Banking Outlook | 2017 - JLL - JLL | Global commercial

Banking United States | Banking Outlook | 2017

Branch banks: Navigating a sea of industry change JLL Research

Banking Outlook | United States | 2017

Contents

Future state: 5 changes on the horizon for branch banks

3

Current state: Branch banking

4

Branch leasing & investment trends

6

What does this all mean?

8

Branches by metros 2010–2016

10

Glossary

11

3


Future state:

5

changes on the horizon for branch banks 1

2

The number of branch locations will continue to shrink—and we won’t miss them—as banks optimize market needs.

Mobile apps and the broader applications of FinTech will streamline personal and business banking, seamlessly changing how customers use branches.

3

4

5

Banks will shrink branch sizes, saving billions in real estate costs annually, as they refocus to meet changing consumer behavior.

In the future, not all branches will be created equal as banks tailor branches to meet customer needs and demographics— from a handful of full-scale operations to much smaller locations for basic transactions.

Automated branches are coming—as public acceptance gains traction, expect to see greater use of “centralized” tellers to handle basic transactions.

Number of U.S. bank branches 2007 97,000 2017 89,300 2027 71,500 (est’d)

New construction

Under development

475 branches 2.4 million s.f.

100 branches +500,000 s.f.

(2014–2016)

(2017)

4


Current state: Branch banking Before the 2007 financial downturn there were 97,000 bank branches in the U.S. Today, there are about 90,000 and we could see a further 20 percent reduction over the next 10 years.

Today’s banking industry is a diverse business, fulfilling the finance needs of both consumers and corporations. Despite a complex corporate landscape, branch banking continues to be an integral part of the industry. Branches directly serve the basic banking needs of personal and business customers, as well as providing vital access to services for borrowers in low- to moderateincome neighborhoods through Community Reinvestment Act (CRA) efforts. In fact, through their simple daily transactions, branches are the most immediate and visible way individual customers interact with banks.

Branches formed the front line for banking operations. At the most basic level, banks used a strategy of “overwhelming” force in their branch networks to demonstrate market superiority. The idea was simple: more branches were thought to yield greater customer awareness—and through that, a brand could garner higher market share.

now about how effectively the bank is delivering services to its customers and their need for remote, anytime, anywhere access for their transactions —the “clicks.” Bank holding companies are navigating these challenges. While customer access at the branches remains a priority, especially for small businesses, the necessity of a branch network must be balanced with today’s rapidly expanding mobile platforms, as well as FinTech advances.

Bricks vs. clicks With the evolution of online and mobile banking services, the branchon-every-corner model has evolved. It is no longer about which brand has the most locations—the “bricks.” It is

Banks have been quietly consolidating and optimizing

Branch bank growth and retraction by metro area Seattle Portland Minneapolis – St. Paul Milwaukee

San Francisco San Jose

Sacramento

Chicago

Salt Lake City

Cleveland

St. Louis

Columbus Cincinnati

Raleigh - Durham Charlotte

Atlanta

San Diego

Washington, DC Richmond Virginia Beach - Norfolk

Nashville Los Angeles

Hartford New York Philadelphia

Indianapolis

Denver

Boston

Stamford Detroit Pittsburgh

Phoenix

Retraction Growth

Dallas – Ft. Worth +2.01% — +4% 0% — +2% -1.99% — 0% -3.99% — -2% -5.99% — -4% -7.99% — -6% -9.99% — -8% -11.0% — -10%

Jacksonville

Austin San Antonio

Houston

Tampa

Orlando Miami – Ft. Lauderdale

Source: FDIC Summary of Deposits, JLL Research

5

One final note: Since the Recession, deposits have steadily increased indicating that banks have been doing more with less. As noted in the accompanying chart, deposits have risen 70 percent, to $11.3 trillion, as of 2016. This map also highlights deposit growth by state. The growth and decline in branch bank deposits by state

This decline in branches is widespread and few markets are immune. Even high-growth areas in Florida, Texas and the West have seen a reduction in bank branches. Although a few markets seem to have bucked this trend, net branch additions in these markets are modest and may have more to do with local location optimization, as well as bank holding company expansion and M&A dynamics, than a targeted growth initiative.

Total U.S. branches 102,000

Total U.S. deposits $12.0

U.S. branches Deposits (trillions)

100,000

$10.0

98,000

$8.0

96,000

$6.0

94,000

$4.0

92,000

2016

2015

2014

2013

$0.0

2012

88,000

2011

$2.0

2010

90,000

2009

New development continues, but at a restrained pace. According to our review, fewer than 100 branches are currently under development, at an average size of 5,300 square feet. These new branches are most often freestanding properties in traditional suburbs. New banks are also selectively opening as ground floor uses in denser, urban areas. These branches are often much smaller, and in places like NYC, can be well under 1,500 square feet.

Source: FDIC Summary of Deposits, JLL Research

2007

This is not meant to imply that the branch bank is disappearing. Branch openings are also taking place, albeit on a selective basis. We estimate that between 2014 and today, around 475 new branches have been constructed in the U.S., accounting for 2.4 million square feet of space at an average of 5,100 square feet per branch. While some of these may have included the relocation of existing branches, all are new construction. The average size of these branches is consistent with the sizing of existing branches across the markets we reviewed which suggests that banks are slow to change their local branch model.

-4%–0% 0.01%–5% 5.01%–10% 11.01%–15% 15.01%–20.75%

Total deposits percent change 2015–2016

2008

branches behind the scenes over the last decade. Just before the 2007 global financial downturn, there were roughly 97,000 branch banks in the U.S. Banks continued to turn out more branches through 2009 until the severity of the recession encouraged U.S. banking companies to tighten operating costs. At the same time, mobile banking began to take a firmer hold as more consumers embraced smartphones. Mobile technology allowed early adopters to complete many typical transactions without ever entering a branch or being tied to their computers. As a result, the FDIC estimates that today, on a net basis, there are almost 7,700 fewer branches in the U.S. This represents a decline of close to 8 percent in the number of bank locations nationwide.


It is no longer about which brand has the most locations—the “bricks” —but how effectively the bank is delivering services to its customers and their need for remote, anytime, anywhere access for transactions—the “clicks.”

6


Branch leasing & investment trends While overall branch numbers have been declining, the approximately 90,000 branch banks in the U.S. represent a robust, mature, yet evolving industry. In terms of leasing trends, banks are still taking up new space as they look to position their brands across markets, especially in growing areas, as they follow both residents and jobs. Because new location decisions are made on an individual basis across markets and balanced against existing brand locations, site availability, and competition, it is difficult to identify broad trends. Rents for bank branches vary significantly by market and micro locations, as well as freestanding versus ground floor operations in commercial buildings. Triple net rental rates can range from $20 to $25 per square foot in small markets to well over $75 to $100 per square foot in high-demand locations in major metropolitan areas. In fact, in dense urban areas like NYC, triple net rents for high-traffic, ground floor branch space can easily span $200 to $400plus per square foot. NNN bank branch sales As part of our industry review, we also examined the investment sales trends for triple net leased (NNN) for bank branches. This sector, which tends to focus on the freestanding branch bank, has consistent transaction flow and the underlying asset financials are very transparent because values are based purely on net operating income. Our analysis of sales completed since 2010, and some

currently being marketed, covers 4.0 million square feet of branch space and more than $2.3 billion in transaction value. In looking at this pool of deals, we’ve seen notable cap rate compression. Like other commercial real estate asset classes in this economic cycle, NNN cap rates have declined from 6.2 percent for assets sold during 2010– 2013 to less than 5.0 percent for properties now being marketed. It’s the perceived safety and predictability of the triple net asset class that’s driving this cap rate tightening. In addition, branch net operating income is up 7.0 percent overall due to higher rents that are indirectly supported by the increase in branch deposits.

From a property perspective, the average branch size in these transactions is stable at around 5,000 square feet. Rental rates (NNN) presently average $35 per square foot. This is up slightly and reflects current sector averages. In comparison, rents for newly constructed branches come in at $33–$34 per square foot for the typical branch.

7


U.S. region (2010–2013) Average branch size (s.f.)

Cap rate

Average NOI

Average price/s.f.

Average rent

6,409 4,032 5,092 5,655 5,156

6.08% 6.11% 6.85% 5.88% 6.18%

$192,497 $164,439 $174,924 $173,917 $175,177

$497 $662 $501 $523 $547

$29.72 $40.49 $34.36 $30.75 $33.80

Average branch size (s.f.)

Cap rate

Average NOI

Average price/s.f.

Average rent

3,403 5,192 5,873 4,362 4,988

4.98% 5.83% 5.79% 5.17% 5.60%

$167,037 $141,048 $203,930 $139,014 $157,186

$986 $466 $600 $617 $563

$49.09 $27.17 $34.72 $31.87 $31.51

Average branch size (s.f.)

Cap rate

Average NOI

Average price/s.f.

Average rent

4,102 4,732 5,290 6,525 5,372

4.75% 5.11% 5.48% 4.52% 4.89%

$178,384 $183,569 $171,740 $207,567 $186,676

$915 $759 $593 $704 $718

$43.49 $38.80 $32.46 $31.81 $35.12

Northeast South Midwest West U.S. average

U.S. region (2015–2016)


U.S. region (new offerings)


8


What does this all mean

?

The branch bank is evolving. The old branch model that relied on sheer numbers to win market share is being replaced by a more focused, customer-centric approach.

Typical costs to make a deposit Teller = $8.00 ATM = $0.80 Mobile = $0.08

While it may make strategic sense to eliminate (or redevelop) older, less productive locations and open new ones that are sized appropriately to meet current demands, this can only happen as existing leases mature. Because of this, continued industry consolidation and location optimization will happen in stages— and will take years to fully play out.

Linear vs. Exponential Rate of change

Branch numbers and square feet will continue to decline, even in growth markets, as banks look to find more effective ways to meet customer expectations—and manage their costs. The challenge for the banking industry is that this change cannot happen overnight. Even with today’s technology revolutionizing financial services, customer acceptance takes time.

20%

IoT/Adoption “Technology”

Total branch reduction R/E

Time

A good example here is the use of automated tellers. The cashdispensing ATM machine has been around for more than 30 years and now receives almost universal acceptance. A simple advancement such as the introduction of automated tellers contacted remotely via interactive screen might take almost as long to gain acceptance. The most significant industry challenge right now in the evolution of the banking sector isn’t technology but real estate. Because existing branches all have leases in place (often with five or more years left on the term), optimizing market coverage is neither easy nor quick.

Based on our analysis of current rental rates, this overall shift could save the banking industry $8.3 billion annually in direct real estate costs alone. This, of course, does not include any labor cost savings associated with a more efficient footprint and operations.

91 million

Reduced space needs (s.f.)

$3.2 billion

Annual cost savings

Significant cost savings What is critical to understand is that the cost savings from this shift can be significant. As branch bank consolidation continues, we could expect to see another 20 percent reduction in existing branches. At the same time, as banks perhaps move to a dual regional plan with a limited number of large, full-service operations that are complemented by smaller units offering only basic transactions the average branch will shrink significantly. This “dual strategy” could easily take the average “convenience” branch from 5,000 square feet to 3,000 square feet or smaller.

2,000 s.f.

Downsize remaining branches

146 million

Reduced space needs (s.f.)

$5.1 billion

Annual cost savings

Total annual real estate cost savings

$8.3 billion

9

As this shift takes place, there will be greater emphasis on the reuse and redevelopment of existing branches. Quite simply, not all branches need to be “closed” in favor of new operations. Many locations are in the right place and serve established markets. The issue is that many operations may be too big for today’s market—and reuse of these properties is a challenge from a physical development perspective. For example: Subleasing surplus space as a coffee shop is a popular notion that works in select locations, but is not a universal solution. Some operations could become regionally serving, fullservice branches. In other cases, branches may need to be razed to make way for complete redevelopment to a more modern standard—a trend that especially impacts freestanding locations.

Surplus space More than likely, concerted efforts will be made to repurpose good locations because they remain competitive. Downsizing and reconfiguring these branches is not easy and could ultimately result in surplus, unproductive space from the bank’s perspective. Strategies to redeploy this space will become an increasingly important industry topic over the next few years, and will entail finding compatible shared space, cotenancy options or other cost-effective alternatives to generate revenue. Not all branches fit into this reuse category. Many branches will be vacated because they are no longer in competitive locations. For others, demographics and/or retail shopping patterns may have deteriorated to the point that sites become tough to reuse or re-tenant. Clearly, owners will have greater flexibility in redeveloping inline retail locations for non-bank tenants versus more singlepurpose, freestanding locations. For the banking industry, the tides of change are significant and unrelenting. Technology will continue to advance and banks will have to constantly adapt to engage both corporate and personal customers. To lead, successful banks will have to thoroughly understand how and why consumer behavior is changing. Banks will have to proactively adapt their platforms, be it by “bricks” or “clicks.” Right now, the industry still tends to focus on bricks and mortar because it’s the way they’ve always done business. As FinTech’s reach makes even more “mobility” possible, online banking will become increasingly important. This does not mean that the


traditional branch will vanish. Far from it. Rather, a successful strategy will embrace both physical property and technology—and optimize each to respond to individual customer needs.

Subleasing surplus space as a coffee shop is a popular notion that works in select locations, but it’s not a universal solution.

10


Branches by metros 2010–2016 Branches

Total change in branches

Metro market

2010

2011

2012

2013

2014

2015

2016 2010–2016

Atlanta-Sandy Springs-Roswell, GA

1,399

1,383

1,361

1,337

1,313

1,294

1,284

Austin-Round Rock, TX

470

466

468

476

476

467

467

(3)

Baltimore-Columbia-Towson, MD

833

822

813

802

770

747

728

(105)

1,517

1,522

1,516

1,526

1,540

1,516

1,527

10

0.7%

1

0.1%

416

411

409

399

388

382

368

(48)

(11.5%)

(31)

(7.8%)

Boston-Cambridge-Newton, MA-NH Bridgeport-Stamford-Norwalk, CT Charlotte-Concord-Gastonia, NC-SC

(115)

Percent 2013–2016 (8.2%)

Percent

(53)

(4.0%)

(0.6%)

(9)

(1.9%)

(12.6%)

(74)

(9.2%)

579

581

573

562

550

549

543

(36)

(6.2%)

(19)

(3.4%)

3,228

3,209

3,183

3,148

3,031

2,972

2,863

(365)

(11.3%)

(285)

(9.1%)

Cincinnati, OH-KY-IN

813

808

803

788

771

764

754

(59)

(7.3%)

(34)

(4.3%)

Cleveland-Elyria, OH

702

722

731

720

707

691

679

(23)

(3.3%)

(41)

(5.7%)

Columbus, OH

585

596

587

585

565

567

564

(21)

(3.6%)

(21)

(3.6%)

1,812

1,740

1,731

1,738

1,729

1,718

1,711

(101)

(5.6%)

(27)

(1.6%)

733

719

715

694

684

670

657

(76)

(10.4%)

(37)

(5.3%)

1,157

1,146

1,133

1,117

1,083

1,043

1,049

(108)

(9.3%)

(68)

(6.1%)

Hartford-West Hartford-East Hartford, CT

391

397

392

394

396

382

377

(14)

(3.6%)

(17)

(4.3%)

Houston-The Woodlands-Sugar Land, TX

Chicago-Naperville-Elgin, IL-IN-WI

Dallas-Fort Worth-Arlington, TX Denver-Aurora-Lakewood, CO Detroit-Warren-Dearborn, MI

1,558

1,534

1,530

1,526

1,514

1,493

1,482

(76)

(4.9%)

(44)

(2.9%)

Indianapolis-Carmel-Anderson, IN

639

640

636

610

585

575

553

(86)

(13.5%)

(57)

(9.3%)

Jacksonville, FL

325

320

311

310

318

320

317

(8)

(2.5%)

7

2.3%

Los Angeles-Long Beach-Anaheim, CA

2,423

2,461

2,482

2,498

2,507

2,477

2,456

33

1.4%

(42)

(1.7%)

Miami-Fort Lauderdale-West Palm Beach, FL

1,626

1,619

1,655

1,665

1,651

1,646

1,619

(7)

(0.4%)

(46)

(2.8%)

Milwaukee-Waukesha-West Allis, WI

604

585

577

578

554

550

552

(52)

(8.6%)

(26)

(4.5%)

Minneapolis-St. Paul-Bloomington, MN-WI

872

861

855

843

827

821

815

(57)

(6.5%)

(28)

(3.3%)

Nashville-Davidson-Murfreesboro-Franklin, TN

590

589

593

598

602

595

598

8

1.4%

0

0.0%

6,043

6,057

6,001

5,971

5,905

5,855

5,735

(308)

(5.1%)

(236)

(4.0%)

618

611

612

601

584

580

570

(48)

(7.8%)

(31)

(5.2%)

1,924

1,917

1,889

1,833

1,783

1,765

1,732

(192)

(10.0%)

(101)

(5.5%)

Phoenix-Mesa-Scottsdale, AZ

942

933

928

913

900

889

867

(75)

(8.0%)

(46)

(5.0%)

Pittsburgh, PA

878

876

873

871

853

838

825

(53)

(6.0%)

(46)

(5.3%)

Portland-Vancouver-Hillsboro, OR-WA

572

580

590

583

563

557

546

(26)

(4.5%)

(37)

(6.3%)

Raleigh-Durham, NC

441

443

439

426

424

424

423

(18)

(4.1%)

(3)

(0.7%)

Richmond, VA

373

369

362

360

345

350

347

(26)

(7.0%)

(13)

(3.6%)

Sacramento-Roseville-Arden-Arcade, CA

424

425

427

427

423

412

405

(19)

(4.5%)

(22)

(5.2%)

Salt Lake City, UT

255

256

252

247

242

240

230

(25)

(9.8%)

(17)

(6.9%)

San Antonio-New Braunfels, TX

476

465

453

452

447

443

437

(39)

(8.2%)

(15)

(3.3%)

San Diego-Carlsbad, CA

615

634

637

633

622

608

599

(16)

(2.6%)

(34)

(5.4%)

San Francisco-Oakland-Hayward, CA

1,049

1,062

1,069

1,085

1,086

1,056

1,043

(6)

(0.6%)

(42)

(3.9%)

San Jose-Sunnyvale-Santa Clara, CA

350

354

364

368

372

367

361

11

3.1%

(7)

(1.9%)

Seattle-Tacoma-Bellevue, WA

926

933

939

941

925

909

903

(23)

(2.5%)

(38)

(4.0%)

St. Louis, MO-IL

940

947

943

922

921

916

917

(23)

(2.4%)

(5)

(0.5%)

Tampa-St. Petersburg-Clearwater, FL

790

788

786

785

767

751

739

(51)

(6.5%)

(46)

(5.9%)

Virginia Beach-Norfolk-Newport News, VA-NC

385

386

368

363

355

351

334

(51)

(13.2%)

(29)

(8.0%)

1,781

1,790

1,778

1,750

1,719

1,697

1,677

(104)

(5.8%)

(73)

(4.2%)

43,054 42,957

42,764

42,445

41,797

41,247

40,653

(2,401)

(5.6%)

(1,792)

(4.2%)

New York-Newark-Jersey City, NY-NJ-PA Orlando-Kissimmee-Sanford, FL Philadelphia-Camden-Wilmington, PA-NJ-DE-MD

Washington-Arlington-Alexandria, DC-VA-MD-WV Total - JLL markets

11


Glossary

ATM:

Automated teller machine. First introduced in the U.S. in 1969, it is now estimated that there are more than 3 million ATMs worldwide with more than 500,000 in North America.

Automated banking:

FinTech:

Automated tellers utilize a large screen to connect a branch customer directly with a teller at a remote location. While customer acceptance has been mixed, branch automation is coming. By using centralized tellers, banks can seamlessly serve their customers’ basic transaction needs and balance daily workflow across all branches. Broader advances in FinTech will enable banks to conduct more complex transactions at automated tellers and neutralize one of today’s key customer criticisms.

Short for “financial technology”; streamlining and mechanizing banking processes ranging from payments and investments to lending and accounting for retail, corporate and private banking. FinTech facilitates efficiencies in B2B, B2C and C2C activities. Also closely associated with “blockchain,” which utilizes complex, interrelated databases that incorporate machine learning to manage and maintain financial ledger transactions automatically.

Walter Bialas Director of Research +1 214 438 6228 [email protected]

Christian Beaudoin Senior Director of Research +1 312 228 2020 [email protected]

Geno Coradini Executive Vice President +1 214 438 6415 [email protected]

About JLL

About JLL Research

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $136 billion. At year-end 2016, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of more than 77,000. As of December 31, 2016, LaSalle Investment Management has $60.1 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.

JLL’s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today’s commercial real estate dynamics and identify tomorrow’s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions.

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Banking Outlook | 2017 - JLL - JLL | Global commercial

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