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Coronavirus - COVID-19

Mid-Market Fitness Concepts the Most Likely to Feel the Burn of COVID-19

Once the U.S. economy begins re-opening, expect a “thinning of the herd” among fitness tenants.

The once-booming fitness sector is taking a hit from the COVID-19 pandemic as big-box gyms and boutique fitness studios shutter across the United States.

During normal times, fitness is big business. In 2018, U.S. health club industry revenue totaled $32.3 billion and more than 71.5 million U.S. consumers used health clubs, which hit an all-time high, reported the International Health, Racquet & Sportsclub Association.

The number of fitness centers in the U.S. increased by 24 percent since 2010 to 111,055 locations, according to IBISWorld data, as reported in January by real estate services firm JLL. The figure was expected to jump further, to nearly 121,000 locations by 2024.

Since social distancing has become the new way of life, however, the outlook for fitness centers is likely to change as businesses wait for governments to lift quarantine restrictions.

COVID-19 has forced the temporary closures of big-box gyms and fitness studios in an effort to help slow the spread of the virus, and owners are taking a financial hit. Many have furloughed employees and suspended membership dues.

Fitness center owners also worry that the continued quarantine could alter consumer behavior in the long term as gym members find new ways of getting fit, including on-demand fitness services like Aaptiv, Glo, CorePower on Demand and Peleton, which has seen a big uptick in sales. (However, Peleton announced on April 6 it was suspending production of live fitness classes until April 30 after an employee in its New York production facility tested positive for COVID-19, reported The Verge).

Fitness industry goes virtual practically overnight

To stay afloat, many bricks-and-mortar fitness concepts are streaming workout classes through YouTube, Zoom or Instagram Live. Many classes are currently free in an effort to stay connected to members as brands figure out how to retain existing membership and attract new customers who will pay for their services.

Most chains and independent operators have rolled out some kind of virtual platform, notes James Cook, head of retail research with JLL. Cook spoke with Jenine Wright, owner of Fit Life in Melrose, Mass., who quickly transitioned her fitness classes online following the closures of her two fitness clubs.

“Within 24 hours, they figured out how to roll out online classes through Zoom and another platform,” Cook says. Fit Life is averaging six live-streaming classes per day.

Virtual classes are not the only way for fitness brands to stay connected with their members, according to Cook, but since Fit Life is a small, local business, it’s also counting on community support. Members who can afford to are keeping their memberships open and continuing to pay.

Many fitness studios are operated by small business owners who may not be able to afford to pay rent or employees while closed. Wright estimated her club’s memberships have so far dropped by around 20 to 30 percent.

Oversaturation was already a concern

“There were issues with the gym category even before COVID-19,” notes Lauren Leach, director of real estate advisory services at Birmingham, Mich.-based consulting and advisory firm Conway MacKenzie.

“If you look at what exists, there are small, value-oriented gyms that charge $10 per month, and on the other end of the spectrum, there are expensive, large gyms for people looking for a luxury experience. Everything else falls in the middle and doesn’t have clear distinguishing factors.”

Most consumers either want a cheap experience where they don’t feel the need to cancel their membership if they aren’t dedicated enough to show up regularly or they’re willing to spend the money for a “club feel,” in Leach’s view. As a result, she expects a lot of consolidation in the mid-market category.

Working with landlords

Since many fitness centers are freezing membership payments and have no revenue coming in at the moment, they’re reaching out to landlords to try and renegotiate rents or ask for rent abatement, Cook says.

Every landlord is having a conversation with their tenants right now, Cook notes. “Landlords that don’t have a lot of debt on their properties are the ones who have more wiggle room,” he adds.

Experts forecast a recession coming out of this health crisis, and in recessions, there’s typically a change in the consumer mindset, according to Cook. Over the last three weeks, 16.8 million Americans filed for unemployment.

Even consumers who aren’t in danger of losing their jobs trend away from discretionary purchases during economic downturns.

“So, one of the winners long term when this is over might be value fitness [concepts],” Cook notes.

Value gym player Planet Fitness may be well-positioned for future growth, for example. A recent Cowen survey found that Planet Fitness is expected to recover quickly following the pandemic, according to Market Watch.

Planet Fitness has a lean business model and will recognize revenue when gyms reopen, Cowen researchers note. Additionally, it will gain market share from financially struggling fitness chains that are at risk.

“We’ve seen this bifurcation trend in fitness leading into this,” Cook says, pointing to growth in two primary sectors.

The biggest growth was in the budget gym category and the other was in high-end concepts, including boutique fitness brands like Orange Theory Fitness, CycleBar and Core Power Yoga, as well as full-service, upscale health clubs like Equinox and Life Time. Life Time was opening locations in malls as part of the “experiential” retail movement as landlords tried to drum up traffic.

That bifurcation trend will likely amplify after the U.S. economy re-opens, Cook notes. Concepts in the “middle” may have to offer short-term discounts to maintain membership numbers, so there will be pressure on membership pricing, he says.

Additionally, brands that will come out ahead will likely be the ones that “go all in” on creating good digital fitness content in addition to their physical locations, as consumers will become more sophisticated about digital offerings.

Some bright spots

The U.S. may see somewhat of a “fitness renaissance” emerging from COVID-19, because people have been so cooped up and are turning to exercise as a release, Cook notes. “A lot of people are doing that right now,” he notes. This “pent-up desire for access to fitness is only going to grow, in his view. “I think that’s a good silver lining for fitness centers.”

However, “there’s no way to avoid the fact that this is bad for business,” Cook goes on to say. “It’s tough to say what the scope is going to be, because it’s in the early days, but we’re certainly going to see [fitness center] locations that have closed for COVID that are not going to reopen.”

In general, if small businesses are lucky enough to tap government relief through the CARES Act or small business loans, many could make it through the crisis.

“It’s the middle and large chains that may have already been carrying a debt load that will have the toughest times,” Cook notes

There will be a thinning of the herd in the bricks-and-mortar industry, agrees Alan Zell, president of Phoenix-based retail property management/leasing firm ZELL Commercial Real Estate Services. He believes most of the closures will be at the small facility level, but some of the large health clubs will likely fail as well once their members’ contracts expire and they will be targeted by competitors.

The biggest impact on landlords is that most, if not all, fitness center tenants and other non-essential retailers are seeking rent relief, which causes cash flow issues, Zell notes.

With fitness centers temporarily closed, there’s also a drop-off in customer visits to retail centers that remain open, though with most businesses closed, it’s not that much of a problem now.

However, when the retail centers do re-open, the permanent closures of fitness clubs will have a widespread impact since fitness is a big traffic draw for other tenants, Zell says.

Meanwhile, vacancies will offer surviving fitness brands a chance to backfill space at attractive lease terms. The fallout from the pandemic may lead to a lot of vacant spaces built out for fitness, Zell notes. Businesses seeking to lease these types of spaces after the crisis will have leverage in lease negotiations because there will be plenty of space to choose from and fewer tenants competing for it.

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