Fewer and fewer bank customers are visiting branches to make a deposit or cash a check, and their proclivity to bank virtually will exacerbate the challenges landlords already face repositioning vacant commercial space.

Banks had been trimming their fleets of branches for years before the novel coronavirus upended the U.S. economy, as customers migrated to increasingly sophisticated digital banking services. "Certainly for the last six or seven years, the amount of new lifetime value — new deposits, new customers — that the branches bring in has been declining," Kevin Travis, a senior partner at New York-based financial institution consulting firm Novantas, said in an interview.

Branch transaction volume has declined 7% on average each year for the last seven years, according to Novantas research. That trend is expected to accelerate in the coming quarters, as older bank customers who had been the backbone of in-store, over-the-counter transactions discover digital banking services by necessity in the social distancing age. Travis said the pandemic has created market conditions for a "really aggressive" paring of bank branches, and the number in operation post-pandemic could fall by as much as 50% — an eventuality he called "radical" but "fair."

"It's one of those situations where every year you look at it and you go, 'There will come a day when we will need to do something really bold and drastic, but it's not this year. We can wait another year.' That's been going on for five or six years," he said. "And in our math, now we're there."

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Shedding branches

At the 2009 peak, there were 99,950 full-service bank branches in operation in the U.S., according to data compiled by the Federal Deposit Insurance Corp. That figure has declined steadily throughout the 2010s and stood at 86,367 as of midyear 2019.

Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp., in that order, operate the most bank branches, according to S&P Global Market Intelligence data. Wells Fargo has 5,400, JPMorgan Chase has 4,973 and Bank of America has 4,242 — totals that far outstripped other banks' branch counts. Bank of America had the largest total deposit figure, at $1.365 trillion, based on the June 30, 2019, FDIC Summary of Deposits.

Many banks that have shut down branches in response to the pandemic may opt not to reopen them to save money, said Mike Carter, executive vice president at Strategic Resource Management, a firm that seeks to improve banks' operational efficiency.

"It'll take some time, because there are [banks] in leases and they don't want to pay the penalties to get out of those," Carter said. "But when those are up — I'm not sure I would want to be in the commercial real estate space right now."

There are 11 U.S. shopping center and net-lease real estate investment trusts that count banks as top tenants. JPMorgan Chase, Wells Fargo and Bank of America are all top tenants of shopping center landlord Regency Centers Corp. In other cases, REITS rely on banks for a significant portion of their total rental revenue. Wells Fargo is responsible for 19.0% of Alpine Income Property Trust Inc.'s rental revenue, for example, and Truist Financial Corp. is responsible for 7.0% of American Finance Trust Inc.'s. Neither REIT responded to a request for comment.

New hybrid concepts

While a bank may move to shutter underperforming branches, some locations offer advantages that are more difficult to quantify, like brand awareness. Some banks and landlords have experimented in recent months with a hybrid branch-retail solution that promises to boost foot traffic.

For example, a landlord may carve out — or the bank tenant itself may sublease — branch space for a coffee shop that will simultaneously bring in customers and improve customer experience. The option also allows the bank to shrink its branch footprint without having to build a new, smaller location. National Property Concepts, which helps banks optimize branch networks, has brought two such concepts to the market, and has two additional ones under contract.

"If you had to rank your retail locations, your bank branch is going to be toward the bottom of the list in terms of exciting places to go," National Property Concepts founder Carter Campbell said in an interview. "But if you can create a cutting-edge experience by incorporating Starbucks and really marry [the branch space with] the Starbucks space, you've created a really cool experience."

A hybrid Pinnacle Financial Partners Inc.-Starbucks Corp. location in Germantown, Tenn., presents an instructive case study. Before a Starbucks was added to the property, the Pinnacle branch logged 12 to 15 new accounts and $500,000 in new deposits per quarter, according to a company presentation. After the Starbucks was added, the branch averaged 50 to 60 new accounts and $2.5 million to $3.0 million in new deposits per quarter.

Campbell said Starbucks wants to open more locations in branches, but banks have paused because of the pandemic and are focused internally. Other retailers, both local shops and large chains like Panera Bread, have also expressed interest, according to Campbell, who said the hybrid model likely will work best in dense, urban markets.

"This is not a wholesale solution for every single branch location, but it is a solution for select locations where you can work to carve out space," he said.