NBA valuation soars, behind sports is still real estate

Due to the explosive growth of media rights, the NBA's valuation has significantly increased over the past decade. As the media landscape changes, questions have arisen about the NBA's growth drivers, but analysts believe that real estate will push the NBA's valuation to new heights. Last week, Forbes released its 2024 NBA team valuation report, with the average valuation of NBA teams reaching an astonishing $4.4 billion, a year-on-year increase of 15%. Among them, the Golden State Warriors topped the list with a valuation of $8.8 billion, a 14% increase from 2023. Following closely are the New York Knicks ($7.5 billion), Los Angeles Lakers ($7.1 billion), Boston Celtics ($6 billion), and Los Angeles Clippers ($5.5 billion). Even the least valuable teams in the NBA, such as the Memphis Grizzlies, New Orleans Pelicans, Minnesota Timberwolves, Orlando Magic, and Charlotte Hornets, now have values exceeding $3 billion. Notably, this year, the average price-to-earnings ratio of NBA teams reached 11.7 times, a significant increase from last year's 10.9 times. This price-to-earnings ratio is higher than any other major professional sports league, including the NFL (football), MLB (baseball), NHL (hockey), MLS (soccer), WNBA (women's basketball), NWSL (women's soccer), Formula 1 racing, and top European football clubs, which also indicates that investors are willing to pay a premium for the NBA's valuation. Media Rights Have Made a Big Impact The NBA's total revenue for last season reached $13 billion, with 22.5 million viewers in 2023, both setting historical records, and the NBA recently signed a media rights deal worth $76 billion, with an average annual value 2.7 times that of the previous agreement. Analysts point out that this media rights deal will significantly increase player salaries by raising the salary cap and will also boost the annual revenue distribution checks for NBA owners. Therefore, it is reasonable for investors to have high hopes for this growth. However, there are concerns. The NBA's viewership still shows a significant gap compared to decades ago, and some of the most financially savvy team owners, such as Mark Cuban, Marc Lasry, and Chamath Palihapitiya, have begun selling their stakes in recent years. However, they state that this stake sale is not because they believe valuations will decline, but rather because the risk-return profile of the league has changed. Due to the explosive growth of media rights, the NBA's valuation has increased significantly from around 2010 to today, primarily because cable companies have had to raise their bids to slow asset loss, while well-funded tech companies like Amazon have driven up media rights prices. The Next Source of Growth is Real Estate Projects Now that the NBA's media rights have set the direction for the next decade, it remains unclear how the sports media landscape will change in 11 years, and many are beginning to question where the next phase of growth will come from Analysis suggests that ticket sales will not be the answer. Many NBA arenas are already at full capacity, and the prices fans are willing to pay are limited. Sponsorship will also not be the answer, as it is not a sufficiently large source of revenue, and the inventory for each game is also limited. The same principles apply to other revenue streams, such as merchandise sales, franchises, parking, concerts, and naming rights. The analysis points out that currently, many of the smartest sports owners have begun to develop multifunctional projects, even if these projects often extend beyond their areas of expertise. However, they have become the most obvious way to drive growth in the current environment, specifically real estate projects around sports venues, which typically include bars, restaurants, shops, hotels, and office spaces, with various construction methods such as direct property ownership, leasing space, and collecting monthly rent. Examples include New England's Patriots Place, Milwaukee's Deer District, Arlington's Texas Live, and St. Louis's Ballpark Village. Some of these projects are privately funded, while others use taxpayer money. Notably, Atlanta's The Battery has now become the third-largest source of revenue for MLB teams, generating nearly $60 million last year, a 10% increase year-over-year. Private equity investors favor these deals because they offer predictable real estate investment opportunities, and the NBA's international growth strategy brings additional upside potential. Therefore, although the NBA has begun allowing private equity funds to purchase minority stakes in teams as a way to artificially increase demand while providing current owners with liquidity, many NBA owners are bringing in private equity partners to leverage their cash and expertise to develop more multifunctional projects. However, not every NBA team can do this, as some teams do not own their arenas or cannot easily purchase/develop real estate around their venues. Mark Cuban specifically mentioned: “When I bought the Dallas Mavericks in 2000, I was a tech guy in the NBA, a media guy. I saw every advantage and every angle. Now, twenty-four years later, to maintain growth and compete with the new collective bargaining agreement, you must have other sources of revenue. So you see other teams, all sports projects, talking about casinos and real estate development. This is not my idea. I wouldn’t spend $2 billion to learn how to build. If we could build a Venetian-style casino in the middle of the American Airlines Center in Dallas, then the valuation would be $20 billion. I still own 27% of it.” The analysis also mentions that teams have become a larger business, and winning is still essential; without fan interest and television demand, teams have little value. However, given the current valuation multiples of these teams, owners either need to innovate through real estate or may be better off investing elsewhere.