Before the coronavirus pandemic hit in March, fitness gyms across the U.S. served as consistent traffic drivers for shopping centers that could no longer rely solely on traditional retailers to attract patrons.

The health and fitness industry has been growing 3% to 4% annually in the U.S. for the last 10 years, according to the International Health, Racquet & Sportsclub Association, or IHRSA. The group tracked 39,570 gyms in the U.S. in 2018, up 2.8% from the year prior.

But the gym world is now in flux with the coronavirus pushing major brands like 24 Hour Fitness and Gold's Gym into Chapter 11 bankruptcy as the companies struggle with marginal revenues and anemic traffic.

“It’s a major disruption,” said Steve Jellinek, vice president for CMBS Credit Risk Services at Morningstar Credit Ratings. “They are seeing a financial hit to their business.”

It isn't all about the pandemic; signs of some risk appeared as early as last year, Jellinek said.

“The amount of experiential tenants and specifically fitness tenants in malls and shopping centers was already a concern before the pandemic,” Jellinek said. “There was oversaturation; and now we have this pandemic where fitness clubs are closed or the ones that can reopen have conditions limiting the number of people that can come in at any one time.”

The distress potential for gym landlords is substantial — 24 Hour Fitness is linked as a tenant to $1.7B of retail commercial mortgage-backed securities, according to Morningstar data.

Looking at properties in CMBS that feature 24 Hour Fitness as a tenant, the numbers suggest if these gyms close in large numbers, the occupancy levels at certain retail centers tied to 24 Hour Fitness will fall below the critical 80% threshold that analysts prefer as a safe zone, Jellinek said.

From the landlord perspective, gym bankruptcies highlight the underlying credit risk that's always been inherent with gyms, said Micah Ashford, who handles acquisitions at Younger Partners with a focus on shopping center purchases and ownership.

“Pre-COVID a gym was a great traffic driver, but it was never a great credit tenant,” Ashford said.

There's another big challenge landlords face as gyms fail, she said. In certain shopping centers, smaller retail tenants have stipulations in their contractual agreements that state a big-box retailer, such as a gym anchor, must be open on the site for their own contract to perform at the same level. As a result, their leases may be adjusted if an anchor tenant leaves.

This results in landlords not only losing foot traffic from failing gyms, but also facing the risk of contractual changes and rent adjustments when smaller tenants suffer from gyms closing, according to Ashford.

The good news is empty gyms can be converted to other asset types, Transwestern Senior Vice President of the Retail Division Larry Jordan said.

“You can use it for a fulfillment center for retail distribution, as a storage facility or an education facility,” Jordan said.

There's also a chance for remaining gyms to negotiate for better terms and per square foot prices.

“It gives them a chance to renovate rents maybe from $22 a SF down to $12 to $15 per SF to make it more tolerable to operate,” Jordan added.

But one thing is clear, U.S. gyms are in trouble and more could go dark, leaving shopping centers with a glut of empty big-boxes.

“It's definitely still a concern that other gym brands may struggle,” Jellinek said. “I don't think we are through this by any means. Keep in mind there is not a vaccine, and people are still at risk of getting sick. We are cautiously optimistic but there is definitely the potential for additional bankruptcies.”