How Big Banks Manage Their Own Real Estate

Article excerpt

Taken together, the nation's largest banks occupy over 350 million square feet of office space and spend over $3.5 billion annually on rent and operating expenses.

Pressures to improve profitability have forced banks to scrutinize every expense. To provide the industry with better information on at least one major expense-domestic operating real estate-Julien J. Studley, Inc., in cooperation with ABA's Chief Financial Officers Division, developed a survey covering financial performance; efficiency and location; and the real-estate decisionmaking process.

Methods and highlights. A survey questionnaire was distributed to the country's top 100 bank holding companies. In addition, the senior real estate executive of each responding bank was interviewed. The written portion of the survey focused on the cost and efficiency of each bank's operating real estate (the real estate it operates in, as distinguished from real estate acquired through foreclosure).

Sixty banking companies participated. The results revealed that:

(1) Operating real estate costs the average responding bank $72 million annually.

(2) The average bank controls nearly double the amount of office space per employee as other industries.

(3) Interior construction costs for bank space tend to be higher than for other industries.

(4) Many banks do not perform audits of their leases and operating expense statements.

(5) Many banks do not take advantage of the leverage they command in the marketplace.

(6) Assumptions used in decisions to lease or to own space are changing.

(7) Increasingly, real estate executives are gaining needed access to adequate financial data.

(8) Sixty-five percent of real estate executives report directly to upper management.

Cost controls. On average, operating real estate constitutes a bank's second-largest noninterest expense. Moreover, it is a controllable cost. The average large bank holding company spends $72 million, or $1.54 per share, annually to house its employees; each bank, on average, controls 3.5 million square feet of space. Owned real estate and capitalized leases account for $200 million of assets for the average bank.

Historically, real estate has not been included in a bank's strategic planning effort. Decisions have often been reactive and costs not managed closely. The survey revealed that real estate is increasingly becoming included in a financial institution's long-term planning effort. Top management is now identifying, in advance, markets where the bank expects to grow, shrink, or consolidate multiple user groups. Managers are considering which groups need to be in more expensive downtown space and which groups could be in less expensive suburban space.

Likewise, real estate departments are undergoing many changes. Approximately half the banks surveyed have replaced their top real estate executive in the last four years. Overall, these executives realize the significant cost of operating real estate and are managing these costs better. In 65% of the banks responding, the top real estate executive now reports directly to the president's office.

Too much space. On average, banks control 450 square feet of office space per employee. This is nearly twice as much as for other industries.

There are a number of reasons for this difference. First, banks have traditionally given employees larger space allocations as an alternative form of compensation. Second, recent mergers and layoffs have left banks with excess space. Clearly, one of the primary benefits of a merger is the reduction in overhead costs from the elimination of duplicate personnel and space. However, this space is often scattered in small blocks throughout the bank's inventory. This makes the space difficult to sublease or use.

Likewise, as banks have grown, they often have acquired space in small increments; the average bank surveyed controls space in 14 buildings. …