Posted by Andrea Rovira in Untagged
Regional and community banks err on value of corporate real estate portfolio
There's more to getting your bank's corporate real estate strategy right than picking out an office location.
By Thomas D. McCarty, managing director, Corporate Solutions, Jones Lang LaSalle.
Imagine that your bank is establishing a branch and back-office facility to house 50 employees.
If planned improperly, your bank might find itself with 10,000 square feet of excess or inappropriate space. What are the implications?
First, construction can cost about $150 per square foot, which means you could spend $1.5 million unnecessarily.
Second, with additional lease and operating expenditures coming in at $20 per square foot, your bank could face $1 million in unnecessary expenses during the first five years.
That's $2.5 million the bank could have saved.
How can such costly mistakes be avoided? It's a matter of attitude. And adopting a new attitude towards corporate real estate can help with much more than avoiding expensive missteps.
Many bank executives see real estate as a financial institution's third-highest expense, following labor and IT. After all, leasing, owning, occupying, managing, and maintaining offices, branch networks, ATMs, and data centers weigh heavily on the income statement. The hypothetical example above illustrates the stakes.
But corporate real estate represents far more than just a necessary cost of doing business. When managed strategically, the conversation about real estate can be transformed from "cost reduction" to ‘"driving growth and profit." Given today's economic pressures on banks, corporate real estate should be considered a strategic investment that generates returns and serves as a lever for growth.
Most large national and multi-national banks have made major inroads on boosting the productivity of their corporate real estate. They have tapped their in-house corporate real estate departments and outside service providers to slim down facilities expenses and optimize their real estate footprints. Often their ideas can also apply, when properly adapted, to regional and community banks as well.
Even in a recovering real estate market, real estate is a major operating expense for regional and community banks, despite their smaller footprints. By not focusing on the strategic use of corporate real estate, you may overlooking thousands or even millions of dollars. Those dollars, when uncovered, can be redirected toward revenue-generating opportunities.
Here are steps you can take to begin managing your institution's corporate real estate more strategically.
1. Establish a governance structure for corporate real estate.
Who is in charge of facility management at your bank? Who manages routine maintenance? Who decides when equipment should be replaced rather than repaired? How are vendors contracted for properties the bank owns and occupies? Do you know how much is spent annually on building repair, maintenance, and insurance? Is this information accurately reported?
A key challenge for banks with 250 or fewer branches is that, unlike the larger institutions, you probably don't have a centralized corporate real estate function. Your institution has the same real estate concerns as a bank 100 times its size, but such tasks as lease negotiation, space planning, site selection, facility services contracts, and site design and construction are probably addressed sporadically by banking professionals or administrative staff.
When real estate functions are dispersed among several different departments and individuals, it can be very difficult to assess the true operating costs of the bank's facilities. Just as challenging to quantify is the opportunity lost when bank executives spend time on real estate operations rather than on generating revenue and building customer relations.
Furthermore, decentralized and undocumented facilities decisions expose the bank to financial risk and excessive expense. Hastily made corporate real estate decisions can result in unfavorable lease terms or other consequences that may jeopardize customer relationships and the brand overall.
And, when the scale is smaller, critical decisions--and significant errors--become amplified.
Another issue is that procurement becomes more fractured and expensive than it should be.
Centralized purchasing and a standardized vendor procurement process can help drive costs and inefficiencies out of the facilities management function. For example, using one janitorial service for all facilities will enable you to negotiate more favorable pricing, streamline the procurement process and enhance the bank brand with consistent practices. Standardized RFP (request for proposal) language and processes will enhance your vendor relationships and clarify the scope of work covered under each contract.
Consider a field survey to gain a clear picture of exactly how maintenance and management activities are implemented across all sites.
For leased properties, does the landlord manage repairs? At what price? How do you know the landlord is not taking maintenance shortcuts that might jeopardize your operations and brand image?
On the other hand, do you want bank personnel to be distracted by facilities issues? Consider the opportunity cost when a branch manager tackles an ongoing HVAC problem instead of attending to customer relationship issues. A survey will make it easier to grasp the full implications of your facilities management requirements.
If centralization sounds structurally challenging, it may make sense to explore outsourcing the function, so that it becomes centralized with the service provider. Many service providers can provide economies of scale across multiple clients, providing your bank with even more buying power.
Between mergers, acquisitions, and evolving retail banking strategies, many community and regional banks face numerous real estate decisions. If your bank is undergoing frequent changes in its size, scope, and approach to its markets, do you have the team in place to not only support, but also to expedite the evolving business goals with strategic real estate planning and implementation?
Assess your resources, whether in-house or among your vendors.
What roles and skills sets are missing that would allow you to better manage the corporate real estate portfolio? Who should "own" the real estate function? How large should the real estate team be? What functions should be managed in-house, and what should be provided by outside real estate services providers?
One essential role is an internal liaison to cultivate a close working relationship between the real estate function and the business units, human resources, and information technology. Among the essential competencies: portfolio strategy, including workplace strategies; site selection; and transaction management, e.g., lease negotiation.
Given the considerable investment involved, skills in capital planning and management, and program management, are also essential.
Additional critical skills include managing contracts, vendors, and quality assurance. You will also need access to skills in occupancy planning, transaction management, and lease administration. A technology platform appropriate for managing all the details of the corporate real estate portfolio can be essential.
In many community and regional banks, local offices in the field are often where facilities decisions are made. But this winds up happening outside of the larger context of overall bank and real estate strategy.
For instance, if you are planning a facilities move, are you aware of other bank initiatives that might affect the site and space usage? Are there opportunities for co-location and cross-pollination with other business units? How much space, and what kind of space, does the bank need now and in the foreseeable future--and at what price point? And what are your peers' strategies?
Smaller institutions can find it difficult to develop and implement a clear strategy for the facilities they occupy. To thrive into the future, your institution will need a clear direction that includes "what if" scenarios based on potentially significant variables, such as a merger that doubles a real estate portfolio in 120 days or a retrenchment that involves closing branches. Such planning can be a key differentiator in the fight for market share.
If you have been managing your facilities leases on an Excel spreadsheet, it is probably time to consider a more detailed approach. With a professional lease audit, you can uncover significant potential savings and previously hidden financial risk.
Typically, a lease audit involves reviewing your lease agreements through two primary lenses: Are terms advantageous to the bank? Are terms favorable compared to local market averages?
For example, for which costs are you responsible? What property taxes must the bank pay? Is the bank entitled to any extra services or space options under the lease?
Leaving these decisions in the landlord's hands puts the bank's interests at risk, as the landlord will naturally seek to structure the lease in its own favor. That's one reason leasing is a specialty area in corporate real estate--experience makes a difference in negotiating lease agreements that are aligned with a bank's business needs.
Consider the bank that signed a lease agreeing to pay a pro rata share of the utility costs in a multi-tenant building. Shortly after signing the lease, a data center tenant moved into the building. Energy costs skyrocketed, yet the bank was still responsible for one-third of the expense per the terms of its lease. Over a typical ten-year lease, these high energy costs would add up dramatically. In contrast, if the bank adopted common lease terminology with clear language, it could have avoided the energy expense and instead invested in revenue-generating activities.
Is your bank's approach to building and renovating your branch bank network different for every branch? Build efficiency into the process by working with preferred vendors and designers, using standardized materials, and adopting a flexible branch layout template to establish a consistent customer experience.
Don't let too many senior-level cooks spoil the broth.
One fast-growing regional bank retained a high-end architect to create an attention-getting retail branch design, only to be thwarted by senior executives who micro-managed every aspect of the floor plans and furnishings. Ultimately, the design intent was completely diluted, at significant cost to the bank.
Strategy and planning are especially important today, in a time of present and coming bank mergers, branch consolidations, and branch network reconfigurations. A changing and turbulent environment often reveals unnecessary expenses, as well as new ideas and thinking. The new thinking among forward-looking institutions is that real estate is a tool that should be leveraged to support business goals.
Large-footprint banks have established corporate real estate planning, governance, process and resource teams not simply because their footprints are high-volume, but also because they have learned the hard way that lack of strategy and a road map leads to costly mistakes and missed opportunities.
Being strategic with real estate and facilities helps the bottom line and identity of a bank. The most successful financial institutions, no matter what their size or business model, will be defined by their ability to proactively plan for--and execute--real estate solutions that support long-term business goals.
About the author
Thomas McCarty is managing director in Jones Lang LaSalle’s Strategic Consulting Group, where he uses Six Sigma business improvement methodology to help clients boost the productivity of their corporate real estate teams and portfolios. As a Six Sigma Master Black Belt, McCarty was lead author of the Six Sigma Black Belt Handbook and co-author of The New Six Sigma--A Leaders Guide to Business Improvement and Sustainable Results and Six Sigma Financial Tracking and Reporting.