CoStar recently reported on Citigroup’s prediction that one-third of US bank branches will be closed in 10 years. Citigroup blames FinTech for this, and suggests that automation will be one of the main factors involved. Antony Jenkins, former chief executive of Barclays, has a similar prediction: “The number of branches and people employed in the financial services sector may decline by as much as 50% over the next 10 years, and even in a less harsh scenario I predict they will decline by at least 20%.”
Whether it’s 20% (18,800 branches), 30% (28,200 branches), or 50% (47,000 branches!), that’s still a lot of branches…and all the more reason to start selling branches now. “Wait, why not hold onto my branches, even if I know I will probably be letting go of them in the future?” you may be asking. Well, here are 4 reasons to not hold onto branches you are not positive your bank is keeping for the rest of eternity:
1. Vacant buildings do not sell for as much as buildings with tenants
Unless you are selling to a business owner-operator (not likely, most buyers of commercial real estate are investors, and many retailers/businesses prefer to lease buildings over own), there is a high chance you’ll be selling your branch to an investor. If you keep your branch for another ten years, then completely vacate it and want to sell it, your branch value will be drastically reduced. You may even have to take a loss to get rid of the building (tenant-less buildings are valued drastically less than buildings with long-term tenants).
2. You can engage in a sale-leaseback and maintain a presence in the market
Sale-leasebacks are common in the retail industry, enabling companies to gain flexibility and optionality in their real estate strategy (along with gains from the sale of buildings). Sale-leasebacks allows banks to sell buildings but maintain a presence in the market and to quickly and easily change their branch networks (at the end of the lease, banks can choose to renew or vacate, without having to go through the hassle of trying to sell the building…when every other bank will be trying to sell their branch as well). With the future of the branch so uncertain, why wait?
3. Everyone will be selling branches…and no one will want to buy them
Your 4,000-5,000 square foot branch may still be the national average, but it’s not what banks today are looking for. We’re already seeing a glut on the market of branches that are 4,000 square feet or more. Most banks looking for new locations are not looking to acquire branches that are more than 2,000+/- square feet. Banks also know that buying a branch does not necessarily mean that they will acquire the deposits of the branch, and therefore banks are even more wary to purchase outdated, inefficiency buildings. As more and more branches close, and more and more branches go up for sale, you will be competing with other branch properties that nobody wants, driving the values down.
4. Bank buildings are difficult to retrofit
Bank branches are notoriously difficult to retrofit to accommodate new or different businesses. Vaults, teller desks, and building layout and design are all significant issues affecting the ability of a branch to be turned into, say, a restaurant or an office building. This further winnows your pool of potential buyers.
CoStar states that all those branch closings will put 124 million to 155 million square feet of real estate back onto the market. As more branches close and more real estate buyers recognize that banks are less stable, less long-term tenants, branch real estate will become less and less valuable.
If you want to sell your branches or want to stay in your branches but aren’t sure if you’ll be there forever, you should sell your branches as soon as possible to maximize your branch real estate (BRE) value.
Brookline Branch Services helps banks prepare their branch networks for the future. If you’re interested in learning more about your BRE options, contact us today.