Feb 8, 2022 | ICSC
Fitness chains that faced a tough battle just to survive COVID-19 shutdowns now are expanding again. Global franchise F45, for example, is almost doubling its locations. It has more than 3,200 franchises sold in 65 countries, including the over 1,700 already open. In the fourth quarter alone, it sold 275 new franchises and opened about 130 net new studios. “A big part of the reason behind that growth is that there is significant demand,” said Brandon Famous, an executive vice president for CBRE global retail, which is representing F45 in its search for locations across the U.S.
The “great reopening” of 2021 brought a return of customers and surge in membership activity thanks to rising vaccination levels, greater comfort in the safety of gyms and simple pent-up demand from people eager to get out of their homes. At the same time, COVID spurred people to be more health conscious, which is bringing new customers to the gym, added Famous.
Vestar project director Ryan Ash said, “There is room for growth, and we expect to see the work-from-home trend fuel additional growth in the fitness sector.” People crave human interaction, and if they’re not getting that with daily trips to the office, then fitness classes and gyms will become a great outlet, he said. Vestar recently added two fitness tenants to its Las Tiendas Village in Chandler, Arizona. Rock climbing gym Alta Boulders opened in December, while Eat the Frog Fitness opened in January. That concept, pictured at top, is a boutique fitness studio co-founded by Olympic decathlon gold medalist Bryan Clay.
Gyms and fitness centers took plenty of punches during the pandemic. Fallout included some high-profile Chapter 11 bankruptcy filings around the 2020 shutdowns, including 24 Hour Fitness, Gold’s Gym and Town Sports International. However, no major liquidations occurred at the chain level, noted Lockhouse director of advisory services and COO Garrick Brown. For example, 24 Hour Fitness was able to close 20% to 25% of its locations and emerge from bankruptcy with a strong balance sheet, he said. “So after a lot of pain, they are in a healthier spot.”
Brown estimates that nearly 10,000 gyms and fitness locations in the U.S. closed permanently in 2020 and 2021, bringing the size of the market he tracks down to 32,000. Though government aid and Paycheck Protection Program loans helped immensely, a lot of the damage occurred among the small business franchisees that didn’t have access to deep credit to weather the storm, he said.
Brown said fitness brands now are shifting their focus from survival to growth. “We are seeing some pretty decent growth goals, much of it being driven by the franchised boutique health clubs,” he said. Franchise systems are benefiting from the boom in start-ups created by the Great Resignation. According to the U.S. Bureau of Economic Analysis, 4.4 million businesses formed in the U.S. in 2020 and 5 million in 2021. Brown said the growth planned for 2022 amounts to about 700 new fitness clubs, which is a fraction of the volume lost in the wake of the pandemic. That’s a sign of recovery, and Brown expects growth to ramp up going forward.
Recovery also has varied by concept, business model and geographic market. Some fitness tenants continue to face challenges, depending on their state and local government restrictions, noted Ash. “We have seen businesses located in Arizona and Texas have their operations meet or exceed levels pre-COVID, while businesses in California and Washington continue to adjust to the restrictions in place,” he said.
As COVID variants continue to impact in-gym traffic, some players view this as an opportune time to open a new club and thus they remain in wait-and-see mode. The slow return to office also has created challenges for health clubs that serve daytime office workers, noted Brown. “I think the way it’s going to play out is that we’re going to see growth trickling back this year,” he said.
According to research firm IBISWorld, the gym and health and fitness club industry generates $35.3 billion in annual revenue and is projected to grow at an average annual rate of 2.7% between 2021 and 2026.
Fighting for Market Share
Still, many pre-pandemic trends are picking up where they left off. Specialty fitness concepts are hot, while middle-market gyms feel pricing pressure from the increased competition.
For the larger, mass-market clubs, the big challenge is price. “It kind of mirrors retail in a lot of ways,” said Brown. On one hand, there are smaller, boutique niche brands that are willing to pay a higher price. On the other end, much like apparel, there are the discount operators. Anyone in the middle was facing challenges prior to the pandemic, and the shutdown magnified those challenges, he said.
According to IBISWorld, LA Fitness parent company Fitness International is the largest player by revenue, representing about 5.5% of market share. The company operates more than 700 locations in the U.S. and Canada. Other top players are Life Time Fitness Inc., which operates nearly 160 Life Time and Life Time Athletic Resorts brands. 24 Hour Fitness USA Inc. has about 450 clubs, and Equinox Holdings Inc. operates more than 100 locations. On the franchise side, the largest players are Anytime Fitness, Planet Fitness, Orangetheory Fitness and F45.
In-person gyms also face competition from the explosion of fitness apps, Peloton, and other at-home fitness equipment that people purchased during COVID. In some cases, though, they’ve created consumer awareness around fitness. Apps, fitness trackers, in-home fitness equipment, full-service gyms and specialty clubs all create more awareness of fitness, which is driving more overall demand, noted Famous.
Landlords definitely are paying attention to fitness as a means to fill space and drive traffic. Five years ago, owners were reluctant to lease to gyms because they felt they took up too much parking and were not effective in driving traffic to other tenants, noted Famous. These days, gyms and even boutique fitness concepts bring customers to a marketplace at an average of three to four times per week, and landlords now view gyms as very viable tenants, he said.
In some cases, gyms and fitness concepts can be opportunistic and take advantage of vacancies and more attractive rents. However, operators are cautious on urban locations due to the slow return to work. Instead, they’re focusing more on suburban locations or on urban locations like Miami Beach, Florida, that rely less on daytime office workers.
Fitness studios typically have bypassed mall locations in favor of convenient high street locations and neighborhood retail centers. However, fitness could be a solution for some shopping centers moving away from a reliance on apparel or those repositioning as mixed-use centers. COVID did create a lot of vacancies in malls, and fitness brands are having real discussions with major mall developers about location opportunities, noted Famous. “It’s a credit to these major mall developers that they recognize that they have to reactive these spaces and they are thinking about nontraditional retail.”