Opening a gym in SF poses heavy lift, despite demand

San Franciscans may not be racing back to in-person work, but they are more than ready for a real-world workout over two years after strict Covid precautions led to the closure of fitness centers. Boutique studios that are not subject to San Francisco’s block on formula retail are leading the way in capitalizing on the rebound, though some landlords remain wary of fitness tenants, retail agents say.

In January, the San Francisco metro area still had fitness foot traffic a quarter below 2019 figures, according to cell phone data from Placer.ai, the biggest drop in gym attendance in the country during that all-important New Year’s resolution month. But by June the metro, which includes Oakland and San Jose in Placer.ai’s report, saw foot traffic more than 16 percent above where it was three years ago, part of a nationwide trend showing far stronger returns to fitness than to grocery stores, fast casual restaurants or big-box stores.

Inflation may be one reason people are seeing value in gym memberships, according to the Placer.ai report.

“Partaking in most other activities, from dining out to shopping, leads to a new expense each time the activity is undertaken,” it reads. “But gyms usually charge a flat fee – which can be as low as $10 – for monthly access.”

The month-to-month fee structure made gyms vulnerable during the pandemic. With no commitment and a fear of shared spaces, people canceled memberships and gyms shut their doors. San Ramon-based 24-Hour Fitness filed for bankruptcy in June 2020, closing 13 Bay Area locations.

“Some gyms and fitness centers faced trouble immediately (at the onset of the pandemic) and some were able to sustain for a while but ultimately could not withstand,” CBRE agent Alex Sagues said via email.

Also, masks were required for indoor workouts in the city until the end of January, an uncomfortable deterrent for customers and a logistical nightmare for front desk workers turned reluctant enforcers.

Mask mandates and the perceived laxness of District Attorney Chesa Boudin were two reasons cited by a national fitness chain for its hesitations on taking over a former 24-Hour Fitness space near Fisherman’s Wharf, according to Avison Young agent Cameron Baird. Negotiations for the 30,000-square-foot space at the North Point Shopping Center, where most gym equipment was left behind when the company went into bankruptcy, were on hold until after Boudin’s recall in June, Baird said. They only resumed after he was removed from office by voters and the fitness chain felt its staff would be supported by law enforcement if members flouted local guidelines.

Losing Formula

Baird said the chain fitness company is interested in the shopping center in part because the location evades the city’s block on so-called “formula retail” — businesses with more than 11 outlets worldwide.

“If we didn’t have formula retail it’d be tough,” said Baird. “It’s not every local guy who can do spaces that big.”

The goal of the restrictions, which are in place in the city’s main commercial strips outside of downtown and Fisherman’s Wharf, is to save mom-and-pop retailers from having to compete with the bigger pockets of national chains and preserve neighborhood character. But agents say the regulations are a big reason more gyms, as well as other formula retailers, have not been interested in going through the red tape and major expense to get a conditional use waiver to open their businesses, which isn’t helping to fill the city’s many vacant retail spaces.

“Going through the formula retail process requires a tenant to find a location, negotiate a lease, complete a design and then spend sometimes up to a year to get approval that is not guaranteed,” said CBRE’s Sagues. “That is a very risky proposition for an operator. When that opportunity is compared to other markets that don’t have that requirement, formula retail can tip the scale and cause tenants to avoid the city for now.”

Even local owners of franchise businesses, which make up much of the boutique fitness industry, are subject to the conditional use process. Sagues said a San Francisco fitness franchisee he works with recently abandoned plans to open another studio after she realized she could spend $100,000 on land use attorneys and consultants, only for her application to be denied.

Max Sander of Kidder Mathews said overcoming the formula ban is so onerous that he has advised many growing companies to open their San Francisco branches before they hit the 11-outlet mark.

“I make it a point to say, ‘There’s nowhere else in the country that does this. Get into San Francisco before you hit 11,’” he said.

Union Street, Not Union Square

Formula retailers can open downtown, but right now that’s the last place many gyms want to be, even as amenities like onsite fitness are more important than ever for office building landlords trying to attract tenants. With so many people still working from home, gyms want to be on Union Street, not Union Square, agents said.

Sander said he has done 10 deals this year with boutique fitness brands and they were all in the neighborhood commercial districts.

Some mom and pop owners in the neighborhoods have been flexible about working with tenants to share the cost of building out their spaces or giving them a few months of free rent to get their doors open.

“Some landlords are saying, ‘We’re going to have to help out with this or we’re not going to have a tenant ready to move forward,” said Baird of Avison Young. “It’s better to pay a bit more now to get someone in there.”

Landlords have also been keeping rents flat to get existing fitness tenants to extend their leases, or offering them extra perks like outdoor space when possible. During the indoor fitness shutdown the landlord at NorthPoint Shopping Center let its other fitness tenant, F45, use the parking lot to hold its circuit training group classes at no additional cost, Baird said. That allowed the 3,300-square-foot studio to stay open and it remains in the shopping center abutting North Beach today.

The REITs that own many downtown office buildings and residential high rises aren’t always willing to make deals, agents say. But some have been coming to the table because they see fitness as such an important amenity to offer their other tenants, according to CBRE’s Sagues.

“We are working on several gym amenity offerings where owners are looking to subsidize gym operators, many small local businesses, in order to create an amenity that will serve their office or residential population,” he said. “Our biggest challenge is actually finding operators for these opportunities because many operators assume that a new location will be prohibitively expensive. Once we can solve for the upfront
cost, the deal becomes a much easier proposition.”