The Wall Street Journal reports that retail landlords now get to deal with the fallout of major bank branch closures. It seemed not too long ago that other retailers were complaining that they couldn’t afford leases in prime areas because banks were willing to pay so much more.
Well, that’s not really the case nowadays. One bank, Washington Mutual, which was getting more prominent in some areas than Starbucks, has closed about 400 units since its merger with JPMorgan Chase. Bank of America is shaving back 10% of its 6,000 units.
Even worse, it sounds like these empty spaces aren’t very adaptable to other uses. Says Colliers’ Patrick Duffy to the Journal: “banks have a somewhat unique footprint that doesn’t work for many retailers.”
Great! Well, we guess there are always drugstores and discounters out there that can take up the space. Hope they need drive-thrus…
Counter Culture 
When we lost a bank tenant a while back we backfilled the space with…Starbucks. Guess that won’t be happening again any time soon. For what its worth, the manager swears that storing the coffee in the basement vault keeps the coffee fresh longer and makes it taste…money.
Banks need a sticks and bricks presence in the neighborhood to attract depositors. The prospects are good that these branch facilities will eventually get reflagged. I disagree with Duffy, many of these buildings have relatively small footprints and are adaptable to reuse for real estate offices, Insurance, medical clinics, credit unions, etc. Typically the architecture and construction is above average in quality and appearance. At the right price former branch bank buildings could be great investments for the future. We currently have a portfolio of eight fully occupied NNN leased branch bank facilities that are doing very well. What, me worry!
Amen regarding reuse, James. While it’s laughable to think of this in the near term, consider USAA and what they’ve done with mobile banking in such a short amount of time. Branches are slowly becoming an unnecessary part of banking. However for the sake of argument NOW, branches are still very much necessary.
Ian – I don’t think the issue is as much on what the next use will be upon a bank closing, but rather what the next rent per square foot figure will be. Over the last few years banks, under the impression that they need great real estate – although Derrich point out how well the USAA model works – have paid well above market rents that other similar sized users would pay. While re-tenanting a bank with another use can be done, getting the same or a better rental stream, and therefore Property Operating Income will be the challenge. For additional insight on this and other financial matters see http://www.bobgreenfest.wordpress.com.
How very timely, as I am currently appraising several vacant bank buildings. It seems unlikely that any banks will absorb most of these locations. If a bank is looking for locations, they clearly have the upper hand in negotiations, so they should expect lower prices, certainly well below replacement cost. If you must convert a bank building to an alternate use, you lose the contributory value of the initial TIs, which have little value to most other users.
We have a specialty practice group focused exclusively on excess/vacant bank locations. Currently working with an institutional investor sourcing portfolio’s of vacant branches from the FDIC, Bank M&A, REITS and Private Equity/Investors who own numerous locations and have lost their tenant.
With some of the big bank failures, and more to come, there is only so many replacement financial institutions for these spaces. There will be absorption with small and mid size banks and credit unions, but at the end of the day this sector is way over branched, or as they say in retail, over stored!
That being said, our investor specializes in taking these types of assets at below appraised or book value and repositions the asset for alternative uses. We structure the deals so the selling institution can participate in the back side of the deal so it helps with their write downs. The time it can take to sell these assets one-off can be painfully slow, expensive and in this market we provide certainly and potential upside!
Are bank branches adaptable to another use, sure they are. But is the next retailer going in paying rent that is a sufficient return to the cost of construction on a bank branch. No way. The guy in an earlier response mentioned a Starbucks that uses the bank vault to store coffee. Does anyone think that Starbucks pays extra rent because of the vault, not a chance. Bottom line, can a bank branch be converted yes, but the use change cannot provide a return to the extra costs associated with a bank.
We haven’t seen anything yet. The magnitude of car dealerships and their impact is even greater than banks.