David Carlock, Managing Partner, Machete Group

Invest: sat down with David Carlock, managing partner of real estate development firm Machete Group, to discuss how demand for sports and entertainment developments is evolving, the growing role of mixed-use districts, and what it takes for projects to succeed in today’s market. “Being a fan of a football club or a basketball team, or even someone like Taylor Swift, provides turnkey community and connection,” Carlock said.

What trends are having the biggest impact on demand for sports and entertainment development?

Sports and live entertainment have continued to command a greater premium, particularly coming out of the pandemic, where the market is generally looking for more community and more connection. Being a fan of a football club or a basketball team, or even someone like Taylor Swift, provides turnkey community and connection. I think that is driving a lot of the demand, particularly as we are more focused on technology, relatively more isolated, and more polarized. Sports and live entertainment provide an option, or at least the real possibility, of creating more human connections and having more tribal experiences. I think that is a big part of what is happening in the space.

How has the shift toward mixed-use districts around venues changed the way these projects create value?

There is definitely a shift or trend toward mixed-use real estate development adjacent to an arena, stadium, or ballpark, typically in partnership with the team. Several things are driving that. One is that there is increasing evidence that the projects can be successful. The Battery in Atlanta is one of the best examples of this, but previous projects have also done well. The model has evolved a little bit from environments that are driven more by events to environments that are driven more by the mixed-use development itself, where it has its own sense of critical mass and its own sense of place.

Sports team owners are increasingly figuring out that if they can extend the event-day or game-day experience, it results in a broader strengthening of the connective tissue between the club and the fan. That is a good thing for team business. It drives more affinity, higher renewal rates, and greater spend, so those are all valuable and helpful. 

A third significant factor is that the real estate can generate value in its own right. If you are a team owner, particularly if you bought a team recently, you probably wrote a pretty large check to buy it. If there is an opportunity to generate incremental value, you are going to take advantage of it.

What are clients asking for today when it comes to the experience side of these developments?

For sports venues or public assembly venues, there is certainly a shift toward offering a greater variety of premium product and premium experiences. That evolution has been occurring over the past 10 or 15 years and has continued to trend in that direction. When you look at the mixed-use assets around it, being associated with a team, being a fan, or connecting in some way to what that team stands for is relatively aspirational, so the real estate assets and the overall positioning of the project generally are also relatively aspirational.

That does not necessarily mean that you are developing a five-star hotel, although there are some projects we are working on where ownership does want to do that, or we are in the process of helping them do that. But these are not select-service products like you might find out by the airport. The idea is that you are doing something that is more lifestyle-focused and creates more of a sense of connection and community. That tends to be the thread that runs through these projects and is consistent with the strategy that the developer, typically us, and the team owner are focused on.

What makes these projects viable in today’s cost environment?

The short answer is that it takes a village. It is difficult to get projects to underwrite successfully. Money is expensive, construction is expensive, and development is generally complex to start with. In almost any situation, having a strong and enthusiastic partner on the public side is important, so we spend a lot of time figuring out how to take advantage of public incentives that are structured as a win-win. It is good for the community, good for the taxpayers, and good for the project.

Typically, the philosophy is to let growth pay for growth, meaning the incremental tax proceeds the project will generate can be shared in some fashion to pay for things like infrastructure. That is a critical piece. It has always been important to developers, but it is much more important today than it might have been 10 years ago. Coming out of the pandemic, and with a world that has become more turbulent for a variety of reasons, that is a critical success factor.

Where do projects tend to fall short if operations are not considered early enough?

There are a handful of factors. One is an overreliance on the team and the venue itself. The initial bias tends to be that the most important thing is to be partnered with a major team. There is significant value associated with that, but from a development standpoint, even busy buildings are dark much of the time. If you are partnered with a football team, there might be eight or nine regular season games a year. Even in buildings with 200-plus events a year, there is still a large share of time when nothing is happening.

If you invest too heavily or rely too much on the event calendar, you cannot be successful because there is not enough there. It is really important to think of the mixed-use project as largely independent. It needs to stand on its own.

Another issue is when there is not enough belief in the project, and the consequence is that phase one gets watered down into a small piece. There has to be enough critical mass for a project to feel like it is independent and not just a satellite in orbit around the arena, but that requires more investment. There needs to be real confidence in the model and the location to spend what is necessary for the mixed-use project to feel like its own specific place.

The last piece I would mention is the importance of having the appropriate mix and diversity of uses. These projects tend to work best when you have a hotel, residential, office where it makes sense, a music venue in addition to an arena or stadium or ballpark, and retail. The retail is usually a relatively small proportion of the overall square footage, but it punches above its weight class in terms of the message it sends about the project, the brand, and the kind of experience that a visitor can enjoy.

Looking ahead, where do you see the most opportunity in this space?

It is still relatively early days for these kinds of arena- or stadium-adjacent projects in professional sports. There are additional opportunities for growth in secondary and tertiary markets, as opposed to just the major U.S. cities. Again, it is critical to have the right kind of public partner, but we see opportunity there, and we are working on a couple of deals right now that are in secondary markets.

I also think what is happening in college sports in the United States represents a fairly significant shift. College has gone from being much more tightly regulated than professional sports to, frankly, less regulated than professional sports. I think there will have to be some kind of structure imposed going forward, but Pandora’s box has been opened with respect to how college sports will be handled in this country.

Universities are looking more and more to leverage real estate that they control to generate profit, to help support the athletic program, to help recruit athletes, and to help recruit professors, administrators, and students just to make the university a more attractive place to be from a lifestyle point of view. I think that is going to drive a fair amount of activity in that space.