As retailer bankruptcies rise, there's still one shopping center tenant category that remains free from credit risk: banks. In the past year, consumer financial institutions have begun gobbling up real estate as they roll out aggressive branch expansion programs across the United States. Shopping center landlords are eager to cash in, whether through inline space or ground leases for freestanding buildings.

Among the most aggressive expanders are National City Bank, Bank of America, LaSalle Bank, Bank One, Harris, TCF, Washington Mutual and Fifth Third.

“As we are building individual branches, we are really building a network,” says Al Watson, a facility planner for Charlotte, N.C.-based Wachovia Bank N.A. “It's all about adding value to customers by providing access to them — where they live and where they work.”

Wachovia, which has 2,600 U.S. branches, plans to open 50 more this year, compared with 20 in 2003 and no more than a dozen in any previous year.

The surge in activity also reflects pent-up demand. Throughout the 1990s, banks focused on expanding other channels such as call centers, ATMs and online banking. Bank expansion slowed as many speculated that the Internet was going to reduce the need for physical branches.

“The pendulum has swung back dramatically the other way in the last couple of years,” says Chuck Stroup, a senior vice president at Minneapolis-based U.S. Bank. “Banks have decided that there is still a need for brick-and-mortar locations, and that customers are still looking for a way to do their banking face-to-face.” U.S. Bank plans to open 150 new locations in 2004.

Convenience

The top priority for expansion-minded banks is securing convenient locations. And in their searches, they're willing to explore many options — from freestanding locations at high-traffic intersections to inline space at local shopping centers.

“Banks like to be conveniently located for their customers,” says Shannon Pope, a senior associate in the retail brokerage division of HSA Commercial Real Estate in Chicago. That could be near a Wal-Mart, a grocery store or a major intersection.

Pope, along with her associate Michael Havdala, recently assisted National City Bank's move into the Chicago market. In 2003, the pair completed 13 retail branch locations for National City Bank in a combination of land sales and lease transactions. New stores include locations in Lincoln Park, River North and Bucktown — all of which take advantage of nearby public transportation stops and a high volume of foot traffic, Pope notes.

“Typically, we are looking for destinations that our customers will be frequenting on a regular basis such as shopping centers, business parks or downtowns,” says Wachovia's Watson. The basic criteria Wachovia has for those destination locations are easy access, good visibility and a strong presence.

Wachovia will consider both inline and freestanding locations. However, the bank's first preference is freestanding sites because they tend to have better visibility and access, as well as dedicated parking. “We also have more control over what type of space we can build, and we want to emulate our brand in terms of the space and building,” Watson says.

However, inline spaces tend to be more readily available and less expensive. “It is much easier to find available space inline than to assemble corners that are not on the market,” Pope says. Pad sites available for development can be difficult to find, particularly in mature markets. Another advantage of opening inline bank branches is that the turnaround time from finding a site to opening the branch is much quicker because there is no lengthy construction process as in ground-up development.

Regency Centers recently sold a 1.47-acre outparcel at its Johns Creek Shopping Center in St. John's County, Fla. to Bank of America for $1.35 million. The center will be anchored by Publix and will include 30,000 square feet of small shop space.

Take it to the Bank

Shopping centers certainly rank at the top of the list for convenient destinations due in large part to the steady flow of repeat traffic. “Banks would like to make it easy for their customers to access. If someone is already going to a grocery store once or twice a week, it is not out of the way to do business at the bank next door,” Pope says.

“In a lot of cases, a neighborhood center with a quality grocery anchor is an outstanding location, simply because most families are shopping at that center one to three times per week,” says Andy Hawkins, a vice president in the Orlando office of Dallas-based Trammell Crow Co. Banks also are migrating to larger community and power centers with high volumes of consumer traffic.

Grocery-anchored centers certainly meet Wachovia's criteria for convenient locations. However, other retail anchors such as discount chains, drugstores and even home improvement stores possess that same “convenience factor” with high traffic volume and repeat visits each week, Watson notes. It's more about the overall activity and creating a retail destination, as opposed to favoring one retailer over another, he adds.

U.S. Bank, which has the third largest in-store bank network in the country, has its eye on grocery stores. Of the 150 new branches it plans to open this year, 100 will be located in existing stores. It already has 342 branches in grocery stores. Most new branches will be in Safeway stores in California, Arizona and Nevada.

The advantages of in-store branches are clear. For one thing, rents average about $3,000 a month, far less than the estimated $2 million cost of constructing a new stand-alone facility, according to Stroup. The bank also gets to tap in to existing foot traffic. Grocery stores average about 20,000 visits per week, while some superstores get 40,000 to 50,000 visits a week. “From the customer's perspective, it saves them a trip,” Stroup says.

U.S. Bank's in-store branches are typically about 400 square feet, and feature traditional teller windows and private offices that cater to home equity lending and financial counseling. For the most part, U.S. Bank engages in a five-year lease direct with the grocer, with an option to extend.

Aggressive Expansion

Medium and small banks led the charge back to branch expansions beginning in the fourth quarter 2002, followed closely by major expansion campaigns from large institutions. Bank of America, for example, opened 150 new locations in 2003, has 165 planned for 2004 and 200 new branches slated for 2005. “I think banks have come to the realization that it is hard to sell loans on the Internet, and they still have to draw customers back into the bank,” Hawkins says.

That expansion frenzy is good news for retail owners. “Banks are a desirable tenant for us. They are certainly creditworthy and they offer a great amenity for our customers,” says Scott Schroeder, a spokesman for Beachwood, Ohio-based Developers Diversified Realty Corp. Often, banks are interested in outparcel lots, and Developers Diversified sees about a 50-50 split between ground leases and purchased pad sites for new banks.

Banks also can help drive traffic to a center. Customers typically visit branches two or three times a month, Pope says. “Landlords love banks as tenants because they have great credit, a nice build-out and will do a long-term lease,” she adds.

RENEWED INTEREST

THAT WAS THEN

Throughout the 1990s, banks focused on expanding channels such as call centers, ATMs and online banking. Brick-and-mortar expansion slowed as many institutions speculated that the Internet would reduce the need for physical branches.

THIS IS NOW

Many customers are still looking for a way to do their banking face-to-face and banks are responding. U.S. Bank plans to open 150 locations in 2004, Wachovia will open 50, Bank Of America will open 165.

THE AGGRESSORS

National City Bank, Bank of America, LaSalle Bank, Bank One, Harris, TCF, Washington Mutual, Fifth Third and Wachovia are among the most prolific expanders.

BANKERS' PREFERENCES

Banks prefer freestanding pads because they have better visibility, access and dedicated parking. But more are opting for inline stores because the turnaround time from finding a site to opening the branch is quicker because there's none of the lengthy construction associated with ground-up development.