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WILL THERE BE MAJOR BANK BRANCH CLOSINGS?

As one by one banks are swallowed up by the few financial institutions still standing, the question becomes: What about my bank? Will my branch still be there in a month or two? It’s a valid question, and with the announcement that Chase plans to close several WaMu sites, it becomes more and more likely that the answer to the question is no. Certainly many of our poll respondents doubt bank branches will escape unscathed. A staggering 78% expect to see major branches close. Only 22% doubt the closures will be widespread. Mark Zurlini, a principal with Palisades Financial, forsees closures not only in bank branches, but in other businesses as well. Here are his thoughts:

“Now stand the big three: Citigroup, Bank of America and JPMorgan Chase. With each of these banks growing by consolidating through acquisitions, there stands to be overlapping of branches, not only in major cities (Washington Mutual has 139 branches in New York City alone that may be closed) but also on Main Street America. In Main Street locations, the vacated branches will be leased or sold to the many well-capitalized local banks that believe they are positioned to capture deposits and increase their market share with the promise of better customer service.

“In New York City, banks created a bidding war over the last several years that drove up rents for prime locations. It may be difficult to find another bank because of consolidation or an alternative use tenant willing to sub-lease at the current rent.

“There are many good community banks that maintained conservative, disciplined lending practices throughout the boom years of the CMBS market. Additionally, local banks did not get caught up in the sub-prime lending frenzy because most, if not all, of their 1-4 family loans were held on their balance sheets. These banks are now in a position to take advantage of the fallout created by the follies of the CMBS market over the past 15 years. Many local and regional balance sheet lenders have been able to pick up new business from quality real estate owners who they have not seen in as many years. Many have been able to attract the $15 to 20 million loans, a hefty increase from the typical $2 to 5 million arena they were accustomed to playing in. Although they continue to lend, they realize that, in a declining market, they need to be more conservative in their underwriting.

“Most lenders have already adjusted their lending criteria. Borrowers will have to come up with 30% or more equity when purchasing real estate. The days of 90 to 95% financing created by the combination of senior and mezzanine debt are long gone. Loan-to-value ratios are in the 60 to 75% range for most asset classes. Properties are now underwritten on current cash flow and not projections that reach out five years or more. As we have recently witnessed, those projections never came to fruition. The increase in the equity requirement will force capitalization rates to increase, thereby reducing the value of the asset.

“Sellers, on the other hand, have yet to come to terms with the fact that their properties are not worth as much as they may have paid for them in the last few years due to the increase in cap rates and equity requirements. In many cases, real estate assets, which are typically long-term holds that appreciate over time, were financed with short-term debt. As these loans come due in two- to three-year terms, owners will find themselves in a situation where they will most likely be unable to refinance their current debt levels without coming up with additional equity.

“The loss of thousands of jobs in the financial sector and the consolidation of financial institutions will certainly lead to an increase in office vacancy rates. In addition, consumers will retract and spend less (and maybe save for a change) on goods and services that will result in the retail sector being hit. We have already seen vacancy rates increase in small towns that have created new upscale retail shops in the last five years as tenants cannot afford to pay the high rents plus the increase in real estate taxes and utility costs that are typical in triple net leases. Landlords will be facing trying times to keep their spaces occupied.”

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