Operators Plan Growth After Trimming Locations in Pandemic
Fitness centers were among the first and hardest-hit retail properties to suffer from efforts to curb the pandemic, with at least six companies filing for bankruptcy protection after local governments shut down gyms and clubs. And of the roughly 260 U.S. locations permanently closed, half were 24 Hour Fitness centers.
But the San Ramon, California-based chain emerged from Chapter 11 bankruptcy protection on the last day of 2020 and is resolved to start bulking back up, as are other operators.
The property investment market for fitness centers was walloped by the pandemic, falling 74% to $235 million in sales in the past three quarters from $918 million for the same time in 2019, according to CoStar data.
What is not certain is whether property investors and landlords will come back around. They should want to, Karl Sanft, chief operating officer of 24 Hour Fitness, told CoStar.
“The fitness industry has long been considered a viable option to assume large and often vacant retail space previously occupied by grocery stores and other retail merchants that have experienced consolidation or other business circumstances that make a brick-and-mortar retail location untenable for financial reasons,” Sanft said in an email.
24 Hour Fitness started the year with reduced costs and a leaner balance sheet after eliminating $1.2 billion of debt. With a new loan facility of $200 million in place, the company expects to grow its club footprint and increase membership as governments and public health agencies indicate it is safe to do so, Sanft said.
Competitors, too, are talking expansion. Planet Fitness said last month that its Southeastern U.S. franchisee Sunshine Fitness opened its 100th location and is planning nearly 15 more clubs in 2021.
Fitness is a lifestyle choice that grew in popularity during the pandemic as people found they weren't commuting to work and had more time to spend with their families and on their personal goals, according to Sanft. And being stuck in the house and not moving about as much as people would in the workplace can also boost demand for exercise facilities.
Fitness centers “will return to familiar and popular locations such as shopping complexes with the appropriate mix of lifestyle tenants,” he said. “We are bracing ourselves for the overwhelming interest in fitness and workouts in the refreshed club community environment.”
More Clubs Projected
Technavio, a London-based global technology research and advisory company, is projecting a rising number of fitness centers and health clubs over the next four years. It expects the number of centers globally to grow about 4% a year, with North America accounting for almost 34% of the growth.
Randy Blankstein, president of The Boulder Group in Chicago, specializes in the sale of single-tenant leased properties. He expects buyers to exercise caution before jumping back into the sector.
“Most net-lease investors are waiting to see membership numbers post COVID-19 and thus not really expecting transaction activity until the third quarter of this year,” Blankstein told CoStar.
Jeff Myers, a senior associate with brokerage firm Marcus & Millichap in downtown Los Angeles, is already seeing some buyers express a willingness to accept the risk with such properties.
In October, Myers helped broker the off-market sale of an LA Fitness club in Huntington Park, California, for $7.2 million.
The deal “ultimately came down to the previous owner’s desire to trade out of their higher-risk assets, which actually never appeared risky pre-COVID, and into a product type that makes up more of their portfolio,” Myers told CoStar.
The main concern of potential buyers was whether the operator would file for bankruptcy reorganization or shut down the location, he said.
“Once we got comfortable that this was a high-volume club for LA Fitness, it just came down to how long the new buyer would have to go without rent due to the government shutdowns,” he said of getting the deal done.
24 Hour Fitness now operates 300 locations after its reorganization and has changed its strategy in the pandemic. Not only is it taking sanitary precautions to help keep members safe, but it has set up more than 50 outdoor workout facilities in Hawaii, Oregon and California.
The company, while expecting people eventually to come back to its properties, is also hedging its bets a bit. It's adjusting to the workout-at-home trend that helped propel Peloton Interactive, the personal cycling class provider. After seeing a stock price tumble of 11% from $29 per share to $27 per share upon an initial public offering in September 2019, Peloton’s stock has climbed steadily since the coronavirus outbreak to about $143 per share.
24 Hour Fitness has responded to the interactive exercise trend with its own virtual workout program called 24Go.
“It has been extremely successful and is now utilized in our clubs for touch-free check-in, among other features,” Sanft said.