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WCC Administration should provide post-COVID-19 HFC plan

The WCC Health and Fitness Center will not open until at least June 12. Even when the stay-at-home order is lifted, it’s hard to picture a return to “business-as-usual” anytime soon. That’s a problem for the HFC because its business model didn’t take COVID-19 into account. As such, the WCC administration owes the Washtenaw County taxpayers a new post-COVID-19 HFC plan.

The plan was simple. Borrow money to build the HFC from private lenders. Pay it back over 20 years using operational proceeds from the facility. It didn’t involve asking the taxpayers for bonds – a guaranteed income stream for the loan repayment. After all, the taxpayers can’t refuse what you don’t ask them for.

The plan for the building hasn’t really worked out. WCC will be paying upwards of $1M per year through 2027 on the building loans. In addition, WCC has already sunk millions of dollars into repair and maintenance for the facilities, with absolutely no end in sight. Now, COVID-19 seems almost certain to change the way the fitness industry operates permanently – or at least long-term.

What the post-COVID-19 fitness future looks like

24 Hour Fitness, a mid-tier fitness facilities operator will likely declare bankruptcy. This is even as the company begins re-opening gyms shuttered due to COVID-19. The Ontario Teachers’ Pension Plan bought the company in a leveraged buyout in 2014. As a result, the company now carries a staggering $1.3B in debt.

On August 1, 2019, the company’s bonds sold at full face-value. By May 1, 2020, you could buy them for about $0.03 on the dollar. 24 Hour Fitness, it seems, needs all of its operational proceeds to pay its debts and stay ahead of its maintenance costs. And COVID-19 has left it only limited prospects of operating.

24 Hour Fitness is not alone. Gold’s Gym has already filed for bankruptcy, and Town Sports International, another major fitness center operator, will follow. Currently, industry analysts give Planet Fitness slightly better than a 50-50 chance of not filing for post-COVID-19 bankruptcy protection in the next 24 months. Customers of Fitness International – owners of LA Fitness, face a potential COVID-19 related class-action lawsuit by its members. They say the gym kept charging them for membership even after their facilities closed.

Medical fitness centers face exact same rocky future

You could argue that WCC’s Health and Fitness Center is different because it’s a “medical fitness center.” Except that it’s not different. Power Wellness – the company that manages the HFC for WCC – recently released a survey of medical fitness operators to determine how they were faring.

“As of May 2020, most of the United States’ 40K commercial fitness facilities remain closed, impacting 80 million consumers and 900,000 employees. The industry’s $32 billion in annual revenue will be significantly reduced, leaving many locations no option but bankruptcy or permanent closure. The future of commercial fitness operations is uncertain. While bolstered by larger institutional ownership, the medical fitness industry is facing similar challenges in uncharted territory, while their core business financials have also been significantly impacted.”

Power Wellness Pandemic Industry White Paper – May 2020

By its own admission, Power Wellness and other medical fitness operators will face exactly the same post-COVID-19 financial disaster that commercial fitness operators will. People don’t want to go places where their risk of contracting COVID-19 is elevated. This is especially true for people with pre-existing conditions.

Second, some people have a lot less disposable income than they did prior to COVID-19. Others may have the funds, but have reduced their spending significantly. In many cases, people have replaced their in-person workouts with virtual ones. There is little reason for them to return to fitness centers.

Even if COVID-19 had never come to pass, major fitness operators were reporting declines in memberships as early as Q3 2019. Analysts estimate that COVID-19 could erase $10B or more in revenue from the fitness industry. Globally, the fitness industry could shrink by half.

COVID-19 doesn’t play well with at-risk people

Medical fitness centers are set up to work with members who potentially have underlying health conditions. These same people may not want to rush back to the HFC anytime soon, given their elevated potential for complications should they somehow contract COVID-19. (Not that a building filled to capacity with sweaty people breathing heavily from open to close poses any special risk for contracting COVID-19.)

As of this writing about half of all states have permitted fitness centers, gyms and health clubs to reopen. Of those clubs that have opened, they report that only 30%-50% of their members have returned post-COVID-19.

A 30%-50% return rate isn’t going help the HFC, which depends on operating at 100% capacity and unrestrained oversubscription to pay the bills and keep the facility in operable condition. The WCC Board of Trustees obligated the Washtenaw County taxpayers to pay for the HFC without asking. So, under those circumstances, they should now be required to tell us all what their post-COVID-19 Plan B is.

Photo Credit: Coast Guard News, via Flickr