ST. LOUIS-Credit unions looking to take advantage of the relative weakness of the big banks by expanding their geographical footprint need to take a deep breath before making commitments, according to several experts.
There are good deals on existing structures to be found, however CUs must be wary of committing to bad locations or over paying for new facility construction, industry experts warned.
As residential property values plunge across the country, commercial properties are now just starting to experience a similar drop-off, but preconstruction costs are keeping undeveloped commercial land from falling too far. "The market value of vacant land has not changed that significantly on a commercial level," said NewGround CEO Kevin Blair. "The developers that did the infrastructure still have those hard costs."
However, vacant property is not immune from the collateral damage that the price plunge in the developed real estate market is wreaking. That, along with the bust in the commodities market, is bringing the cost of new construction down, but not to obscene levels.
Commodity Prices
"What we're seeing reported today is commodity prices, but commodities have a long way to go before they become a product," said Tom Lombardo, national director of business development at Clayco Financial Facilities.
"When we see commodities prices go down in the futures market, it's not until 90-120 days when we [see an impact]," added Arp Trivedi, VP-strategic planning at DEI.
Blair believes credit unions should expect a 5% to 10% savings on a new facility compared to estimates they would have received just a year ago-but don't expect the trend to continue forever.
"The cost of the average branch is probably in the $2 to $2.5 million range. If you can save 5%, that's a significant savings," he said. "The trough of the cost of land and construction is likely going to happen between now and the end of the year."
Labor costs are also likely to be lower than they were last year, but subcontractors are already working with pretty tight profit margins and site workers will not show up to do the job for free. Bids that look too good to be true, probably are, warned Clayco VP Paul Barrath.
Risks Are Greater
"In this market, your risks are greater," he said. "You have to make sure people who are working on the job can complete the contract."
"You better be careful whom you're getting those low numbers from," Lombardo added.
CUs may find that they get a better bang for the buck expanding their footprints by purchasing existing sites; and while commercial real estate should continue to fall throughout the year, it is very unlikely it will drop as much as residential property. Financial market consolidation could also help credit unions find appropriate sites that would not need much work to get up and running. Trivedi said a number of his CU clients are looking at their expansion models and "if WaMu and Chase are in the same market then they would want that geography weighted higher in terms they would see as desirable. They believe that one of those two branches could go on the market."
If purchasing is out of the question, the good news for credit unions looking to lease a facility is that landlords are desperately searching for tenants.
"I've seen some land prices come down, but moreover I've seen landlords being very amenable to shorter term leases and just trying to get somebody in the door," Trivedi added.
Caution must be exercised when finding a good deal in those situations as well, Barrath noted, pointing out facilities likely to be closed down by consolidating FIs or other companies could very likely have site drawbacks such as location or egress/ingress issues.
"What's going to be available on the marketplace is not necessarily what the credit union wants," he said. "Just because it's a good deal doesn't mean it's going to be a good branch."
