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Arriving in my downtown Boston office one day last month, after an early spin class, I read a surprising article about my gym.
Equinox, the operator of nice (okay, high-end) health clubs, is branching out of its expertise, opening its first branded hotel and investing in a real estate project that will include co-workspace and apartments, all in Manhattan's newest and hippest location, Hudson Yards. Industrious, a venture- backed WeWork-like developer, with an enviable name, will be its partner.
Why surprising? I never considered that my gym could or would want to be anyone's landlord. Plus, I always question when businesses move into arenas that seem far afield of their expertise: Tesla owning Solar City, Urban Outfitters buying a pizza chain, or when Jarden, a consumer brands company, bought Yankee Candle, a mall-based retailer with hundreds of locations to manage nationwide.
I am as amazed by the ambition and arrogance as I am by their success. However, because both positive and negative outcomes are possible, it's important to remain open-minded. I remind myself of my original "impossible" assessment, which I have described in a past posting, of mobile phones, when I first heard of them decades ago.
But spaces and their use now seem to fit under the umbrella of "experience," a concept that both reflects how consumers increasingly spend money and how investors allocate capital. For over a century, developers created retail space where consumers bought things, much of which is now obsolete. Now, the industry needs to redefine and reimagine the use of commercial and residential space.
Dwellings, not for pets but for humans, are apparently highly sought after in 250 square foot increments.
Despite monthly costs of $2,000 or more, these units are reminiscent of the tiny Tokyo overnight facilities introduced years ago where you could rent a "drawer" that looked like the storage spaces for victims' corpses in Law and Order morgue scenes. Urban, claustrophobic, text-communicating, non-driving millennials who crave the human contact or sightings offered at an adjacent gym, may be the perfect market for this combined work/live/work-out/eat/drink concept. Equinox plays the unifying adhesive in this mosaic, and once businesses fill the co-work space, corporate travelers will come to fill the Equinox Hotel rooms.
If that sounds simple to accomplish, let's think again. Equinox and its partners need populous, high-end environments with strong demand for each segment of the package to succeed. If WeWork charges $150+ per foot in many Manhattan buildings, can Industrious sell $200 a foot rentals in Hudson Yards? On what data has Equinox based its expansion plans and what returns might be embedded in the project?
Obviously, the venture capitalists backing Industrious have optimistic views of the rental market and perhaps both they and Equinox are aiming toward a multi-billion dollar IPO valuation. New concepts, whether they are great ideas in the long term, or not, attract investors, and this will be no exception.
What have been the stock returns of the sectors in which Equinox now and potentially will reside? The two public gym companies have diverged wildly in stock performance. Town Sports and Planet Fitness are both aimed at the mass market, with the former having abysmal stock performance, down 75% from its initial price of 12 in 2006, while the latter, a franchise model, has climbed nearly 300% since its IPO in 2015.
Hotel stocks have been more successful, with Marriott, Hilton, Intercontinental and Choice Hotels beating the five year S&P 500 CAGR of 11%. The major mall operators, such as Simon Property Group (5.0%) and Taubman Centers (-3.3%), have dramatically underperformed the S&P(10.8%), and the overall Real Estate Sector (9.8%) has fallen short of the S&P five year returns. Two of the larger developers, Brookfield (+4.7%) and Howard Hughes (-6.5%), have been relatively weak stocks.
Nevertheless, the morale of the story might be that an interesting and novel idea will attract investors, and while the allure still shines, the originator should capitalize on the opportunity to realize that vision. There are hundreds of billions of dollars looking for a home, and this might be a clever place for it. Maybe not, but Equinox and its partners could be out by the time those millennials grow up and want a yard. Meanwhile, I'm late for boxing class.