Mergers likely to leave former branches shy of tenants.

Mergers Likely to Leave Former Branches Shy of Tenants

Pundits are speculating on what is to become of thousands of abandoned bank branches in the wake of recent megamergers.

One wag predicted a proliferation of theme restaurants in which waiters hand out wine lists that look like passbooks - and where cutlery is attached by little brass chains to the marble tabletops.

Another wondered if the cavernous lobby spaces in the inner city could be refitted with altars and stained glass in hopes of a religious revival.

Somber Undertones

This talk probably exaggerates the difficulty of converting bank branches to other uses. Indeed, some point out that car dealerships and department store branches already occupy former bank retail space in the city.

Still, the problem is real for banks that have enough real estate headaches already. The need to find tenants for 70 former bank branches after the merger of Chemical Banking Corp. and Manufacturers Hanover Corp. has sparked whimsical talk about how bank consolidations may alter the American landscape - but no comprehensive solutions.

How much a projected $650 million a year in cost savings depends on quick disposal from unneeded retail space is not yet clear. But the two New York banks are contending that the savings will outweigh any deterioration in collateral value caused by dumping more real estate into a glutted market.

Upbeat Possibilities

Even real estate experts tend to agree. The long-term benefit of a strengthened banking industry will more than balance any problems the merger creates in the city's real estate market, said Arthur Mirante, president of Cushman & Wakefield. "Intermediate to long term, it's a great positive. People are already calling [the new bank] the new powerhouse."

Still, experts predict shorterm problems.

"In this market there are very few retailers looking for big spaces. Those that are, are pretty choosy," said Michael N. Creamer, a vice president of Healey and Baker, a broker of retail space in New York.

Mr. Creamer said one exception is a Gap clothing outlet on Madison Avenue, which was willing to incorporate the pillars and other banking fixtures when it took over a branch.

In addition to shuttering dozens of branches, the merger could also empty Chemical's leased headquarters building on Park Avenue.

Despite handwringing in local tabloids, the 800,000 square feet of office space that will go on the market when Chemical moves across the street into Hanover's building is a drop in the city's bucket. Edward S. Gordon Co. says more than 56.7 million square feet of office space already are vacant.

Moreover, landlord Stanley Stahl, who owns the Park Avenue Chemical headquarters building, has until mid-1994, when the lease expires, to find a new tenant for what is seen as highly desirable space. And by that time the office market could improve, Mr. Stahl's spokesman said.

In contrast, the addition of 70 vacant storefronts in a much smaller retail market is "not insignificant," said Lloyd Lynford, president of Reis Reports, a real estate data firm.

The amount of leased retail space in Manhattan has been in decline for at least six years, he said, and vacancies have climbed to an alarming 15.1%, or about 7 million feet out of 45 million.

With the financial industry in decline, prospects are limited of finding tenants willing to move into a former bank space with only minor modifications.

But reconfiguring the space could prove even more troublesome.

"A bank branch is especially constructed for that purpose," said Ronald B. Bruder, president of the Brookhill Group, which specializes in repositioning foreclosed retail space. "The costs of just gutting a bank branch are three to four times the costs of gutting the average store."

In order to market bank space, ceilings generally have to be lowered. The terrazzo floors, muted lighting, and revolving doors favored by banks must be replaced, Mr. Bruder said.

Banks can easily sidestep these cost issues, an official of one recently merged bank said. Most bank branches are leased, not owned, he explained, so the bank's only consideration is balancing the cost of breaking a lease against the savings that would result.

Decisions on which branches to close will be driven by such factors as lease terms, location, and capacity of electrical systems, this banker said.

He cited "political" factors, stemming from regulatory pressure to keep branches open in city neighborhoods and the need to minimize the impact on the job force. The two big banks have estimated their merger will eliminate 6,000 workers, and sources in the New York real estate community said many of the jobs are sure to come from branch closings.

Although some suburban units may have been constructed specifically as bank branches, most branches can be converted to other uses, this bank official said: "The Greek temples are a minority."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER