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Own Your Headquarters? Maybe You Shouldn’t.
Historically, the vast majority of credit unions have owned their headquarters. And for decades, this was a prudent decision. After all, office real estate has traditionally been a solid investment.
Except when it isn’t. And for many credit unions, this is arguably one of those times.
Based on our experience with credit unions coast-to-coast, we often see portfolios in conflict. Their branches – typically a mixture of leased and owned properties – are generally efficient, modern and inviting. On the other hand, their headquarters – primarily owned – are often utilitarian, dated and less than inspiring.
The Map to Buried Treasure
Why is that? Because branches are where the action is, so to speak. They are where transactions are managed, revenue is generated and where the “member experience” is fully realized. On the other hand, headquarters are where vital, but “behind-the-scenes” strategic and administrative tasks take place, so no need to upgrade an asset that’s generally doing fine, thanks.
But this long-time owned asset – while looking fundamentally good on your balance sheet – may actually be an anchor weighing you down.
Like any real estate holding, maintaining a building comes with a cost. And the older it gets, the more costly it gets. A new roof. HVAC replacement. Electrical upgrades. Parking lot resurfacing. The list is long and never ending. (Major re-plumbing, anyone)?
Yes, the equity has increased nicely over time, but here’s the point: Until you sell it, your building’s financial value is largely unavailable to you. A treasure chest – potentially worth millions — under lock and key. The bottom line being that, for many credit unions, an HQ is a costly asset that – especially from a recruitment and retention standpoint – is just not keeping up with the times.
The Great Unknown
So hold that thought while we pivot to the effects of COVID on the office marketplace.
Office landlords have been hit hard during the past year. Vacancies have gone way up and lease rates way down. And in spite of so many prognosticators professing to know when and how much people will ultimately return to their offices – they don’t. Full time? Three days a week? Once a week. Not at all? The answer is yes, no, maybe, or an unknown combination.
What is known is that landlords are now open to lease terms that would rarely have been considered back in the “before-times.” And for credit unions, this means opportunity: Opportunity to move into better space with far lower operating cost.
And here’s the key – in the process unlocking funds to significantly enhance and expand their branch network; the very place where revenue is generated and membership is grown, as well as other investment opportunities including more loans to members.
From Fixed to Flex
Which is exactly what one of our federally-chartered clients is doing right now.
After having owned their HQ for decades, we assisted them in recognizing that their building’s value had become essentially maximized, both in terms of functionality and upside equity. In fact, it was becoming a liability – not on paper per se – but in terms of delivering existential value to the organization-at-large.
Case in point: In the battle for recruitment, potential top talent got the vibe of an institution stuck in 80’s. The only place to eat nearby was a sports bar and grill chain more conducive to watching a game than conducting an off-site lunch with employees or business clients. And the location made for a long commute for young, eager, qualified professionals coming into the financial industry.
On the flip side were landlords of Class A buildings suddenly open to lease concessions that were previously deal breakers. i.e., early termination or contraction without major penalty. First right of refusal for additional space. Free rent for extended periods upon signing. Higher tenant improvement (T-I) allowance versus every improvement being the full responsibility of the credit union. On top of these concessions, leasing in general provides significantly more flexibility when the facility no longer meets your needs.
All of this being, in a word … flexibility.
Timing is Everything
And why are landlords now open to such audacious deal points? Because, like everyone else, they don’t yet know the future. As a result, the cash flow they have is worth far more than the cash flow they don’t. Bad for them, potentially good for you.
Now, instead of fixed, boring and stodgy, our client is operating in space that is flexible, bright and sophisticated. And instead of just a sports bar, the dining, fitness and retail amenities within easy walking distance number in the dozens. They are now located near a new Metro rail station and far closer to an array of housing options that make the recruiting net larger and far more qualified.
So, better space, lower cost, a strategic asset for recruitment and retention and millions in capital that is now being applied directly into expanding their branch network. Will they own their HQ again the future? Possibly. And with the flexible terms of their lease, they will be able to move based on their needs when the opportunity arises rather than by terms dictated by the real estate market.
By selling their headquarters, our client unlocked a treasure chest of liquidity. And by looking toward to the future with a leasing lens, their outlook for the future became much clearer.
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