Banks continue to shutdown branches across the country, but investors see creative reuse opportunities for these locations.
The typical closed branch encompasses around 8,000 to 14,000 sq. ft. of space, with some branches reaching up to 25,000 sq. ft. or 35,000 sq. ft., says Walter Bialas, vice president of research with real estate services firm JLL. This is where creative reuse of space comes into play.
“Take a 25,000 square foot outparcel, for example,” says Bialas. “With larger retailers under pressure and limited growth in that sector, you have to match a user with the space. Even many restaurants are not this large, so it becomes a challenge to lease or sell the space and maybe develop a plan to divide the space for multiple users, which is why office type users often fit the best.”
A typical fast-food restaurant encompasses anywhere between 1,000 sq. ft. and 3,000 sq. ft., says Navin Nagrani, executive vice president at Hilco Real Estate, a real estate services company. Fast casual restaurants can occupy anywhere between 2,000 sq. ft. to 4,500 sq. ft.
“A branch bank tends to have a certain footprint and is mostly geared to an office use,” says Bialas. “Having a branch turn into a financial services office for an insurance company is an easy fit. As you move into other uses like retail or restaurants or health clinics, it requires a complete rebuild of the space.”
However, in Chicago, the top two leading uses of closed bank branches in 2019 were fast casual restaurants and health clinics. Nineteen percent of closed branches changed use to fast casual restaurants, while 17 percent changed their use to health clinics. Only 7.5 percent of closed bank facilities went to other financial institutions, according to a JLL Branch Banking 2020 report.
A fast-food restaurant operator “may actually want to take over a bank branch” because of their high visibility and infrastructure, says Nagrani. Most branches already have space dedicated to drive-throughs and receiving zoning for this type of layout “sometimes can be difficult to get” for restaurants, he notes.
“The costs to repurpose a branch can be significant,” says Bialas. “However, the level of investor interest will depend on various characteristics [such as] intended use, overall location, size of the branch, competition or complementary nearby uses, area demographics, etc. Good location will garner interest and potentially an investor willing to adapt the property into something new or different.”
While a few large institutions announce reuse plans in advance of closing a branch, other institutions “may see this as a sunk cost and will look for a buyer or a renter passively, choosing to keep the asset on the books until the lease is up and then turn it back to the landlord or a buyer [if one] is found,” says Bialas. Well-positioned suburban spaces, in areas with stable or growing demographics, can often be repurposed by another bank or financial institution because they have similar office-oriented space requirements.
The average time to sell a vacated branch is nine and a half months, while the average time to sublease is slightly over a year, according to the JLL report. Outparcels and endcaps with high visibility and quality signage are often in high demand. In-line spaces, in contrast, can be more difficult to fill and are more commonly repurposed for other uses, such as restaurants, convenience stores or clinics, JLL data shows.
“Visibility is key. Parking in suburban locations is also paramount and [outparcels and endcaps] often have ample parking proximate,” says Bialas. “In-line space, in contrast, lacks some of these ingredients and may need to be transitioned to some complementary retail use.”
Urban bank branches situated in easy-to-access locations “will probably stay in use,” despite the size of the facility being too large by today’s standards and branch functions turning more digital, according to Bialas. But branches that are lacking in visibility, access or demographics may “struggle to find a reuse plan” and remain vacant for a considerable length of time.
Banks continue to close branches across the country with no end in sight, according to JLL research. Close to 1,700 branches closed in 2019, around a 1.9 percent decline in the number of branches in the market. The trend is even more pronounced for the top 25 institutions, as large banks closed 1,450 branches, equality to roughly a 3.7 percent decline in their locations.