Seeking Efficiency in Corporate Real Estate
As banks struggle to push their share prices back up to something resembling pre-crisis levels, many are missing cost savings opportunities hidden in plain sight: in branch network facilities and the corporate real estate (CRE) portfolio. Smart management of these assets can improve an institution’s efficiency ratio by simultaneously reducing operating costs and improving productivity, thus impacting both sides of the efficiency ratio equation.
For large institutions, these metrics are significant and difficult to achieve through revenue strategies alone. To improve the efficiency ratio by a full percentage point, a large institution would need to either increase fee income, interest income or gains on assets by 10% — challenging goals in today’s slow-growth banking environment.
Banks that improve their efficiency ratio using real estate strategies typically use a combination of the following techniques:
Outsource real estate and facilities functions. For the largest institutions, outsourcing CRE management has long been the strategy of choice, not only for cost reduction, but to enable agility and productivity. An outsourced CRE function can enable an institution to become more nimble in response to market conditions and opportunities, deploying resources quickly as needed. Changes in the external banking environment, such as bank consolidation and compliance pressure, have encouraged the evolution of outsourcing.
Enable speed-to-market in branch launches. An agile CRE team can enable a bank to move quickly to boost revenues through streamlined roll-out of new branch locations. When turnkey retail project management is efficiently deployed so that a location is operational a month sooner, that’s an additional month of revenue contribution to the retail line of business.
Reduce downtime in critical facilities. Transaction processing downtime is expensive, and generally associated with the Information Technology (IT) function. However, efficient facility management in critical processing facilities can significantly improve the number of hours that customer service centers and data management facilities are operational. Response time to external factors such as weather and power outages can be reduced, allowing the IT function to step in and do its job, once the facility itself is back on line.
Leverage business intelligence. With savvy use of business intelligence, the CRE team can optimize the CRE portfolio, combining the right locations with space-saving workplace strategies that support collaboration and innovation and contribute to top-line productivity gains. Data-driven decision-making can help realize these results.
Centralize real estate data and operations. Today, large and middle market banks are clearly moving toward centralized real estate management structures, with regional and global portfolio management now more common than localized management structures. Global outsourcing contracts that centralize functionality can maximize the savings for the entire enterprise. According to JLL’s 2013 Global Corporate Real Estate Trends survey of CRE executives, lease administration and transaction management are often the first functions to be outsourced, followed by facility management and project management.
Right-size branches to improve branch productivity. As customers increase their expectations for integrated service across ATMs, mobile, online and in-person channels, branch facilities are evolving with technology capabilities to ensure an efficient experience. Many banks are transforming the size and structure of their branch networks, driving top-line revenues and reducing real estate carrying costs by expediting branch network consolidation. Branch right-sizing and integration is becoming a strategic differentiator, as agile, flexible institutions are better positioned than competitors to capture market share. By bridging the gap between online services marketing and physical locations, real estate can efficiently support technologically integrated retail strategies.
Focus on cost reduction in corporate offices. On the expense side of the efficiency ratio, institutions with well-run CRE functions are benefiting from improved operational efficiency. As the third-largest operating expense for banks, real estate has long been considered simply a cost of doing business, with occupancy costs constituting 7% to 10% of non-interest expenses for larger institutions. CRE strategies can have a direct impact on reducing these costs. Such strategies as portfolio optimization, streamlined facilities management, smart leasing and strategic sourcing can produce year-over-year bottom-line improvements.
Choose sites and use space strategically. Increasing space utilization and consolidating office locations are logical steps toward cost reduction. For many institutions, the drive for efficiency is fueling a shift away from traditional major market hub locations and toward lower cost markets. Institutions that can afford to invest capital into relocation strategies are taking advantage of the opportunity to consolidate and right-size their facilities. The establishment of new financial and banking hubs in markets where low costs and talent coincide will have the greatest influence on the industry’s footprint over the longer term.
These proven strategies apply to all banks seeking to improve their efficiency ratio while conducting “business as usual.” It is also notable that, with every merger or acquisition, a window of opportunity opens for improving the efficiency ratio by consolidating and eliminating redundancies in the combined real estate portfolios of the merged companies.
Banking industry consolidation is expected to increase in 2014, as large banks pursue specialization and smaller banks seek scale to compete and counter the increasing costs of regulatory compliance. Almost 50% of financial services executives expect to be acquirers in 2014, with 71% planning deals valued at less than $250 million, according to KPMG’s January 2014 M&A Spotlight report based on interviews with 1,000 executives in multiple industries.
While real estate is, of course, only one of the key factors that determine the success of banking M&A transactions, the value hidden in a corporate real estate portfolio can be the “x factor” that can make or break the success of the deal. A financial institution can unlock this x-factor value by engaging the CRE team early in the transaction process, enabling the team to identify immediate integration cost savings and to implement a thoughtful change management program for long-term success. When used strategically, CRE can help a buyer edge out the competition for the greatest return.
For banks with overlapping retail footprints, engaging the CRE team during the high-risk due diligence process will help reveal the value and risk that can be hidden under layers of leases and building valuations. Risk may include deferred maintenance on outdated facilities, for example, environmental hazards from contamination, or the need for costly renovations to comply with the Americans with Disabilities Act.
From pre-offer to post-close, the acquiring bank’s CRE team must be equipped with robust business intelligence, processes, tools and expertise to assess the CRE portfolio and retail locations. With the right data and analytics, the team will be able to provide forward-looking scenarios in a matter of days.
After a deal closes, the more quickly an organization can rationalize the CRE portfolio, the more quickly the cost savings will translate into returns rather than a drag on the bottom line. Ideally, the transition team will include change management specialists, workplace strategists, CPAs, legal specialists, architects, project managers and CRE brokers experienced with M&A. Through a facilities-specific program management office, the team should be equipped to rationalize a potentially large and complex portfolio of diverse property types, including not just offices and bank branches, but also data centers, call centers, ATM leases and other properties.
Mr. Hicks leads the Banking Industry Group at Chicago-based Jones Lang LaSalle (JLL), the global professional services and investment management firm specializing in real estate. He can be reached at [email protected]