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LA Fitness Seizes the Moment of Big-Box Opportunity

Many retailers have capitalized on the spike in shopping center vacancies to upgrade to better locations and negotiate favorable rents. In addition, for some expanding chains, the downturn has proven to be a time to upgrade their status in the eyes of landlords from “strong inline tenant” to “reliable anchor.”

Executives at LA Fitness, an Irvine, Calif.-based fitness club operator, have known for years that its locations in retail centers have performed well, according to Bill Horner, senior vice president and chief real estate officer with the firm.

In the past, however, retail landlords sometimes were reluctant to sign deals with fitness clubs out of a concern that they would eat into the parking needs of other tenants by locking up spaces for long amounts of time without providing any boost in sales-per-square-foot figures.

In some cases, other tenants, particularly grocers, stipulated that they didn’t want fitness clubs as co-tenants, says Michael Kinsella, senior vice president and senior market officer for Florida with Regency Corp., a Jacksonville, Fla.-based shopping center REIT. Another strike against gyms is that they usually require extensive build-outs. So during the boom years, if given a choice, landlords would often opt to lease to traditional retailers.

But times have changed.

Fortunately for LA Fitness, recent bankruptcies of a number of big-box retailers, as well as consolidation in the grocery business, have worked in the chain’s favor and made it a more attractive tenant in the eyes of landlords. It is now signing shopping center deals on a regular basis.

In January, for example, LA Fitness opened a 39,300-square-foot location in a former Circuit City building in Kennesaw, Ga. Last November, it took over a 42,000-square-foot Circuit City space in Long Beach, Calif.

In addition, fitness clubs have proven their worth as traffic generators, dispelling the notion that they don’t help drive dollars to other tenants’ bottom lines.

“Everybody now acknowledges that the right type of club in the right space can bring day-to-day traffic to a center, particularly at the beginning of the week,” Horner says. “It can be a contributor to the center, as opposed to people just taking up parking spaces and then leaving. As a tenant group, we are now much more accepted in a shopping center. We just have got to be placed properly.”

Flexing its muscle

LA Fitness is currently on an aggressive expansion campaign—it is planning to open up to 50 new clubs a year over the next five years and it takes large chunks of space with the average club measuring 45,000 square feet. (To see a gallery of LA Fitness photos, click here.)

Today, the company operates 370 clubs and there seems plenty of opportunity for growth, according to Horner. “We are very strong financially, and if you think about it, there are 50 million members of health clubs in the U.S. and over 300 million people overall. So there is a lot of room to go,” he says.

LA Fitness’ site selection requirements are similar to those of grocers, says Horner. The chain prefers locations on the main thoroughfares that people pass every day on their way to and from work and that are in close proximity to residential areas.

It is also in a good position to take advantage of landlords' newfound acceptance of gyms. In fact, the company brought in a team of former shopping center executives, including a full development staff, as far back as the 1990s to help it gain a foothold in the shopping center arena.

What’s more, LA Fitness is perfectly happy to occupy second generation space, which makes it a good candidate to backfill mid-size vacant big boxes, as well as some empty grocery stores. In addition to getting a 15-year lease and a tenant that often pays more rent than previous occupants, owners working with LA Fitness can benefit from the steady traffic that fitness clubs tend to generate.

Starring role

In Florida, where LA Fitness has been scouring for multiple locations, the chain has in some instances replaced grocers as property anchors. In late 2009, it signed a lease to take over a 46,820-square-foot Publix space at Regency-owned MarketPlace shopping center in St. Petersburg, after Publix left the property. Kinsella says the chain has made at least three similar deals elsewhere in the state.

To help create more synergy between LA Fitness and other tenants at the MarketPlace, Regency’s leasing team is searching for other potential occupiers that would appeal to gym rats, including health food and smoothie sellers and tanning salons.

“They are going to bring in a lot of traffic, though it’s going to be a different kind of traffic,” Kinsella notes. “The fitness clubs are more intensive at certain times of the day, as opposed to the consistent flow of a grocery store. We are merchandising around that changing use.”

In recent years, LA Fitness has even started taking junior anchor locations at regional malls, according to Horner. The strategy won’t work everywhere—truly regional and super-regional malls often lie too far away from residential areas to provide the chain with the daily traffic it needs, he notes. But at malls that are located in cities or have a large residential community within a three-mile radius, the strategy can work for both landlords and tenants.

Today, the malls where LA Fitness operates its clubs include Dulles Town Center in Sterling, Va., Northtown Mall in Blaine, Minn., and Del Amo Fashion Center in Torrance, Calif., which is owned by Simon Property Group, the nation’s largest regional mall owner. It will soon open at Trumbull Shopping Mall in Trumbull, Conn.

“Malls now sell services in addition to goods, so I think you see this type of facility at malls more and more,” says a Simon spokesperson. “From a landlord’s perspective, these types of locations are good for the property because they bring in customers.”

Money matters

Since LA Fitness is very focused on securing the right locations for its chain, Horner gives the impression that the company won’t quibble over rent when it finds great sites. Plus, since grocers and many of the big-box tenants that served as anchors or junior anchors in their heyday typically drove aggressive deals, when LA Fitness takes over their locations it’s almost a given that it will be paying higher rents, adds Kinsella.

The chain makes up for the difference by asking landlords to contribute a substantial amount toward its build-out costs. When taking over existing buildings, the clubs need to have swimming pools installed, and remove columns from common areas. Former grocery stores, in particular, present challenges because their buildings often can’t support the kind of energy-efficient HVAC systems that LA Fitness employs. As a result, it costs on average $700,000 to retrofit an existing retail location into a club. Ground-up construction can cost as much as $3 million.

“There is a lot of capital that needs to go into outfitting the gym and that’s a combination of landlord money and tenant money,” Horner notes. “And landlords have had some difficulty coming up with the money, not out of lack of desire to sign a deal,” but because the downturn has left some of them hurting for cash.

That’s part of the reason why this year LA Fitness expects to open only 30 locations, below its desired target of 50. So far in 2011, the chain has opened 14 clubs.

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