The physical bank branch business is a rapidly evolving situation. To understand why I would suggest we ask two rhetorical questions:
When was the last time you walked into a branch for the bank you have accounts at?
Could you make your household financial situation work without having bank accounts?
For me the answer to question one is unknown, but certainly more than one year ago. On question two I am a hard “no.” At the moment I am responsible for somewhere around one hundred commercial real estate assets. Each asset has a minimum of one bank account per property and in some cases, there are two, three or four plus bank accounts for a property.
The answers to these questions for myself and many of you show a change in the banking industry. Banks have been responding to this in general by moving many of their services online and encouraging their bankers to work with the private banking community virtually or making office calls and visiting the customers at their place of business. ATMs have also started offering many more functions than the traditional one way dispensing of money to customers. Now they take deposits, take loan payments, offer U.S. Mail stamps, etc.
Nine percent of all branch locations in the US closed between 2017 and 2021 — a loss of about 7,500 brick-and-mortar locations*. How can we as commercial real estate investors take advantage of this opportunity?
In the Fall of 2019, I started tracking a former Chase Bank that had been closed due to consolidation. I liked the lot and what the site represented for me as a potential investor. The property had great highlights:
Anchored by Walmart Neighborhood Market
Located along Highway 193 in a booming growth suburb of Layton, UT
The site was located on the hard corner of the shopping center
There was only one vacancy in the adjoining shopping center that contains more than two dozen tenants
I worked with the local broker for Chase Bank and made a market rate offer. Buying from banks is always an interesting process. They do not look and behave like many buyers. Typically, the sales are only on “their terms.” Be prepared for a seller form of PSA with not much flexibility for negotiation, a short (60-90 day DD) and a 30 day close. In almost every case the sale will be as is where is. Mine was no exception from any of this. We tied it up and engaged for 3rd party reports at our expense:
Phase 1 Environmental
ALTA Survey with typography
Architect engaged to shoot the building with their LIDAR machines to create plans
Roof Report from a couple of roof vendors
HVAC Report from a couple of HVAC vendors
All in at a cost of $18,000. Obtaining these reports is really the only way to solve for a more accurate pro forma. Even that can be tricky though and you are typically guessing when you go to re-tenant these buildings unless you 100% know who your tenant is as you get under contract on the site.
We close March of 2020 right when COVID hits. What a wild time… Through some version of serendipity or clean living we end up with a tenant in the Spring of 2020 and start working with a renovation on the drive thru for a local UT coffee operator, Beans & Brew. We execute a lease in May 2020. This was a critical point in the redevelopment process as Beans & Brew is a great tenant, but they are smaller than most of the coffee competition at their leased size of 1,872 square feet. That left us with a remainder size of 2,042 SF in the building. For shop space leasing you always want to pay attention to the depth of your building for the smaller spaces. If you are dealing in 1,000 square foot increments, then most leasing agents are going to want no more than sixty feet of depth maximum providing 16.67’ of frontage for a 1,000 square foot tenant. So we move forward with a plan for a 3 tenant building.
We have a 2,042 SF vacancy and our depth is sixty-five feet leaving us with approximately thirty feet of frontage or fifteen feet if we end up with three tenants in the building. That left us with a scope of work to deliver a reconfigured drive thru for Beans, and then interior work to provide three electrical services, three splits on the HVAC, three ADA restrooms, etc
Our leasing team gains some interest from Little Caesars in occupying one of our spaces. We go back and forth on an 18-month negotiation. Ultimately, we convince Little Caesars to occupy all of our remaining space and sign a lease with them in March 2021. This is a big cost savings to us as the developer. Now we do not need to provide the 3rd electrical service, 3rd restroom, 3rd HVAC setup. We promptly hire a local general contractor and get to work.
The first step is to move the “rotunda” facade that was beautiful for Chase Bank but irrelevant for a modern shop space look. We no sooner take the rotunda off than find structural steel beams that are cross braces in the front of the space. Finding a structural steel beam in an under 5,000 SF retail outparcel building is very out of place. What’s more odd is that we found building plans when we were touring the building and the beams were not on any of the plans. Our LIDAR scanners didn’t pick it up as the beam was behind drywall which ran from the floor to the roof deck.
With the discovery of the beams we come up with a plan to work around them and ultimately deliver the best store front we could have delivered with our onsite conditions. It results in a single door entrance on the Beans & Brew store and then a two single door entrance points in the middle and west sides of the building for Little Caesar’s. We complete the balance of our building work, utility splits, patio, new sidewalk, and drive thru reconfiguration as planned with little to no hiccups. Both tenants take the space and do a first-class job with their buildout work.
The building opened in the Spring 2022 and both tenants have been putting up good sales volumes since opening. When we originally selected this site, the biggest selling point was being in front of the Walmart Neighborhood Market. We recently asked LowCo to complete a state of Utah grocery casing study for us. This Neighborhood Market is ranked as the #2 of 10 stores in UT from a gross sales standpoint. Always good to invest your money adjacent to where the grocers are doing big business.
Building Purchased: 2/22/2020
Construction Complete: Spring 2022
Deal Level IRR: 25.22%
This remodel worked out well for our team and has changed the way we look at bank branches. We now see them as sites of opportunity for groups that are looking for a well-located site with a potential drive thru. Since this project’s completion we have done a few more bank remodels and have a couple more in our pipeline. Commercial real estate is interesting because of the rapid evolution that we see across the market. Often interesting opportunities like this Chase branch come about because of a change in the market which we are always on the lookout for.
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