Branching out: FinTech, rising CRE costs driving design strategy for U.S. banks

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1 Branching out: FinTech, rising CRE costs driving design strategy for U.S. banks United States 2015 Banking in 2015: How trends affect space design A JLL research study of recent office and retail leasing activity among banks and financial services firms across the U.S. and Canada identified several trends for These trends have major implications on space design and project management. Due to the increasing role technology plays in the financial sector, FinTech a term used to describe financial services firms whose product or service is based on technology is driving growth in the industry. The number of FinTech companies expanded 26.0 percent y-o-y, and global investment is on track to reach $8 billion by Fintech firms demand unique office environments that include both creative spaces attractive to millennial workers and data security in accordance with federal regulations. Seven years later, global banks are still feeling the pain from the financial crisis. Legal, compliance and security expenses are driving up overhead costs. The industry continues to pull on levers like real estate and headcounts to lower expenses. The focus on cost management is front and center as banks seek to refresh store branches and improve office density, all while minimizing downtime and staying within budget. A customer-centric strategy that delivers an omni-channel banking experience is priority one for retail banking. The bank branch remains a critical component in reaching customers and growing revenue. Banks must create interesting connections between physical and digital channels; this is fueling the need for multi site program management. Renovating outdated branches and incorporating new technologies, without losing brand consistency, will be on the agenda for the next few years. Net income declines, as banks face a new regulatory environment Bank net income ($ millions) $50,000 $40,000 $30,000 $20,000 $10,000 $0 -$10,000 -$20,000 -$30,000 -$40,

2 New office space is springing up just as demand for relocations increases Office s.f. under construction in major U.S. markets 6.91 Seattle 2.07 Portland 3.13 M.S.F San Fran 2.34 Denver 3.13 Chicago 3.84 Philly 2.13 DC 5.08 M.S.F Boston 7.2 M.S.F NYC 1.62 San Diego 3.66 Phoenix 7.14 Dallas 1.62 Atlanta 1.57 Charlotte Houston 45.7 percent of banks relocated in In many cases, it is more cost effective to consolidate and relocate into new construction than to retrofit older office buildings. The majority of office space under development is in banking hubs like New York City and Boston, as well as in cities that are newer to the industry, like Houston, which led office construction by square footage in 2014.

3 While those looking to build or renovate see construction costs growing Cost of construction in major markets Average interior build-out cost: $2.5 million RLB Comparative Cost Index tracks the bid cost of construction, including: labor, materials, contractor and overhead costs. The decline in oil prices was expected to depress material and shipping costs for the construction sector. However, increased demand and labor shortages have kept overall construction prices high. This trend impacts the banking and financial services industry significantly as many of the highest construction cost markets are those with a strong financial sector such as New York, San Francisco, Boston, Chicago, Washington, DC, and Los Angeles. Banks and financial services firms looking to renovate or proceed with ground-up construction need to be extremely careful to minimize costs in an effort to combat declines in revenue.

4 While banks have generally used traditional office designs, open plan layouts are becoming more popular and can be used to attract millennials. Even as space usage declines, employment is increasing, indicating banks need to do more with less space. Employment in finance and insurance April Y-o-Y Average lease size: Banking and financial services 6,200 6,100 6,000 5,900 5,800 5,700 5,600 5, ,000 52,000 50,000 48,000 46,000 44,000 42,000 40, % Cellular Space Open Plan Activity-based Open Plan Hybrid Mobility Full Mobility Fully assigned offices and/ or high partition workstations Fully assigned open plan workstations Fully assigned open plan workstations and support space Mix of unassigned and assigned workstations and support space Fully unassigned workstations and support space sf/person sf/person sf/person sf/person sf/person The majority of banks utilize the cellular space and open plan models, with a few adopting the activity-based open plan model, which is more attractive to millennials.

5 The need to modernize while facing strong headwinds makes project management critical. The banking and finance industry is facing a period of transition after the financial downturn. In order to adhere to new government regulations, large commercial banks have decreased riskier investments which has reduced net income. To maintain profitability, companies are trimming expenses by tightening space usage and moving to lower cost buildings and markets. This is driving financial firms to rethink workspace design and make the most out of smaller footprints while accommodating changes in employment. Fintech firms, a growing segment of the industry, is especially mindful of how it approaches buildouts and renovation. They need a unique combination of open workflow spaces with very secure data capabilities. It is vital that banks and financial institutions balance business requirements for client confidentiality and data security with workplace trends that attract employees and encourage collaboration. a premium in this city is supremely difficult. Project managers are an important component to saving money on construction and renovation, especially in these markets. On the retail side, banks are looking to update branches to be more cost effective, consistent in branding and customer-centric. Security maintenance is especially important, as technology becomes a key component of the banking industry. Due to the complexity of large branch networks across markets, multi-site program management has become a key component of banks real estate and project development strategies. Project managers are a key component of making sure projects meet business objectives and run on schedule at the lowest possible cost. Rising construction and rental costs will continue to be a factor for banks looking to relocate, as many did in Pricey markets, like New York City, are huge financial hubs, however, finding new space that is not at

6 For more information, please contact: Steve Jones Managing Director Project Management Dana Westgren Research Analyst, Americas About JLL JLL Project Management is a leader in the development, design and construction of commercial real estate projects for the world s most prominent corporations, educational institutions, public jurisdictions, healthcare organizations, retailers, banks, hotels and real estate owners. Ranked No. 7 on Engineering News Record s 2015 list of Top 50 Program Management Firms, JLL s PDS team is comprised of 3,200 project managers across 49 countries worldwide, and is actively managing $25.6 billion under construction Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.