Community banks that set up shop in Brooklyn before it became cool are starting to cash in on the market's newfound trendiness.
Real estate values in the borough are reaching record highs, allowing some of its oldest banks to bring in serious dough from selling real estate.
The deals — one involving a real estate exchange and the other consisting of a sale-leaseback—will allow the banks to shed office space and refigure their retail strategy. They'll also provide the century-old lenders with more capital as they look to attract Brooklyn's craft-cocktail and luxury-condo crowd.
As community banks rethink their branching strategies, selling offices in high-value urban areas will continue to be an attractive option, industry observers said. With real estate values reaching all-time highs in cities along the East and West Coasts, the timing of a branch sale will also be an important consideration.
Banks "don't have to be located in metro New York" to sell real estate, said Robert Ramsey, an analyst at FBR Capital Markets. "You'll never know until three years from now if it was a good time, or if they left money on the table."
The real estate boom comes at an opportune time, as banks look to shed underutilized branch space. Gains from a branch sale can also help offset low margins and high compliance costs.
"With the way property values have accelerated in Brooklyn — to cash in some of these gains is prudent," said Travis Lan, an analyst at Keefe, Bruyette & Woods.
"The banks are clearly very close to the real estate markets and know what's going on," said Mark Fitzgibbon, an analyst at Sandler O'Neill. "There's also an element of smaller banks being under pressure with increased regulatory costs."
In New York, soaring property values have been a boon to community banks with prime locations. The median price of residential property in Brooklyn has
"We're in a neighborhood that has not only gone through explosive growth, but the demographics have changed," said Michael Phillip Devine, Dime's vice chairman and president. "When you spend time in Williamsburg these days, there are new hotels, many new restaurants and people from all walks of life, but characterized by youth."
New condominium developments in Williamsburg — one of Brooklyn's most popular neighborhoods — often sell
"All you have to do is open up a newspaper and you see the value that real estate gives you in Williamsburg," said Michael Pucella, Dime's chief accounting officer. "It's unbelievable. In some cases the value is even higher than in some parts of Manhattan."
Dime said last week that it plans to sell property near its Brooklyn headquarters that includes administrative offices and a parking lot. The site, located around the corner from one of the Brooklyns's busiest subway stops, also features views of the Williamsburg Bridge. (The company's traditional limestone-clad main office, which dates back to the early 1900s, is not part of the planned sale.)
Gains from the sale could be "significant," Devine said, declining to provide an estimate.
Sandler O'Neill said in a recent note to clients that the property could sell for $50 million to $75 million, which would boost the company's tangible book value by up to 16%.
The property is being marketed as a prime spot for condo development. Nearby units have been selling for $1,300 a square foot, with units renting for more than $7,000 a month, according to
The transaction will be structured as a like-kind, 1031 exchange, where Dime would sell the property through a competitive bidding process, then reinvest the gains into a separate acquisition.
Dime plans to use the proceeds to open a new Williamsburg location, which could include a branch and administrative office space, though it has not yet identified a location. It will lease out any excess space, generating a new source of fee income for the bank.
"It has solid financial benefits at every turn," Devine said.
It remains to be seen whether the $4.5 billion-asset Dime will able be able to attract the banking business of well-heeled Brooklyn hipsters, which has become a larger initiative for the company.
Flushing Financial has also cashed in on the Brooklyn real estate boom. The company said on Monday that it earned $12.7 million after selling three branches in the borough, then leasing back the space.
"They just happen to be very valuable locations," said John Buran, Flushing's president and chief executive.
The $5.1 billion-asset Flushing will recognize about half of the gain in the second quarter, and defer the remaining portion of the proceeds over the terms of the lease agreements.
The company plans to use using the proceeds to make large-scale technology upgrades. It will also switch over one of the branches to a "universal banker" model, where a small number of employees assist customers with a range of transactions.
"We're looking at what's happening in the industry with the reduction in the number of transactions, and we feel like it's no longer appropriate to have large branches," Buran said.
Brooklyn isn't the only part of New York generating returns for banks willing to sell real estate. Valley National Bancorp in Wayne, N.J., recently sold a branch Midtown Manhattan for $18 million.
The $18.8 billion-asset Valley National said at the time of the sale, in December, that it planned to use the proceeds to offset the cost of prepaying debt. The company did not respond to a request for comment.
