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North America Sports Infrastructure: The Cheers Will Prevail In 2023, Even During A Recession

In the world of infrastructure lending, one of the more niche asset classes is stadium and arena project financings. Given the level of disruption during the pandemic, the sector has shown a perhaps surprising level of resilience. While lender waivers and covenant amendments were needed in some cases, no major sports league defaulted as a result of the pandemic, and attendance and spending has generally rebounded to pre-pandemic levels.

Key challenges in the overhang of the pandemic in 2023 and beyond include recessionary headwinds, the ability to renew key sponsorships and advertising agreements, and competition from within sports and other discretionary entertainment options as inflation squeezes personal spending. Despite these pressures, we expect stable credit and ratings. The sector has demonstrated sustained demand from fans to attend events and corporations remain eager to access these fans with advertising and branding.

Lessons From The Pandemic Bring Growth Opportunities

The proactive league response and liquidity supported U.S. teams and their stadiums and arenas during the pandemic

The COVID-19 pandemic introduced unthinkable circumstances for sporting franchises globally. Health experts identified sporting events as high risk and when some teams resumed play, it was often in empty facilities. The lack of defaults in the sector was largely due to liquidity and proactive league support. Professional sports facilities utilized a variety of solutions to navigate the challenges including existing cash, ownership equity, and significant league support. Many buildings developed contingency plans using internal cash and reserves. Support also came from the expansion of league- and team-level borrowing programs to provide additional liquidity to offset lower revenues and meet operating needs or debt service obligations.

Also, the U.S. league's ability to be agile and deliver media content throughout the pandemic provided significant revenues to fund operations and exhibited the leagues' willingness to alter traditional formats. The costs involved were significant and many venues across all leagues lost revenue during the alternative schedules, but the content delivered provided significant revenues to the leagues and value to media providers.

Fan and corporate engagement is critical for further monetization of sports facilities

The durability and long demonstrated history of U.S. sports leagues and demand for live sports content despite existing competition and new entertainment outlets suggests a long-term value proposition associated with sports that the pandemic didn't upend.

Stadiums and arenas can be long lasting assets through continued reinvestment in the fan experience. To meet future generation's expectations for sports entertainment, stadium and arena facilities must continue adapting to changing individual fan and corporate tastes to sustain and grow revenue. Improvements include continued technology and Wi-fi enhancements to facilitate connectivity, diversified and improved food and beverage offerings to fit changing tastes, and enhanced premium seating products including club-level offerings to meet the requests of corporate partners. Sports facilities will be tasked with not only delivering a favorable live gameday experience but focus on new brand affiliations, sustainability, and affordability in 2023 and beyond.

The appeal of U.S. sports has led to new sponsorship categories and revenue growth opportunities, but lack of history is a concern

In recent years, important sponsorships and related advertising have grown beyond the historically predominate Fortune 500 names and toward start-up businesses and new industries like cryptocurrency and casino brands. Their general acceptance by leagues, teams, and venues raises the question of what future renewals will look like, especially given the limited history of renewals of these new entrants during economic downturns. At the same time, technology such as enhanced ribbon boards and on-field graphics are enabling agile advertising and dynamically priced revenue streams. Sports betting continues to grow in acceptance across many states and offers a new level of fan engagement that could induce additional revenue prospects for stadiums and arenas.

High Fives Have Returned

Attendance has rebounded and demand for live sports content is strong

With such a massive shock to the industry, there was significant uncertainty around whether pre-pandemic demand for live sporting events would regain momentum. U.S. sports attendance levels for the 2021-2022 National Basketball Association (NBA) and National Hockey League (NHL) seasons and 2022 Major League Baseball (MLB) and 2022 National Football League (NFL) seasons demonstrated the resiliency of sports facilities. Professional leagues experienced generally favorable aggregate levels in 2022, with many markets increasing average ticket prices at or above inflationary levels, while some markets with poor team performance (combined with weaker economic conditions) largely faced minimal declines in attendance and/or an inability to increase ticket prices. Major League Soccer (MLS) posted a new record attendance level for the 2022 season while other major golf, tennis, and motorsports events produced strong attendance levels.

Attendance rebounded and then stabilized as a function of widespread vaccination availability, strong team loyalty, and pent-up demand for live sporting events, and shows and concerts which for many facilities provides year-round revenues. Concerns related to timely payment from corporate sponsors and suite partners given pressures on some operating budgets or renewals, were largely unfounded given the continued long-term view related to the value proposition associated with these sponsorships and premium seating inventory.

While economic downturns and recessions can affect individual and corporate discretionary spending, attendance levels during the 2007-2009 financial crisis provide some insights into potential attendance volatility. Aggregate league attendance in 2008-2009 was generally stable. During this period, stronger franchises in robust markets were able to pass through some ticket price increases, while other markets hit harder by the economic conditions did not increase prices and experienced some marginal declines. We believe recent inflation levels will impact essential household spending and may impact discretionary entertainment spending.

Pent-up demand is linked to strong food and beverage (F&B) spend

F&B spending per capita is trending extremely favorably across venues as a result of the pent-up demand for sports, concerts, and other events and in some cases increases to F&B offerings and price increases. Many stadiums and arenas had the opportunity to update and enhance F&B offerings during the downtime of the pandemic. For example, many venues transitioned to contactless service. This has enhanced fan experiences by improving transaction times and reducing cash handling by employees and security costs associated with gameday cash handling.

Strong sponsorship and advertising agreements represent the value proposition

Sponsorship and advertising agreement renewals were solid in 2022 in major markets after key sponsors utilized a variety of arrangements in the two years prior to maintain partnerships during pandemic-related shutdowns. Somewhat surprisingly, we observed that some traditional categories in renewal cycles achieved higher renewal rates. We observed newer sponsorship strategies within the larger traditional categories such as auto, financial, beer and soft drinks. Some buildings divided larger categories into subcategories, lowering the price for exclusivity while allowing more brands in individual categories. For example, an exclusive domestic beverage and pouring rights category were renewed at existing levels or lower but allowed for additional pouring partners including a new international brand, and new brands of microbrews, hard seltzers, and ciders. We've seen a similar trend across other primary categories such as financial (local, national and global banking) and technology (software, hardware and consulting).

Premium seating renewals were mixed but flexibility provides opportunities

Sports facilities faced unique hurdles in 2020 and 2021 to renew luxury suites and premium club seats that were expiring. Stadium and arena operators used a wide variety of strategies to maintain existing partnerships and negotiate for lost games. Stronger markets were able to extend agreements with favorable terms while providing additional incentives. Other markets were able to lease suites for half or quarter seasons or game-day basis and provide creative solutions to meet the terms of the suite agreements.

Table 1

U.S. League Media Agreements§
League Primary content providers Expiration (season)
National Football League (NFL) Paramount Global (CBS) (AFC Package) 2033
Fox Corp. (Fox Sports) (NFC Package) 2033
Comcast (NBC) (Sunday Night Football) 2033
Disney (ESPN) (Monday Night Football) 2033
Amazon (Thursday Night Football) 2033
YouTube TV (NFL Sunday Ticket) (beginning 2023) 2030
Major League Baseball (MLB)¶ Fox Corp. (Fox Sports) 2028
Warner Bros. Discovery (TNT, TBS) 2028
Disney (ESPN) 2028
National Basketball Association (NBA) ¶ Disney (ABC/ESPN) 2025
Warner Bros. Discovery (TNT, TBS) 2025
National Hockey League (NHL)¶ Rogers Communications (Canada) 2027
Disney (ABC/ESPN) 2029
Warner Bros. Discovery (TNT, TBS) 2029
Major League Soccer (MLS) Apple TV (beginning 2023) 2032
PGA TOUR Paramount Global (CBS) 2030
Comcast (NBC) 2030
U.S. Tennis Association (U.S. Open) Disney (ESPN) 2025
¶NBA, NHL, and MLB franchises also have local media agreements. §Leagues also have additional streaming agreements, league owned networks, international rights, and other exclusive content packages and agreements. Source: League Resources, S&P internal

Table 2

U.S. League Collective Bargaining Agreements
League Expiration (Season)
National Football League (NFL) 2030
National Basketball Association (NBA) 2024
Major League Baseball (MLB) 2026
National Hockey League (NHL) 2026
Major League Soccer (MLS) 2027

Areas To Watch

We do not foresee major interruptions or an inability to operate due to staffing shortages, even with inflation affecting gameday operating costs. In some facilities, we believe recent operational enhancements like cashless and contactless transactions will offset higher costs such as employee wages. Supply chain issues have largely been limited for most facilities. Minor delays associated with key components for technology enhancements have occurred, but these delays did not materially change construction or renovation schedules.

Higher construction costs could force difficult decisions for new builds and major renovation projects

We believe many projects associated with aging infrastructure will be viewed as essential. Teams and facility owners and operators typically see infrastructure investments as a way to maintain and grow the fan and corporate experience while increasing revenues. Enhancements to club levels, score boards, and digital advertising upgrades, new F&B offerings, and general esthetic improvements all come with significant costs, which have risen significantly in recent years. Elevated capital costs may prohibit teams from embarking on significant infrastructure projects, make projects financially unrealistic, or will have a significant impact on return on investment. Changes in scope or reductions may have to be implemented or higher costs will need to be funded through owner equity leading to lower debt levels.

Public funding for sports projects through public private partnership model, or the P3 model, is a common financing method to fund the construction or refurbishment of North American professional sports venues. Funding is typically provided by a mix of government support (tax-supported financing or land), project debt, and owner equity. However, economic pressures may limit future funding for new or renovation projects. Mixed-use development around stadium and arena projects may also be delayed or have significant reductions in scope due to higher construction costs or risks related to new retail and restaurant offerings.

Inflation and interest rates are near-term risks

While management largely navigated operating hurdles during the pandemic, risks like higher employee wages and other operating costs could erode favorable revenue increases from contractually obligated revenue streams. Rising interest rates will inevitably affect near-term bullet refinancing, bank loan renewals, or expected refinancings in the long-term debt markets. Projects may face additional costs and may be forced to analyze new alternative financing solutions or funding options.

A recession increases uncertainty on prices for key sponsorship and advertising agreements

We believe individual fan and corporate support will continue to be robust in 2023, but weaker economic conditions will affect sponsor and advertising renewals in certain markets. U.S. sports facilities have a long history of positive sponsorships and advertising renewals, represented by average annual increases typically at or above inflationary levels in stronger markets with deeper corporate reach and diversified economics.

Exposure to game-day attendance related to team performance and local economic conditions would affect per-capita spending

Per-capita F&B spending post COVID-19 has proven positive for many sports venues driven by favorable demand. Spending concerns in 2023 could materialize in certain markets where economic conditions are more severe and recent or current poor team performance affects ticket sales and actual turnstile levels. F&B offerings at sporting events continue to evolve and management retains the ability to continue diversifying offerings, which could induce spending. We don't anticipate a major reduction in F&B spending levels, but sports venues are vulnerable to reduced spending in a more normalized season after strong pent-up demand experienced in 2022.

Slam Dunk Seems More Likely Than An Air Ball

Despite near-term economic headwinds we believe U.S. sports stadiums and arenas will continue providing a valuable gameday product attracting fans and corporate sponsors, leading to a stable credit and ratings environment. The key foundational aspects of the U.S. leagues, including long-term national media agreements and CBA's, are sound and provide a solid macro-level framework for these sporting venues to operate. Nevertheless, rising construction costs and high-interest rates will continue to pressure new builds or renovations while inflationary pressures may affect individual spending and potentially operating costs or marginally erode financial margins.

This report does not constitute a rating action.

Primary Credit Analyst:Chad Lewis, New York 5163145387;
Secondary Contacts:Anne C Selting, San Francisco + 1 (415) 371 5009;
Trevor J D'Olier-Lees, New York + 1 (212) 438 7985;

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