Saturday, September 10, 2011

Gyms Working Out for Landlords

Influx of Health Clubs Helps Shopping Centers as Traditional Tenants Pull Back


Vacancy-plagued shopping centers in the U.S. are getting a lift from tenants who deal in sweat rather than typical retail goods.
Health clubs and gyms accounted for 8.8% of new leases signed so far this year by retail chains in the U.S., compared with 7.9% at the same point last year, according to real-estate research company CoStar Inc. The rush into shopping centers has helped fuel a 57% increase in square footage occupied by U.S. health clubs since 2007, to more than 70 million square feet.
Urban Active Fitness
Retail landlords focus more on nonretail tenants. This Urban Active health club opened in Pittsburgh in 2009.
The influx of health clubs comes at a time when retail landlords are scrounging for new tenants to offset a pullback among many traditional retailers. Retail vacancies in the top 80 U.S. markets remain near multiyear highs, reaching 11% for neighborhood shopping centers and 9.3% for regional malls in the second quarter, according to Reis Inc.
To compensate, retail landlords are focusing more effort on recruiting nonretail tenants such as dentists, medical offices, classrooms and insurance agents. Gyms, typically overlooked in boom times by landlords flush with other options, are emerging as big favorites in this category.
"As we expand, that is where we're going to go," Gold's Gym International President Jim Snow says of shopping centers. "That's what everybody is looking at."
Gold's, with 500 U.S. gyms either owned by the company or franchised, intends to open 17 gyms this year and 30 next year. The Dallas-based company recently introduced a 15,000-square foot express-gym format, which is less than half the size of its traditional clubs. Gold's has found that its express gyms fit well in spaces vacated by defunct or shrinking retailers. The chain recently opened gyms in Oklahoma City in locations that previously housed a Circuit City and a Sportsman's Warehouse.
Other rapidly growing health-club chains include L.A. Fitness International LLC, which intends to expand its stable of 370 clubs by opening 50 in each of the next five years. Global Fitness Holdings LLC's Urban Active is looking to add seven to 10 new clubs to its 37 by the end of 2012.
The expansions dovetail with a recent increase in health-club memberships nationally. According to the International Health, Racquet and Sportsclub Association, health-club membership in the U.S. increased 10.8% in 2010, to more than 50 million members, after several years of remaining relatively stagnant.
Also expanding in shopping centers is a close cousin of health clubs: day spas. Massage Envy Franchising LLC, which franchises massage clinics averaging 3,000 square feet, opened 43 clinics last year and another 43 so far this year, bringing its total to roughly 700. Many of the Massage Envy venues are popping up in fashion-oriented shopping centers frequented by female shoppers.
Not every health-club operator is following the herd. Clubs operated by Life Time Fitness Inc. are so huge, with indoor soccer fields, basketball courts and indoor and outdoor pools, that they typically are built as freestanding structures.
For landlords, health clubs are a cavalry riding to the rescue. In many cases, the clubs pay rent comparable to or only slightly less than what big-box retailers pay. L.A. Fitness's chief real-estate officer, Bill Horner, says his gyms are paying roughly $12 a square foot per year in the South and in the "high teens" in northern states. Gold's Mr. Snow says some older retail spaces can be had for $6 to $10 a square foot.
What is more, the costs for landlords of setting up a health club's facilities aren't onerous, roughly matching that of retailers in many cases, landlords say.
"Generally, health clubs are pretty good rent payers, in the sense that you will be able to recapture your [set-up] costs as part of the rent," says Michael Pappagallo, chief operating officer of Kimco Realty Corp., which owns stakes in 900 shopping centers in North America. "They're paying market rents for the space."
The trick comes in placating a center's other tenants about a gym's pending arrival. Parking often is a concern, as gyms tend to draw most of their patrons on Monday through Thursday nights, clogging parking lots. Fortunately, gym traffic tends to be light during key weekend shopping hours.
In addition, retailers typically want complementary stores around them to attract traffic. Health clubs don't often deliver many shoppers for fashion stores and jewelers.
In contrast, gym patrons do frequent nearby vitamin and supplement stores, pharmacies and casual restaurants that offer takeout service.
In this economy, an occasionally crowded parking lot might be tolerable if the alternative is a vacant storefront.
"We're always of the opinion that the more people we can get to a shopping center, the more chances we have" to boost the center's sales, says Greg Maloney, president and chief executive of brokerage Jones Lang LaSalle's Americas retail practice. "If [health clubs] don't come, we have no chance at all."
Write to Kris Hudson at