Good Time to Open a New Branch? Probably, But Be Sure to Tend to Basics
Well, yes. But credit unions and builders stress you still have to move carefully and tend to the basics. Does the new branch actually fit your strategic plan? Is the price quoted really a case of too good to be true? Have you spent the time needed for due diligence? Is the location a good one? What are the demographics in the specific area you're considering?
However, even with all that in mind, they also note that there are indeed opportunities available.
A prime example is Phoenix. Paul Stull, senior vice president/marketing at Arizona State Credit Union, said it's "a very good time, particularly in our market. Certainly, Phoenix has been among the hardest hit in the current recession. We have seen some real changes in the way business is being done in relation to leasing property."
"One thing that has really benefited us is that a number of banks have closed up shop and left some nice retail spaces, locations that previously would not have been something we could get."
He cited an Arizona State CU branch that was a former Washington Mutual office. The landlord was left with an unleased property in a prime retail location close to an upscale shopping area in Scottsdale.
"We went there to look at it while it was still functioning. They were getting ready to turn out the lights and close the door in a few weeks. The landlord was very interested in getting a new tenant," Stull said.
In fact, Stull added, the normal leasing negotiation in Phoenix today involves how many months of free rent the tenant will receive and how much the landlord will pay toward tenant improvements. A few years ago, the situation would have been completely different, with prospective tenants bidding against each other.
In other cases, it may not be a matter of going into a new area but finding a better location for an existing branch.
"The challenge which is always there is not to lose sight of the fact it's all about location," Stull said. "In my mind, it's a well-proven fact you can't assume if you build it they will come. You can't locate in the back of the shopping center. It's got to be a well-traveled, convenient commercial location that allows easy entrance and exit and is located close to other services members may use."
"It may be a smoking deal, but it may not be the location you want."
Even with the economy limping, each location presents its own challenges. For example, in the summer of 2008, Hope Community Credit Union, Jackson, Miss., wanted to renovate its New Orleans branch and expand into an adjacent building. When Hope Community put the project out for bid, prices came in about 50% higher than expected.
Yes, the national economy was slipping, but along the Gulf Coast, recovery still underway from Katrina, which has created a very active construction market. The credit union was advised by the architect to wait. When the project was rebid in January this year, the offers were significantly lower but still 10% higher than originally expected.
Hope Community has also opened a branch in Biloxi, Miss., that was a little more expensive than anticipated. The land was purchased in late 2007, and construction was put out for bid in 2008. Again, that part of the state was seeing a lot of recovery money pouring in, wiping out the downward impact of the national economy. Contractors were asking high prices. It was a seller's market.
"We cover a pretty large area, and we see definite differences between local markets in terms of how real estate is moving and prices per square foot," said Alan Branson, executive vice president/programs. "If you compare Memphis to Little Rock, there's a lot of difference."
"You have to do your due diligence around the property itself. If you're doing a demolition, is there anything you have to worry about? In Biloxi, we had to deal with an old gas station located next to a dry cleaning facility. You also have to do due diligence in terms of market location. If you make a bad decision today, you may not be able to recover as quickly as four or five years ago. Development you planned on coming your way may not happen."
Branson agreed that bank consolidations have indeed left some ready-made branches. But you still have to keep your business model in mind, he said. That can be an advantage for a low-income credit union like Hope Community. A bank may decide to close a branch because the demographics in the immediate area are slumping. That could be just fine for Hope Community.
Veridian Credit Union, Waterloo, Iowa, typically opens a branch or two a year. Recently, a number of former bank properties have come on the market at prices less than it would cost to build.
"So far, they aren't in areas where we want to be, so we haven't pursued this," said Doug Gilbertson, senior vice president/operations. "If one were to become available in an area we're interested in, we'd look very strongly at that."
Gilbertson reinforced the idea that each market presents its own issues. For example, it's easy to find locations in one city because it's a growing metropolitan area. Another community just 100 miles away is far more challenging because it's stagnant. The cost is substantially higher because there simply aren't as many parcels.
Paul Barrath, business unit leader for financial facilities at Clayco real estate developers in St. Louis, works with clients throughout the country. Overall, he said, there are certainly opportunities available for credit unions right now.
"It's a very good time to plan a building program," he declared. "We think the market is the best it's going to be right now. People are going to be deciding whether they can buy something for less later on. I don't think that's going to be the case."
Tom Lombardo, national director of business development, added that for several years leading up to the current financial crisis it was a seller's market. Now there are options, including land, that simply weren't there a few years ago.
"What we're stressing to our clients is to do the planning," Lombardo stated. "Even if you're uncomfortable making the investment, which some clients still are today, now is the time to do your planning and evaluate your present service delivery system."
Clients are indeed starting to peer five, 10 or 20 years down the road, he added. They realize the current situation isn't going to last forever.
Tom Mooney, a Clayco project director, looks at things from the nuts-and-bolts construction angle. He said the subcontractor market is very competitive, with many firms looking at projects they wouldn't have considered a couple years ago. He noted that it's important to check a subcontractor's financial status and references but added even those in a strong position are reducing their markups. National data sources indicate building costs are down or at least on a plateau.
The folks at Clayco also noted that firms are not stockpiling materials. Inflation is likely to creep into new orders. Margins are tight. If a subcontractor makes a mistake, there can be problems.
"There are a lot of people out there who need to make a deal and a lot of cheap talk," Mooney cautioned. "When a location becomes available because there's consolidation, why is it for sale? Generally, there's a reason when you get rid of a branch. Sometimes people are taken in by the price. Some clients make decisions without all the due diligence."
Paul Seibert, vice president/financial services at EHS Design, Seattle, said many credit unions have held off on their branch expansion plans. Even though they may have capital, they're nervous. But as other credit unions and banks do the same thing, it can translate into an opportunity.
"If everybody's holding back, then maybe it's time to gain greater market penetration. There is a lot of fluid money right now, moving from one institution to another. So it's a good moment to take advantage of this shifting money," Seibert said.
In some cases, Seibert has seen land prices drop 40%. So one strategy is to buy land now for long-term use-that is, four to seven years out.
"If they know they're going to want to be in these markets, it makes sense to buy the land as both a good investment and good positioning. We will get back to a point where it will be difficult to find land and leases."
He suggested a credit union that needs to recapitalize may want to sell off property and lease it back with a first right of refusal. It's a way to use existing branches to raise capital that can be used for operations.
The economy, he continued, has changed the decision whether to lease or own in a particular market. If you consider a market, and you need to put in two or three branches over the next five years to optimize market productivity, it might be better to lease so you can establish yourself in the market and get the critical mass necessary in terms of convenience radius overlap so you get the quickest return on your investment.
Then, as the market evolves, you may move from small leased facilities into freestanding facilities if they're the right answer for that market.
In case you're actively thinking about building, Seibert indicated construction bills have dropped 10 to 15 percent, primarily due to reduction in the cost of labor and materials. The price of land has also dropped.
"Is it a good time to build a new headquarters? I think if all the other reasons line up, and you don't know to use the money for technology conversions or branch expansion- which drives income-it makes sense to put the money into a headquarters,"
"You should have a much greater chance of having that building completed on schedule when contractors aren't juggling four or five things at once. I think, though, if you still employ a penalty for going past the schedule, it does motivate contractors."