For each of the past 11 years, the number of bank branch closings has surpassed the number of bank branch openings, according to FDIC data.
But the closings aren't necessarily representative of a struggling sector.
"A lot of people think it's a deteriorating sector because there have been more closings and openings in the last 11 years every single year, but some of that can be explained by mergers, like BB&T and SunTrust," says Randy Blankstein, president of The Boulder Group. "Obviously, when two companies merge, some branches are closed because there is overlap. There has been consolidation within the last 10 years in the banking sector."
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On top of this, the banking industry is going through a revolution of sorts with an emphasis on mobile banking.
"I think the banking industry has realized with mobile and everything else that you don't need as many locations and they don't need to be large locations," Blankstein says. "A lot of the things that were built in the 70's, 80's and even some of the 90's have much larger footprints than they need. I think the future of banks is more very small footprints and extended drive-throughs. Obviously, mobile banking will continue to gain market share."
Blankstein expects more mergers and acquisitions among banks, which means that the closings will continue.
"I don't think [in-person banking] goes away, but there will certainly be a smaller number of bank branches in the future," he says.
Still, investors haven't run away from the space, which was proven in Q1 as cap rates fell. "It's one of the few sectors where you can get investment-grade, long-term leases," Blankstein says. "And no one is really concerned about Chase, Citibank and Wells Fargo. They may be concerned about their branch's future, but not the future of the company."
It's understandable that investors would be nervous about buying bank locations right now. "Retail bank branches get lobbed into retail and that's out of favor, like certain big box stores," Blankstein says. "It's always a little nerve-wracking to invest into a shrinking market."
Blankstein thinks investors will also avoid credit unions and very small regional banks.
"There is less development among the major banks," he says. "So the lease terms are coming down."
To understand which bank branches will remain open, investors will need to monitor branch deposits, in-place rental rates and physical real estate locations.
"You have to be more careful that your branch has good deposits and you like the residual real estate where even in a merger your location would be surviving within that marketplace," Blankstein says.
If the location is strong, there could be other uses even if the bank branch is closed. "Some [locations] have favorable real estate characteristics like drive-throughs that are approved," Blankstein says. "But that's a business model that doesn't work for everybody as far as the re-tenanting."
Even if another use works, there are still downsides. "They aren't going to be paying the same amount as the bank is paying," Blankstein says.
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Leslie Shaver
Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.
