Retail N Illinois

The bank backfill: Sourcing retail tenants for vacant branches

This former MB location at 2607 Lincoln Highway in St. Charles has four drive-through lanes—more than any non-bank user would ever need. This former MB location at 2607 Lincoln Highway in St. Charles has four drive-through lanes—more than any non-bank user would ever need.
This former MB Financial location at 356 Park Avenue is in the heart of downtown Glencoe, a North Shore suburb populated by high-income residents. This former MB Financial location at 356 Park Avenue is in the heart of downtown Glencoe, a North Shore suburb populated by high-income residents.
This Fifth Third location at 2934 N. Milwaukee Avenue in Chicago should have little trouble finding a replacement as it located on a bustling portion of Milwaukee, surrounded by other retail tenants. This Fifth Third location at 2934 N. Milwaukee Avenue in Chicago should have little trouble finding a replacement as it located on a bustling portion of Milwaukee, surrounded by other retail tenants.

This week, 44 bank branches throughout Chicagoland will shut down as a redundancy mitigation measure following Fifth Third Bank’s acquisition of MB Financial in March. Property owners will want to get a new tenant lined up as soon as possible, but there’s one issue: the only fitting tenants for these spaces are other banks.

The easiest and best use for any single-tenant retail location is to find a user who could operate in the space with minimal construction, using the facility as a whole. But with a constrained tenant pool for these spaces in their current conditions, some could languish on the market without repositioning. However, Austin Weisenbeck, senior vice president, investments at Marcus & Millichap, sees only opportunity in these vacant locations.

“Banks have been known to choose solid real estate, much like drug stores,” said Weisenbeck. “The retailers that are expanding right now, most of them are restaurant based, which I think is a perfect use for re-tenanting, especially one that could use the drive through.”

Obtaining a drive through in Chicago or its suburbs usually requires a variance and some sort of approval from the village or community. Having a drive through grandfathered in is a valuable benefit and should attract a number of potential tenants.

However, teller lanes are to banks what blades are to disposable razors—every year it seems like they’ve added one more. Finding a new user for a modern, stand-alone bank branch could be difficult as few tenants have a need for multiple lanes.

“When you have all of those other drive throughs, up to three or four, that really is only utilized by a bank or credit union,” said Sean Sharko, senior vice president, investments, Marcus & Millichap. “However, that’s often expandable building area. We’ve actually sold banks in the past that developers have bought, built out that whole drive through area to add gross leasable area and make it into a small shopping center.”

Chuck Taylor, director of operations at Englewood Construction, agrees. “We’ve seen other concepts come in and simply remove the drive through and convert it into a two-story medical office building,” he said. “The building itself can really be converted into a lot of things, but an element like the drive through really wouldn’t work with something else.”

Bank branches were actually prohibited in Illinois, stemming from the Illinois Constitution of 1870. This ban was in place until 1970, but even then they were restricted, with full branches only allowed in the mid-‘80s. Because of this, Illinois has a legacy of two-story banks intended to house numerous employees. Following the deregulation, all of this space was unnecessary and many of these buildings have been repositioned over the years into office, medical or other space.

There are other internal components of a bank that make it difficult to hand the keys over to a non-bank user. Bullet-proof glass is thick, heavy and obvious. A new restaurant, for example, wouldn’t want to leave that in place and give off the impression that security is an overt concern. The large teller window with its oversized drawer box is another mark that a building used to be a bank. And then of course, there’s the vault.

“In older banks with walk-in vaults, you can do one of three things,” said Taylor. “We’ve seen new tenants use that room as storage, but never lock the door. We’ve seen them put a wall in front of the vault and just leave it as dead space. If it’s a complete gut on the inside, then we’ll have the vault removed.”

If a vacant bank branch isn’t attracting any tenants, it may be time to put in some capital and reposition the space for a broader retail base. Many owners aren’t in the position to or don’t want to go through that headache, so they look to sell.

“A lot of these tenants, in order to achieve that turnkey status, they expect the landlord to make some significant tenant improvement contributions,” said Weisenbeck. “Some landlords perhaps can’t or don’t want to finance it, so they will look to find a developer who will just buy it out right from them and the developer will go about adding value themselves.”

If a developer does reposition a former bank branch, one flourishing trend to follow is the increase in “medtail,” or the retailization of medical space. Not only are many of these locations well-suited for immediate care, physical therapy, dialysis or other healthcare uses, these users often pay rents commensurate to what the bank would have been paying.

“The good thing about these branches is that a strong majority of them are in a good retail locations,” Sharko said. “They are accessible, they are on hard corners, they are in desirable spots where other retailers, even traditional retailers or food users, would like to be.”