Net Lease Fitness Centers Continue Flexing Muscle

CORONA DEL MAR, CA – With the meteoric rise of Amazon and other internet-based retailers over the last five years, many retail buyers are becoming increasingly focused on pursuing investments with “internet resistant” tenants. It’s meant boomtimes for gyms, as once-neglected fitness centers have gained tremendous popularity with the investment community. And whether it’s because of the prohibitive cost of workout equipment or the overall difficulty in replicating the brick-and-mortar experience online, Eric Wohl, EVP at Hanley Investment Group, sees an interest with some stamina: “With the number of fitness tenants in the marketplace growing at a record pace and investor perception of the asset class at an all-time high, we are seeing increasing buyer demand which is translating to historically low cap rates.” talked with Wohl about the growth and increased investment opportunities he is seeing in the fitness sector.  What kind of investor activity and cap rates are you seeing in the single-tenant fitness centers category across the US?

Wohl:  On a national level the two fitness tenants that have traded with the highest volume over the last 12 months have been LA Fitness and Planet Fitness. There were 24 net-leased LA Fitness properties that have sold since the beginning of 2016 with an average cap rate of 6.39%. There were 10 net-leased Planet Fitness properties that sold in the same time period with an average cap rate of 7.4%. Of the total number of sales for both LA Fitness and Planet Fitness, 50% were California buyers, highlighting the increased demand for net-lease fitness properties from the California-based investment community. Both high-net-worth individuals and publicly-traded REITs have represented most of the sales since 2016. The three lowest cap rates recorded were also California buyers ranging between 5.12%-5.65% cap rate. Cap rates for LA Fitness are significantly lower because their leases are backed by corporate whereas the majority of Planet Fitness’ leases are backed by a franchisee. With the dramatic shift in the retail landscape over the last year, net-lease fitness centers continue to gain popularity as many investors view them as “internet resistant” investments.  How big of a market is the Fitness Center category and why?

Wohl:  Fitness is in! “Sitting is the new smoking.” Since 2009, membership and the total number of club-goers has increased by 26.5% showing that America is continuing to become more health conscious. A record number of more than 66 million Americans used one of the 36,540 health clubs nationwide in 2016. Franchises have carved out a significant market share with boutique tenants like Orange Theory and Anytime Fitness leading the pack. Franchisees like Crunch Fitness and Planet Fitness have a very low base membership cost starting at $9.99 per month which makes gym membership affordable to most of the general population. The emergence of these “budget-conscious gyms” has considerably changed the landscape of the fitness space over the last 5-10 years. In 2016, US health club industry revenue increased to $27.6 billion, up from $25.8 billion in 2015, an improvement of 7.2%. Members frequented their health club an average of 106 visits in 2016, also an all-time high. Additionally, the number of adults aged 20 to 64, the largest gym-going demographic, has grown, spurring increased demand for gym memberships. This demand is expected to increase as this demographic grows and becomes more age and health conscious.  What has changed in the retail investment world to elevate these properties in the eyes of investors? 

Wohl:  Given the current state of retail, it is crucial to have what investors deem as an “internet-resistant” business model that can withstand the dominance of Amazon and other major online retailers. Owning service-oriented retail properties is becoming more important to both institutional and individual investors as online shopping continues to grow at a staggering pace. The once blighted health club sector is being seen in a new light because they truly are offering a service that is almost impossible to replicate at home due to space constraints. Another big transformation in this space is the fact that tenants like Planet Fitness, Crunch Fitness, and Gold’s Gym are all okay leasing smaller format spaces of 15,000-25,000 square feet in second or third generation shopping center space. Many investors like this concept because the tenant is paying lower rent and the investor’s ability to backfill the space is much better given that it is typically a smaller format single-story building. As the industry continues to grow, the credit of many of these franchisees is getting much stronger which has translated into lower cap rates.  What emerging trends do you see on the horizon for the fitness sector?

Wohl:  The fitness sector is seeing rapid growth from franchise-based operators such as Planet Fitness, Orange Theory, and Anytime Fitness. These tenants were just recognized by Entrepreneur Magazine as being in the top 25 fastest growing franchises in the United States. They have added a total of 1,824 stores in the last three years representing an average increase of over 404%. As obsolete retailers continue to close their doors, we will see strong expansion in the fitness sector with franchisees taking advantage of prime vacancies coming online.  What else should our readers know?

Wohl:  The retail market is evolving rapidly. Internet retailers are taking sales away from traditional brick and mortar locations leading to dark shop spaces. This year as many as 8,600 total stores may close. One solution to help retail landlords hedge against the increase in online shopping is adding experiential tenants (food, fitness and entertainment), providing services that are internet resistant. As big box spaces are returned to the market, a good option for landlords needing to backfill their vacant space is a net-lease fitness center. Fitness centers operators are keen to absorb second and third generation space to keep their costs down, making the metrics much more attractive to franchisees. Look to low membership fee operators like Planet Fitness to fill these spaces, with a current commitment to open 1,000 new locations over the next seven years. With cap rates for high-quality net-lease properties at an all-time low, many investors are turning to net-lease health clubs where they can take advantage of higher cap rates along with a stable, service-oriented tenant backed by corporate or strong multi-unit franchisees. Currently, Hanley Investment Group has a strong pipeline of net-lease health clubs available including LA Fitness, 24-Hour Fitness, In-Shape Fitness, and Planet Fitness investments available nationwide.  

Visit Hanley Investment Group at Booth 
#S381S at ICSC RECON in Las Vegas.

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