Trimming the Branches (1/8)
Jan 8, 2009 12:46 PM, By Jennifer Popovec
In the upscale suburban Dallas community of Highland Village, four shopping centers recently opened at the intersection of Long Prairie and Justin Roads. These big-box anchored properties offer residents all the retail conveniences they could possibly want—including, count them, six bank branches. In fact, sitting in a car at a single intersection, one can see all six: a JP Morgan Chase, a Washington Mutual, a Wells Fargo, a Bank of America, a Capital One and a regional bank.
This is certainly a sign of the times—there are now nearly 100,000 bank branches in the U.S. But is it sustainable? JP Morgan recently acquired Washington Mutual. Does it need two branches facing each other? Meanwhile, Wells Fargo recently bought Wachovia meaning it too will need to examine its national network of retail bank branches and decide which ones must stay and which will have to go.
The intersection is emblematic of the race that’s taken place over the past two decades during which commercial banks, community banks and credit unions have raced to build market share and generate all important deposit bases. Even as the number of financial institutions has decreased due to consolidation, the number of branches has increased.
Retail landlords and investors have been able to make the most of this trend. For years, banks—many with drive-throughs—could be counted on to take corner pad sites at shopping centers. In some cases it provided a reliable tenant. In other cases, banks became extremely popular options for single-tenant net lease investors. Now, a coming wave of consolidation triggered by the ongoing credit crunch threatens to turn the tide on the wave of expansion leaving both landlords and investors exposed to a wave of risk.
The credit crunch has triggered a wave of forced mergers, leading to overlaps in banking networks. Moreover, the industry is dealing with an increased number of outright failures. In 2008, 40 banks failed, according to the Federal Deposit Insurance Corp. (FDIC). In most cases, these were small regional banks. But the FDIC also was involved in seizing Washington Mutual and passing the assets to JP Morgan Chase. In a typical bank failure, the FDIC moves in—typically over a weekend in order to minimize disruption—takes over a bank and passes the assets along to another bank so it can re-open on Monday under its new banner. Overall, 170 banks currently sit on FDIC’s watch list. In a typical year, 10 percent of the banks on the watchlist fail. However, in the current credit crisis, estimates are that failures could be much higher with as many as 200 banks failing before all is said and done. This could lead to further consolidation and adjustments to bank branch networks.
As a result of all of this, fewer banks will be looking to expand their footprint organically, says Mike Purchia, vice president of strategic market intelligence for BrandPartners, a Rochester, N.H.-based consulting firm that specializes in bank branch site selection, design and construction. Purchia says most bank consolidations result in a 5 to 10 percent overlap of branches, which means that sector could see at least a couple hundred bank branches go dark in 2009. However, Purchia also believes that there remain a large number of healthy banks ready and able to backfill the empty space. For example, Morgan Stanley and Goldman Sachs, the last two remaining Wall Street investment banking titans, both converted to bank holding companies and are exploring ways—either through organic growth or acquisition—of building deposit bases.
Ultimately, experts think the number of bank branches could drop in 2009, but the effects could be minimized with less than 5 percent of existing bank branches going dark for good. Purchia says the national and super regional banks will be occupied for some time sorting through their new networks and identifying the branches they need to close. Meanwhile, regional banks are looking to restructure their leases because of the downturn in the market. That could create some pain for landlords. For non-urban new pad sites, banks might pay more than $35 per-square-foot for rent. For in-line or end-cap space, the rents would be between $25 per-square-foot and $35 per-square-foot. In today’s market, it would be difficult to find replacement tenants to fork over those kinds of rents.
At the same time, however, Purchia thinks the ultimate effect of bank branch closings will be diluted. Regional players are keeping their eyes open for opportunities to pick up the branches that other banks have abandoned. The other banking segment—community banks and credit unions—haven’t missed a beat, Purchia says. “This segment is very strong financially and still selectively looking for expansion opportunities,” he adds.
Miami-based Union Credit Bank is an example of a community bank that is expanding. The bank, which currently has one branch and another under construction in West Miami is looking for existing banks and branches to acquire, says president and CEO Fernando Capablanca. “It’s a good time for my bank to expand,” he says, adding that he’ll be able to take advantage of opportunities created by the closure of other bank branches, either from consolidation or weak economic conditions. “We think this is an opportunity to gain market share.”
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