How To Boost Your Retail Foot Traffic With a Fitness Center
Need help regaining foot traffic lost during the pandemic?
You can whip a struggling retail center into shape with a gym.
New research from analytics firm Placer.ai shows that fitness centers by far led the pack in terms of 2022 foot traffic for retailers, with customer visits rising 29% from 2021 and 14.5% from pre-pandemic in 2019.
That’s good news for gyms, which struggled in the face of pandemic restrictions and rising competition from home fitness brands. But it’s also a sign of optimism for retail landlords seeking more visitors.
“Gyms used to be kind of the ugly stepchild [of retail] and now everybody wants them because they’re driving traffic into these shopping centers,” said Mark Thiel of San Diego-based NNN Fitness, a Marcus & Millichap group that sold around $400 million in fitness centers last year. “A lot of times when a visitor goes to the health club, they’re going to stop and visit one of the stores in the shopping center. They’re going to run into the grocery store. They’re going to stop at Starbucks. So, it’s increasing business throughout the shopping center.”
If you’re looking to add a fitness center to your property, but don’t know where to start, here’s some advice from Thiel, a leading broker who represents both fitness chains and retail landlords.
Getting Warmed Up
Ask Thiel about the benefits of fitness chains and he’ll tell you that they’re among the experiential retailers that are rising in popularity despite the prevalence of e-commerce.
Unlike home gym brands that often only offer a single piece of equipment, gyms offer a variety of activities, plus growth opportunities in group classes, recreational leagues, juice bars and recovery services. Never mind the social aspect many people missed during pandemic lockdowns.
“There are a lot of digital fitness avenues that you can access, but at the end of the day, people want to get out and they like the social interaction of going to a health club,” Thiel said.
As far as real estate goes, health clubs offer:
- Higher Returns. Fitness centers often trade with cap rates 100 to 200 basis points higher than other single-tenant net-leased properties, even with equally credit-worthy, national tenants, Thiel said. Rental escalations of 10% over five years are standard with long lease terms and options.
- Convertible Use. Many new health clubs are now designed and constructed to accommodate several uses in the event the property is vacated. Likewise, many health clubs have less specialized buildouts and are prime candidates to replace vacant big box spaces such as groceries or former Toys-R-Us and Bed Bath & Beyond stores (more on these value-add plays later).
- Expansion and Consolidation. Institutional fund managers such as Oaktree Capital Management and Goldman Sachs have recently invested heavily in fitness chains that survived the pandemic, betting that the worst is over for fitness chains and that people are tired of working out at home. Look for mergers and acquisitions to grow the strength of national health brands.
“I think institutions had a rough go through COVID when a lot of these gyms got shut down, and now they’ve seen how resilient the product type is and how well clubs are doing today after going through that challenging time,” Thiel said. “As they continue to see traffic coming in and out of these health clubs, they are going to start investing again in the sector. So, when the institutions come back in, it’s going to be good overall for transaction velocity.”
‘High-Value, Low-Price’ Operators
Like other retailers, fitness chains vary in cost, mostly based on the users they’re targeting. One quickly growing segment is so-called “HVLP” or “high-value, low-price” operators that cost $10 to $20 per month for basic memberships. This segment includes established brands like Planet Fitness, but also emerging concepts such as EōS Fitness, VASA Fitness, Chuze Fitness and The Edge. These brands are all capturing market share in a growing number of major metropolitan areas as they look to attract more casual customers, Thiel said.
In the luxury segment charging $70 per month or more, Life Time Fitness continues to grow with its sprawling health clubs combining comprehensive facilities and luxury amenities such as “beach clubs.” LA Fitness recently rolled out a higher-end model called Club Studio that aims for a more boutique feel than its big box gyms.
Rent, Cap Rates and Net Leases
Most fitness centers are roughly 35,000 to 55,000 square feet, with some chains like Life Time using much bigger, freestanding facilities.
As far as rent rates, “you want to try to be in the teens (per square foot),” Thiel said. “I’ve seen deals recently coming out of COVID right around $12 per square foot. A lot of new construction deals are going to be in the $18-$22 per square foot range. So, depending on the market, anywhere from $10-$12 up to $22-$24 on the high end.”
Cap rates on some of Thiel’s featured listings range from 6% (for a 42,000-square-foot EōS Fitness in Boca Raton, Florida) to 8.5% for a 42,000-square-foot 24 Hour Fitness in Fort Worth, Texas.
These properties usually offer the standard split in net-lease responsibilities between landlords and tenants as well. Some may be double-net where landlords care for roofs and structures. Other properties will be hands-off for landlords .
“It’s a site-by-site basis similar to any other retailer,” Thiel said.
Where They’re Looking
Like other retailers, fitness chains seek out major retail corridors, especially those next to other big-box retailers such as Walmart, Costco and grocery chains. Dense residential neighborhoods and highly visible locations with strong traffic counts are key. Major markets are more desirable than tertiary ones.
One recent market shift, due to high-interest rates, is an increase in value-add deals, Thiel said.
“With interest rates so high, the stabilized deals have hit a bit of a stalemate,” he said. “There’s a pretty big gap between seller expectations and buyer expectations due to the cost of capital.”
That means more repositioning deals with older health clubs that need improvements, whether it’s with the finishes, equipment or a new concept altogether.
“A lot of those leases are now coming due, and the rental rate has become unsustainable. It’s grown over the last 15 to 20 years,” Thiel said. “A lot of times you need a new concept to come in. Maybe it’s outdated, maybe it’s the older traditional model, or maybe the equipment needs to be shifted to the other side of the floor plan and there’s more functional training that needs to come in.”
And, as previously mentioned, many landlords are finding success in backfilling vacant, second-generation retail spaces with fitness centers.
Backfilling existing space can take as little as six months but more likely averages eight to 10 months for construction, Thiel said. Site work and construction for a new build usually take 18 to 20 months.
There are many reasons Thiel remains optimistic about the future of health chains, especially with the growing awareness around health and wellness: Health club memberships have risen 28% over the past 10 years. And there’s still room for growth, with 75% of Americans not currently belonging to a gym, according to the International Health, Racquet and Sportsclub Association, a trade association serving the health club and fitness industry.