Bank-Occupied STNL Assets Pose Challenges for Buyers and Sellers

There are approximately 453 single-tenant bank-occupied properties on the market for sale in the US.

A president of a large banking institution recently told me that bank branches have become very expensive billboard advertising for the brand. The older age demographic still likes to go “visit” their money, drop off or add something to their safe deposit box, or just enjoy a fresh cookie and a cup of unexceptional coffee. If you ask a younger person where they bank, a typical reply is: “Um…I have never been in a bank, I do everything through my app.” While larger stores are closing, bank branch footprints have been shrinking into 750-square-foot sites with two employees, desktop computers, and an ATM machine. Some banks, such as Capital One, have created Capital One Café, which also happens to be a bank branch.

All this change can be attributed to the combination of mobile/online banking technology and the fact that people are using less and less cash to buy things. The trends for how consumers spend money and conduct financial transactions have been picking up even more steam during the COVID-19 crisis, as they generate an accelerated amount of adoption and acceptance from demographic groups that had been resistant to utilizing them prior to the crisis. As a result of all these dynamics, we are seeing a significant amount of for-sale inventory on the market that consists of bank-occupied assets or those that were vacated by a bank branch over the past several months.

Per CoStar records, there are approximately 453 single-tenant bank-occupied properties on the market for sale in the US. Of these listings, 187 are marketed by an owner/user. Of that 187, 116 of those listings are vacant. However, there is a high potential that even more of those could vacate in the near future. To provide further insight, there are currently 282 single-tenant bank-occupied properties for lease right now in the U.S. – 102 of those locations are vacant.

I have had an increasing number of clients asking me about this property type. Should I sell? Should I hold? Should I buy? While every situation is unique, it is important to be realistic about an asset and what its future holds in order to create a data-driven scenario that addresses the risks and rewards in a creative and honest way.

If a seller wants to dispose of this property type, it is important to understand the local market, lease terms (if it is occupied), potential new tenants, and improvement costs in order to educate and inform the potential buyer pool on a full range of options. What we do know, based on the high inventory across the nation, is that it is a buyers’ market for bank occupied assets. But a bank property may not be the right fit for all STNL buyers.

Private investors beware: Because of the number of vacancies, and subsequently bank-occupied, STNL assets on the market, private buyers—especially those that are in a 1031 exchange—should be weary of investing in this asset type. 1031 exchange buyers are oftentimes looking to stay within the allotted time period to complete their trade. However, this should not translate into making a hasty decision that may have negative consequences contrary to the primary investment goal many STNL investors have, which is: a stable, passive, long-term hold that is, most importantly, worry-free.

Opportunistic play: For retail, location is always crucial, and, overall, bank branches enjoy some of the best positioned single-tenant real estate pads out there. They are situated in highly visible, highly trafficked locations in dense retail corridors. While some buyer types are looking for security, others in times of change seek an opportunistic play. Vacated, previously bank-occupied property can be a good fit for their investment appetite. If the price is right, and with a realistic creative vision for a new use, a bank property can be an ideal asset to create a strong projected return on investment. A word of caution: the deal needs to pencil, and it is important to understand the renovation costs for this highly improved asset category—for example, vault removal can cost upwards of $100,000.

Christopher E. Maling is principal – Retail Capital Markets at Avison Young.