Banks Widen Search for Ways to Downsize Real Estate

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Branch costs are eating more profits, so banks are exploring all avenues for downsizing their real estate holdings.

The options are plentiful, experts say. They range from subleasing portions of branches that are too large for a bank's current needs, or selling branches to professional investors who then lease back to the bank all or some of the real estate. Banks have also gotten to the point of questioning whether they should even own branches in the first place.

Banks' financial reports show why branches would be viewed as potential sources of expense savings. Several regional banks have seen their net occupancy expenses rise over the past five years, including Cullen/Frost Bankers in San Antonio, Huntington Bancshares in Columbus, Ohio, and M&T Bank in Buffalo, N.Y. The net occupancy expense figure, as reported in regulatory filings, includes costs associated with branches as well as data centers, and administrative and loan production offices.

Various reasons explain why most banks' branches are too large, said Joe Brady, managing director and co-lead of the banking group at commercial real estate management firm JLL (formerly known as Jones Lang LaSalle). Some own legacy buildings from a time when most people needed to enter a physical branch to conduct business. Other banks tried to grow too fast and are now stuck with excess capacity. Advancements in bank technology have also rendered many branches obsolete.

"There's just no need to have a 10,000-square-foot bank branch anymore," Brady said.

The situation was illustrated recently when the $1.6 billion-asset CertusBank, in Greenville, S.C., placed ads for five branches that it wants to sublease. The branches, located in Macon, Ga., and two other Georgia cities, range in size from 8,500 square feet to 12,620 square feet. At all five branches, CertusBank is advertising that about half the space is available for sublease.

CertusBank's predicament may have stemmed from a period when former management tried to grow the bank too fast (which resulted in the executives' firing and a subsequent lawsuit). The company's new chief executive, John Poelker, has said he is trying to overhaul the bank, which has included selling off business divisions.

The space Certus is leasing was used as executive offices or conference rooms by banks Certus had acquired and was never fully utilized by Certus, a company spokesman said. Certus is also subleasing its data center in Carrollton, Ga., because most of its functions have been moved to Greenville.

It is smart for CertusBank and other institutions to try to take extra space that they are not using and sublease it, said Bill Yeomans, president of Brookline Branch Services in Syracuse, N.Y.

"These buildings may look new, but they've got a second floor where they used to do loans or insurance or something else," Yeomans said. "You can almost make the argument that these branches should be multitenant buildings."

Some bankers are nevertheless reluctant. Michael Lesler, president and chief executive of the $643 million-asset Bank of New Jersey in Fort Lee, said he would consider a sublease, but such an arrangement would not work if the bank might need the space one day. Plus, it would not really generate enough income to matter.

"At some point, we're all going to have to consider it," Lesler said, referring to the banking industry. "You wouldn't do it if you need the facility for your back-office infrastructure. And it would be a marginal contributor to revenue. I don't ever see a sublease being a significant source of noninterest income."

Sale-leasebacks are especially attractive for banks in the current market, Brady said. Real estate investors, including sovereign wealth funds and wealthy individuals, have been chasing higher yields. Banks' retail real estate offers higher yields, he said.

"It can help a bank tap into the capital markets" by subleasing to a real estate investor, Brady said.

Some banks are wondering whether they should own branches at all, Yeomans said.

"They're looking at their software and their computer hardware and they say, 'We don't own that infrastructure, so why do we need to own our real estate?'" Yeomans said. "It's a burden. It's an unearning asset on their balance sheets."

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