Ailing Strip Centers Get Into Shape

Once shunned by retail strip centers, health clubs are adding muscle to older locations where grocery anchors have closed. Over the past two years, the trend has accelerated. In Poway, Calif., an L.A. Fitness replaced a 40,000 sq. ft. Lucky supermarket. In Orlando, Gold's Gym leased 40,000 sq. ft. of a former Publix. And in Houston, 24-Hour Fitness leased 30,000 sq. ft. of a former Garland supermarket with Dollar Tree, a discount retailer, occupying the remaining space.

What's driving the trend? For starters, health club memberships have doubled since 1990 and are expected to reach 50 million in the U.S. by 2010, according to the International Health, Racquet & Sports Club Association. Meanwhile, grocery store sales are languishing partly because of Wal-Mart, whose superstores often force smaller, older grocery stores to close or consolidate.

What's more, superstores and wholesale clubs are taking a bite out of the grocery industry's total sales. Property & Portfolio Research projects that grocers' market share of consumables will continue a downward spiral, dropping from 55% in 2003 to 48% in 2008.

“I think that as a replacement for an empty box, [health clubs] are great tenants. They generate a huge amount of traffic,” says Doron Valero, president of Equity One, a Miami-based real estate investment trust with a portfolio of 185 grocery-anchored centers in the Southeast, Boston and Texas. Another benefit is rent: Gyms typically pay $14 to $17 per sq. ft. in base rent while grocery stores are in the high single digits, adds Valero.

L.A. Fitness, whose chain includes 110 clubs, has 22 locations in six states refashioned from ex-grocery stores. The company prefers to open stores in older strip centers because they are located near residential areas, a convenience for members. “People that work out now visit their clubs [on average] 90 times a year,” says Bill Horner, senior vice president of real estate for L.A. Fitness.

Other tenants benefit from the presence of a health club, especially service-oriented businesses like restaurants, juice bars, nail salons, dry cleaners and chiropractors, says Valero. Many of the upscale chains cater to women who like to shop before and after their workouts. A downside is that club members may exercise early in the morning before business hours.

Whether health clubs choose to open in ex-grocery locations is partly dependent on their business model. Town Sports International, for example, owns 130 smaller clubs mostly in urban areas in the Northeast, so it's not the best fit for a 35,000 sq. ft. to 45,000 sq. ft. space, the typical size of older grocery stores.

Still, there are some important tenant differences between the health clubs and supermarkets. For starters, many health clubs have a shorter financial track record and riskier credit profile. Tenant allowances for health clubs are also higher — $50 to $75 per sq. ft. compared with $50 per sq. ft. for grocery stores. Leases are typically shorter: 15 years for health clubs vs. 20 for grocery stores. But Valero says the potential rewards outweigh the risks. “When you have a vacant supermarket and replace it with a gym, it has a positive effect on all the tenants.”

Bruce Banker, vice president of real estate for 24-Hour Fitness, which has leased former grocery stores in 15 states, believes that health clubs will increasingly anchor older retail strip centers. “As retailers consolidate, file bankruptcy and build better mousetraps to compete with Wal-Mart, I see it becoming more [prevalent] than it is today.”

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