What are property owners going to do with all of the vacant space from retail bankruptcies and falling rents? The question is top of mind for developers, investors and tenants, as the older generation of brands and retailers fade and uncertainty about the next generation compounds.

Today, consumers are spending more money on experiences rather than things. But despite this shift, the real estate industry’s main answer has been to fall back on its existing business model of renting out space—though maybe this time to a restaurant rather than a retailer. In this scenario, however, the real estate developer is still a supplier that sits far away from the end consumer, forever disintermediated by a brand or restaurant.

In a world where a rising number of companies are striving to control the end relationship with the consumer and going to extreme lengths not to get cut out of the value chain, real estate developers need to take a serious look at how they can evolve their services to align themselves more closely with today’s fast-changing consumer.

There is, however, one real estate company that has proactively acknowledged these developments years before the rest: Related Companies. The major residential real estate developer—which has a small but growing portfolio of retail real estate driven most recently by its Hudson Yards development in New York—bought Equinox in 2005 for just over $500 million when it was just a burgeoning luxury gym.

Equinox is a private company, but today it has 350,000 members across its 92 clubs who spend what the company calls a “blended average” of $3,500 a year. This earns Equinox more than an estimated $1 billion a year in revenue from its eponymous gym, with profit growing 10-15% annually. Additionally, Equinox bought SoulCycle for $177 million in 2011—under Equinox’s guidance, the cycling fitness company’s revenue more than tripled between 2012-2014 to $112 million and likely hovers around $200 million today. That same year, Equinox also launched Blink Fitness, its more financially accessible gym offering, which today has close to 400,000 members who spend about $250 a year—an estimated $100 million-plus business. Most recently, Equinox invested in Rumble, an up-and-coming boxing gym, which might be its next acquisition.

Equinox plans to invest another $1 billion over the next five years in expanding its gyms, in addition to the billions more that are earmarked for Equinox’s hotel brand, the first of which is set to open in Hudson Yards in 2019.

Related’s strategic investments in Equinox and its subsidiaries has not only paid off financially: More than a decade earlier than most real estate companies, Related has indoctrinated important lessons about the powers of being a vertically integrated real estate company:

  • Controlling the consumer relationship is crucial. This is not just because the margin and dollars one can capture are higher—the store selling a product to a customer will always make more per item than the factory making it—but also because the landlord and tenant are the same company. At the same time, Related can use brands like Equinox to enhance the value of the real estate that houses the gyms, as well as the residential properties it owns in the same area.
  • Related can continue leasing its properties at healthy rates both for itself and for Equinox while lowering costs for each, rather than being forced to offer concessions to tenants in a buyers market as rents drop and retail contracts overall. While Equinox’s revenue is impressive, it doesn’t account for the additional money it pays Related in rent, which the real estate company can book as additional revenue.
  • Equinox doesn’t need to spend as much money looking for spaces and building out clubs, and Related doesn’t need to spend as much time looking for tenants. This keeps both companies afloat and allows Related to ride out the crash more smoothly than most.  
  • Importantly, although Related owns Equinox and its subsidiaries, it smartly kept them as separate companies, as they are the best operators in their respective fields. While the real estate and hospitality businesses are clearly related, running a gym requires different outlooks and teams to function than running a real estate company. This prototype will become a case study for real estate companies that explore this business model in the future.

Vertical integration is not easy, but the hard work can pay off. While Equinox and Related are more than a decade ahead of everyone else, other companies will likely follow suit as they realize that being a supplier in today’s market is not reliable enough to earn the revenue and margins that they used to. Additionally, owning the connection between retail real estate, residential real estate and lifestyle services is powerful and possibly more defensible than specializing just one of those verticals. Most importantly, if Amazon has taught us anything, it’s that controlling the customer relationship is the best defense against commoditization.