A commercial real estate apocalypse?! Part 3: Branches, the real estate factor

Assessing the impact on the value of my branch properties, and different options available...

AUTHOR’S NOTE: I presented a speech on this topic in early December 2019, before Covid-19 was part of our daily news. Now, with the introduction of Covid-19 and everything it introduced into our world (such as social distancing and shuttered bars and restaurants), the long-term outlook for most commercial sectors turned from questionable to bleak. This series presents a likely scenario for commercial real estate, as well as actions you should take to prepare your credit union.

In Part 1, I predicted that certain Commercial Real Estate (CRE) sectors would face an Apocalypse, brought in part by Amazon, Big Money, technology (5G and Artificial Intelligence), and changing consumer habits.  We discussed how these factors may drive certain CRE sectors down in the next 5-7 years, and to a level from which they won’t recover. In Part 2, we discussed the neighborhoods in which your branches reside, and the outlook for those different neighborhoods.  In this article, we’ll discuss the value of your branches, and different options to minimize the downside, maximize the upside, and create new value.

Hold for the near-term, unload in the long-term

Let’s imagine you believe your branch will be useful for 10 or so years, but are concerned about traffic and the value of your branch after that period.  That branch is a perfect candidate for a sale-leaseback.

Have you ever visited a Dollar General store?  You might be surprised to learn that Dollar General doesn’t own their stores.  Dollar General builds their stores, sells them to an investor, and leases them back for a long period (usually 20 years). As the name implies, Dollar General has sold their property and then leased it back: a sale-leaseback. 

Why would a company do such a thing?  Well, most companies that do sale-leasebacks believe they can better deploy their capital in opportunities other than their buildings.  Others are unsure of the future value of their properties and want to unload that risk on another party.

I believe this is particularly relevant for certain branches – most typically those that are not our flagship branches.  You likely have seen traffic reduction over the years.  Over the past several months, your members have learned to perform much more banking without visiting a branch. As you consider these recent consumer habit changes and the new technologies on the horizon, not to mention younger members’ affinity toward non-human contact, it’s easy to see that branch volumes will continue to diminish.  

In a basic sale-leaseback, you sell your property to an investor, and then lease it back under a NNN (triple-net) lease.  You maintain maintenance, insurance and taxes (the three “nets”) and control of your property, with the only real difference being that you now cut a monthly rent check to your landlord.  After an initial ten-year lease, you may choose to extend for five years, or simply walk away. Granted, this isn’t necessarily appropriate for every credit union, and certainly not every branch. But it may be a great strategy for ancillary branches that are not a “flagship” location but instead are “filler” branches – branches that will be useful for the near-term, but not the long-term.

With the low interest rate environment, investors are clamoring for real property with a credit tenant (such as credit unions).  A sale-leaseback gives you the ultimate flexibility to stay in your branch for 10 to 20 years, while at the same time passing to the investor the risk of the branch being worth less in the future than it is today.

One of the first questions from credit unions I work with on sales-leasebacks is whether the transactions are financially favorable for the credit union.  In almost every case, the answer is a resounding yes!  Our sale-leasebacks financial model considers numerous variables and calculates the cost of continued ownership compared to sale-leaseback under a variety of scenarios.  In nearly every situation, even considering that branch property values rise (which I firmly believe will not be the case for many branches), the net present value from reinvestment of the sales proceeds less lease costs far exceeded the value from owning the property outright. As icing on the cake, credit unions can deploy the proceeds from the sale into new initiatives including loan funding, technology, and promotion.

Options to drive additional traffic

It’s hard to turn on the TV without seeing one of the many ads from Capital One and their Capital One Café.  Their strategy of building a convening area within a branch is clever.  They’ve created a gathering space, and people gathering in that space are likely to become their customers. 

You need not recreate the Café; in fact, you likely shouldn’t. You should create whatever matches the needs of the community surrounding your branch. Maybe your community would benefit most from a community room.  Maybe a co-working space makes sense, where budding entrepreneurs or members working from home can gather for fellowship and a latte.  

Some credit unions have partnered with national brands or their franchisees. Personally, I would steer you toward a local or regional brand. The local feel is less corporate and more community minded.  You may even be able to assist the business with whom you partner by providing a commercial loan – after all, you’ll be able to keep a really close eye on their business, and you know they have a great landlord!

As we work with credit unions across the nation, we are accumulating a list of local and regional partners who value the credit union difference and make great partners.  If you have any local or regional partners – such as coffee shops, co-working space providers, bakeries, etc. – we’d love to learn about them so we can add them to our network and benefit other credit unions. 


One option being considered by many banks and credit unions is converting to an e-branch. While the upfront investment can be significant, so is long-term payback.  A few important considerations and notes:

  • Adoptability – Consider how your current and prospective members will embrace (or not) the concept
  • Flexibility – Technology evolves quickly, so it is incredibly important that you ensure the technology – both the hardware and the software – can evolve
  • Introduction – As you launch your e-branch, expect to spend a great deal of time “training” your members.  You will likely want 1 or 2 team members greeting members at the door and introducing them to the new technology. This will be a small price to pay for the long-term payback

Branches you wish to sell

Maybe you’ve found the best decision is to sell your branch. What determines the value of your branch? As the old saying goes, “location, location, location!”  We looked at the location factor in our second article.

Another consideration is alternate uses.  Clearly, for your branch the “best use” is as a branch. Some branches can be more easily converted to other uses, namely business offices or health offices; some may be converted to coffee shops, restaurants, or co-working space. The more difficult (i.e. costly) it is to convert, the less valuable your branch is.

Finally, you should see if your branch is in the Land of OZ.   No, not that Oz, but the OZ that stands for “Opportunity Zone.” Opportunity Zones (OZs) were created with The Tax Cuts and Jobs Act of 2017.  These OZs are valuable vehicles for investors, particularly those looking to invest 1031 exchange funds, as the OZs allow an investor to delay or reduce taxable gains.  OZs are “economically-distressed communities,” so clearly fewer branches reside in OZs. However, you may be surprised like we have been that some great properties are within OZs; if you’d like to find out if your branch is in an OZ, feel free to contact me.  

Look for our final installment in this series, when we discuss ideas to protect your commercial loan portfolio from this CRE apocalypse. To be clear, there are impacts on your commercial loan portfolio even if you don’t make CRE-backed loans!

Joe Karlin

Joe Karlin

Joe Karlin has worked with or at credit unions his entire career.  Starting as a CPA with Deloitte and Touche, he audited credit unions, corporates, and leagues.  Joe spent nearly ... Details