It’s Real Estate, AND THE FUTURE IS HERE….
In the year 2001, as you drove along the main roads in your hometown, it would be extremely rare to find industrial parks and retail strip malls that were home to sports or fitness based companies. You would see locksmiths, lawyers, accountants, barber shops, nail salons, hardware stores, manufacturing facilities, warehouses & countless other small businesses trying to make ends meet.
Yes, you’d see tennis centers, hockey rinks, bowling alley’s, and driving ranges. Those would be in stand alone buildings built specifically for those uses. You wouldn’t come close to seeing what exists now.
At that time, these industrial parks and retail strip malls were often times fully leased out because most small businesses could not afford a stand alone location nor could they afford to develop their own property. Renting in a high traffic, densely populated area allowed them to benefit from the other businesses surrounding them.
Now drive down that same street or through that same industrial park complex today.
Sure, you’re going to find similar businesses as were there 15 years ago, but now you’re going to see sprinkled into that tenant mix a variety of youth and adult sports/fitness themed businesses.
Yoga studios, cross-fit gyms, soccer academies, basketball courts, batting cages, gymnastic centers, bounce houses, trampoline parks, physical therapists, nutritionists, golf simulation companies, dance studios, learning centers….the list goes on.
The current wave of new sports/fitness based companies, when you really dive deeper into it, is astonishing.
"The current size of the Gym, Fitness & Recreational Sports Centers market is $26,212 million. The industry has grown on average 3% per year since 2009.
Compared to 2013, 2014 revenues have grown 5%. Long term forecasts for the
industry project positive growth.
The average company in this industry has revenues of $1.0 million, and 24 employees."
-Courtesy of Pell Research, LLC
That’s $26 Billion, with a B.
There are even studios that teach the fundamentals of America Ninja Warrior. Yes, there is strategy, mechanics, and membership programs available for kids and adults to learn from former America Ninja Warrior contestants. Let me repeat. There is a BUSINESS MODEL that focuses on teaching the fundamentals of how to become America Ninja Warriors! Where was that in 2001? Which on a side note, might be one of the best things for youth athletes today.
We’ve only reached the tip of the iceberg when it comes to the growth and expansion of this industry. We’re seeing the first real estate investment groups, REIT’s, private equity, hedge fund, and institutional investors dabble in this market. In some cases they are purchasing land and developing from scratch. In other cases, they have come across under performing properties that have industry standard “value-add” opportunities.
They are identifying opportunities that the average real estate investor or investment group either don’t have the appetite to get involved with just yet or are completely unaware that the asset class even exists. Either way, that means opportunity for the right people.
With the increase in the number of sports/fitness based companies operating today, the demand for real estate that’s suitable for them is also growing. Finding column free, high traffic, functional space for these types of companies is proving to be extremely difficult. The current real estate market of industrial buildings and retail space just isn’t cutting it for this industry. They’re outdated, need to be re-zoned, and way too expensive because landlords are accustomed to retail or industrial-use companies renting their prime space.
That’s a different price point than those in the sports/fitness industry. It’s a service based industry, not high volume retail or wholesale.
There are a few interesting ways real estate investors are taking advantage of these opportunities.
The first is through identifying under-performing or outdated sports facilities and re-branding them as sports themed strip malls. They aren’t interested in owning or operating the businesses. They simply want to own the real estate that those companies need to run successful businesses out of.
For example, a popular trend today is purchasing existing tennis facilities and restructuring them to support multiple sports/fitness based companies all under one roof. So what was once an indoor, 6 court tennis facility with a lounge and locker rooms now becomes a multi purpose turf field, multi basketball court, yoga studio, physical therapy, and learning center all under one roof. No different than buying a strip mall on main street and having multiple tenants with long term leases. The concept is exactly the same and finding deals to be made is actually relatively easy if you know where to look.
In some cases, a sports facility is already established with the ability to cater to multiple sports themed businesses, however the owners are trying to operate every entity. They are running soccer leagues, basketball tournaments, concessions, corporate events, and sports themed parties. In those cases, real estate groups are purchasing the real estate, renting space to the owners for the space they still want to operate, and identifying strong ancillary tenants to help support and lease the remaining space.
Another popular trend is developing these multi-sport facilities from the ground up. Finding inexpensive land through public/private ventures is one way some of the most innovative real estate development groups are entering the market. Purchasing land for cheap from the city, designing the space, putting up the capital to build the facility, and ultimately renting space back to the community and other local sports themed businesses is one of the more popular ways to build from the ground up.
However the real future, from a real estate perspective, is to build portfolios of these sports themed facilities that can be packaged up and sold off as one large, income producing asset to larger real estate management companies.
The exact same way real estate development groups package up restaurants, strip malls, housing developments, apartment complexes, or medical offices to be sold as an entire portfolio to a REIT that is more aptly set up to handle that size investment. In fact they’d rather pay a premium for the portfolio just so they don’t have to go through the years of putting it together.
Over a 5-7 year time period, a small or medium sized real estate investment company acquires 15-20 unique properties around the country that are 90-95% (goal of obviously 100% but with multiple tenants signing leases that’s not realistic) leased year round with credit worthy, diversified sports themed operators, generating positive cash flows, and every individual asset was purchased at no less than a 10 or 11% CAP Rate. They were re-branded and outfitted with companies that are specific to the needs of the people in that community. There is most likely very little competition in terms of other assets that have a similar tenant mix due to the lack of existing facilities that can support this strategy.
This strategy also allows the real estate group to charge higher than average rents as each company can now generate more revenue by being associated with other sports/fitness themed companies under one roof. Paying a premium is worth it to be in these spaces. After all, a rising tide lifts all boats. Most of the time….
That portfolio, to a REIT or institutional investment group is extremely valuable because almost all of the risk has been taken on by the original investment group and now they can benefit from the current income that the properties generate. That entire portfolio, since it is well diversified and income producing, can be then sold off for anywhere between a 7-8% CAP Rate to that REIT.
This is obviously a simple formula and example. As with anything there would be hiccups along the way, but no more so than any other type of real estate project. If done properly, this is a win-win for everyone.
The purchasing investment group can now go to their investors and partners to show them that they are now getting a piece of one of the fastest growing real estate markets in the country and the portfolio that they own already generates income. That’s a story both investors like to hear and portfolio managers like to tell.
It’s just a matter of who can develop the most attractive, investment quality portfolios to be bundled up and sold off. Those will be the pioneers of a new real estate asset class.