developments becomes so significant, and the availability of land in the market drops, it is likely that existing uses will experience an adaptation phase. Adaptation is similar to redevelopment, in that the existing operations of a business are already viable and that the business owner repositions the property to support a higher purpose (at least where economics are concerned). This is an extension of the expansion of the previous HBU phase, except that it is the first stage that shows evidence of a community’s existing base economy becoming altered. Over a number of years, the availability of vacant land and property available for adaptive reuse becomes scarce enough that structures begin to be built taller to achieve a desired minimum floor area. This vertical tenancy tends to be highly catered to human desires, as higher structures offer better views, better security and better finessing of egos.
We see a number of scenarios where vertical tenancy occurs—mostly within our major cities’ central business districts and in a variety of perimeter markets that serve as alternative and more affordable cultural centers to these CBDs. But in recent years, the development of S&E properties has accelerated this process, and in areas where population density in the immediate environs is not particularly high. In fact, the incremental tax benefits to communities that are lower in density are substantially higher compared to those in larger, heaping markets. In this situation, taxing jurisdictions enjoy substantial financial wherewithal as well as flexibility in the distribution of the capital to its infrastructure. Roads are repaved, promenades are enhanced, crime is managed, cleanliness is apparent, and the pride of the community advances. Which leads us into the final phase of the economic impact cycle—population growth and the achievement of critical mass.
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And so the cycle begins again. Higher levels of population generate the need for a larger tax base to support itself; capital could be recommitted to the sportsplex venue directly or to the surrounding infrastructure; additional compression is generated; highest and best use of potential uses expands in the area but with expanding concentric ripples surrounding the anchor…so on and so forth. Fission and critical mass are achieved. Although the model for the economic cycle and the ensuing critical mass event is promising in theory, each phase must be carefully manicured and controlled so that the cycle is not fractured. As with the observation made by Mike Ditka, a failure in the cycle is not fatal, and a successful completion of a full cycle is not permanent. The critical mass is achieved, but only following careful collaboration and the cultivation of each of the transitions in the cycle. A primary catalyst in the chain reaction is the presence of hotels surrounding a major commercial real estate undertaking. They are integral in the advancement of each stage in the cycle. They are the ushers of business as well as the beneficiaries of growth. Most importantly, the flourishing marriage between S&E and lodging properties will contribute to happier, healthier and richer communities across the nation.
About the Author
Mr. Younge is a Managing Director with Cushman & Wakefield of Illinois, Inc., the National Practice Leader of the Sports and Entertainment Group and a member of C&W’s Hospitality & Gaming Group. He has a Bachelor of Science Degree from Cornell University and a Masters in Business Administration from Northwestern University’s Kellogg School of Management. He has been active in real estate valuation and consulting since 1998. Please click here for more information about the Sports and Entertainment specialty practice.
Bryan Younge, MAI, ASA
Managing Director, Hospitality & Gaming Group
National Practice Leader, Sports & Entertainment Group
Valuation & Advisory
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