The Disappearing Bank Branch

Bank branches across the US  continue to bleed out as the COVID-19 pandemic rolls on, and experts caution that the impact on the CRE industry could be profound this year. 

Last fall, US Bancorp made headlines when it announced it would close 15% of its branch locations, including many in supermarkets, in 2021—and in the past several weeks, a growing chorus of similar closures from TD Bank, KeyCorp, and Huntington Bancshares have added to the din. Banks aren’t required to publicly state whether they’re profitable as part of their leases, unlike most retailers who must disclose gross sales, and thus occupancy costs are difficult to determine.

“We must keep an eye on corporate signaling and ensure that we contemplate sufficient retenanting costs in our commercial property analysis for bank branches backing loans,” the report states.

A recent DBRS Morningstar report shows that COVID-19 has continued its relentless push on banks as of late, as more consumers forego branches for digital banking and low interest rates and pressured net interest margins force cost-cutting across the financial services industry. Retail demand for branch space was already in decline prior to the pandemic, and banks have now realized they need less space—much less, in some cases—for those branches that are left standing. Data from Independent Banker shows that the average new branch size has been cut in half, and Morningstar predicts the latest wave of closures will return between 3 to 4.5 million square feet of space to the market to be re-tenanted. 

Alaska, Oregon, New Jersey, Michigan, and North Carolina had the most closures, though some can be attributed to mergers like that between BB&T and SunTrust in 2019. Morningstar notes that banks are increasingly choosing to close unprofitable branches in advance of a lease expiration as the associated costs are often less than those of operating the branch.

The trend away from physical banking has been in play for several years, though the pandemic has accelerated closures. Branch footprints have shrunk from large, expansive ground-level retail space to sub-1,000-square foot sites with a single ATM, and other brands, like CapitalOne, have created café-meets-banking concepts in a move to adapt. Much of the allure in a physical location is related to marketing: “If you can put a bank on a corner with a 100,000 cars passing by in a day, you’re getting your bank branch out in front of a 100,000-plus people, which is a phenomenal form of marketing,” Noah Shaffer, senior director of asset management for Confidant Asset Management, told GlobeSt last summer. But for some banks, the calculus behind that marketing spend no longer makes sense in a challenged environment, and losing branches also impacts landlords, who are losing tenants of the highest credit quality.