The Trouble With High Rent
Thinking more about the decline in the commercial real estate market issue left me with a new line of thought. The past several years in which a lot of people were either making money through real estate speculation or else tapping their (notionally) rising home equity to compensate for a lack of rising wages has created a habit of thought in which rising real estate prices is a good thing. And of course the fact that the housing bubble crash led to a huge snarl throughout the financial system further encourages that. But the snarl isn’t caused by falling prices per se, and as a general matter things like rising commercial real estate prices are a bad thing. You might have a store that’s selling people products they want to buy at a price they can afford. And the store could be making money. But then up goes its rent and suddenly it’s not making money. So it tries to raise prices, but that just reduces the number of people who want to buy the products and it’s still losing money. Next thing you know, the store is out of business and it gets replaced by a new bank branch or something and the whole neighborhood’s worse off, to say nothing of the people who used to work at the store.
Rising real estate prices in one town or neighborhood relative to the rest of metro area is a sign of increased desirability. Similarly, when real estate prices go up in one metro area relative to the country as a whole, that’s also a sign of increased desirability. And increased desirability is a good thing. But you shouldn’t mistake the price increase for the increased desirability — it’s a negative consequence of other good things. It’s a form of resource depletion that, like rising commodity prices, that, though correlated with growth, is actually a constraint on growth rather than a cause of it.
65 Responses to “The Trouble With High Rent”
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January 6th, 2009 at 9:13 am
This sounds like the old “Nobody goes there anymore because it’s too crowded” argument/fallacy. I really don’t think that skyrocketing rents in, say, Brooklyn Heights a few years back had reduced it to a ghost town; quite to the contrary. As a general rule, rising rents are correlated with demand and occupancy, falling rents with lack of the same. Rents, occupancy, and business activity are all symptoms of the broader economy.
January 6th, 2009 at 9:23 am
Hey Matt — pretty decent point.
It strikes me that the tendency to treat rising asset prices (generally) as a good is a symptom of the fact that our economic conversation is dominated by people over 35. If you already own a bunch of assets, rising asset prices are a good. If you don’t, it’s not.
Okay, that’s obvious. But here’s my question for you: are there other, less obvious ways that this sort of age bias distorts our national economic conversation?
January 6th, 2009 at 9:50 am
Hey, what happened to all that talk about appropriate pricing in your parking posts? Given a static short term supply, rising rents and real estate prices help allocate scarce resources (space) among the most productive enterprises. They also signal policymakers and investors for a medium term supply increase (looser zoning and new development). This is using the same basic theory as you appropriately used regarding parking.
Of course there are difficulties with the gentrification consequences, but that is offset by the benefits that other neighborhoods or other cities get from spillover — the shops and types of developments that are removed or forced out of the neighborhood in question, provided public policy allows them.
January 6th, 2009 at 9:59 am
Next thing you know, the store is out of business and it gets replaced by a new bank branch or something and the whole neighborhood’s worse off, to say nothing of the people who used to work at the store.
This sentence, plus the following paragraph, hint at the fallacy that rising prices is a negative externality. If I like cheese so much that I’m willing to pay way more than the existing market price and I’m really rich so I buy enough cheese to be of consequence to price determination at the margin, then I cause the price of cheese to go up and you’re eating less cheese. That doesn’t mean there’s an externality–precisely because an externality is by definition not reflected in prices.
If a store that (supposedly) everyone likes can’t pay the rent and thus goes out of business to be replaced by a bank branch, that only means the market prefers the bank branch. Tough luck if you liked the store.
January 6th, 2009 at 10:05 am
And, apparently, to say nothing of the people who work at the bank. I love this blog, but some posts just seem fundamentally antagonistic to the basis of capitalism. For someone who rightly rails against regulatory interference with, say, population density, you seem pretty willing to reject the market’s judgment that a bank on the corner has more value than a corner store. And why not; you already have ready access to banking, and you’ve got upper-class tastes, so you prefer additional cute bodegas and mom-and-pop bakeries. But that’s just as tendentious as the McMansion owner who supports population density regulation because he already owns his home and likes the neighborhood as it is.
January 6th, 2009 at 11:20 am
This sounds like the old “Nobody goes there anymore because it’s too crowded” argument/fallacy. I really don’t think that skyrocketing rents in, say, Brooklyn Heights a few years back had reduced it to a ghost town; quite to the contrary.
Well, not quite. Rising rents caused quite a few locally-owned, smaller businesses in Brooklyn Heights to go out of business and be replaced by national chains and/or real estate brokerages that can pay higher rent. Just look at Montague from Court to Clinton — virtually the entire block is composed of banks. I’m sure landlords would love to have their storefronts occupied entirely by banks, cell phone stores and real estate brokerages that can pay the high freight, but it really doesn’t make it so pleasant for the casual walker or shopper.
January 6th, 2009 at 11:25 am
If a store that (supposedly) everyone likes can’t pay the rent and thus goes out of business to be replaced by a bank branch, that only means the market prefers the bank branch. Tough luck if you liked the store.
Yes, but the market doesn’t live in the neighborhood. The “market” in general may prefer the bank, but the people who actually live and work and shop on that block prefer the store. The problem, however, is that the economic power of one block of neighbors is neglible when compared to that of a national bank. It all depends on how you define the market — is it the local market (store wins) or national market (bank wins)? Most of us, however, don’t live nationally, but locally, and would prefer to have local stores attuned to local needs.
January 6th, 2009 at 11:27 am
First, if the local people really wanted the services provided by the store more than the services provided by the bank branch, then exactly how did the bank branch end up with higher revenues than the store such that it could afford the higher rents when the store could not?
Yes, how exactly did JPMorgan Chase or Bank of America end up with higher revenues than Kim’s Deli or Amy’s Tea and Biscuits? It is a mystery…..
January 6th, 2009 at 11:32 am
I think everyone else has hit most of the general fallacies in this post. I’d reiterate one that DTM touched on, it should be obvious that without sufficiently high rents no commercial construction or renovations are supportable. Rising rents are certainly not always a good thing, but any sustained decline is always a bad sign for a neighborhood or city with the potential for disinvestment feedback loop.
January 6th, 2009 at 11:36 am
If a real estate crash means someone will be able to afford to open a grocery store with decent produce, a bagel place, a hardware store and a bookstore in my neighborhood now dominated by overpriced restaurants and cute boutiques that are constantly failing when the rents get jacked up, then bring on the crash.
January 6th, 2009 at 11:38 am
Next thing you know, the store is out of business and it gets replaced by a new bank branch or something and the whole neighborhood’s worse off, to say nothing of the people who used to work at the store
I’m with Matt on this. I live in an NYC neighborhood that’s had insane growth over the last ten years and the bank-branch argument is not abstract here: we’ve lost a lot of retail diversity on our main avenue. Our biggest neighborhood coffee shop went under a few years ago for exactly the reasons Matt describes and all but one of the local self-service laundromats are gone. In a nine-block stretch we’ve got six new bank branches with more on the way. It’s diminished the public portion of the neighborhood even as all the growth (mostly in the form of luxury condos) has upped the appeal of the private spaces. I’d be more resigned to this detrioration if I thought that it actually was based on market sense; alas, I suspect it has more to do with irrational land-rush grabbiness than anything else. As for the jobs argument, it may be true that bank branches employ marginally more people, but since the businesses aren’t local (I’m pretty sure that WaMu and CapitalOne aren’t based in Chelseea) the net money stream flows outward.
January 6th, 2009 at 11:40 am
Sorry about above typos… kept getting interrupted by actual work.
January 6th, 2009 at 11:44 am
(1) I don’t think the point Matt is trying to make is about the wisdom of free markets per se. The question is whether rising real estate prices and rents is an appropriate target for public policy Matt’s argument that it is not strikes me as prefectly sound.
(2) One negative effect of high rents is not that they merely squeeze out less profitable businesses, but that they inhibit innovation. This happens because lenders and investors are more reluctant to support a new venture with high fixed costs (rent) unless it is following a very well tested business model.
January 6th, 2009 at 12:06 pm
As for the jobs argument, it may be true that bank branches employ marginally more people, but since the businesses aren’t local (I’m pretty sure that WaMu and CapitalOne aren’t based in Chelseea) the net money stream flows outward.
I’m not even sure they employ more people, since to my eye about half of the bank branches are little more than ATM lobbies that have no one working at them.
January 6th, 2009 at 12:22 pm
A bank branch isn’t an embodiment of the entire bank. Rather, it is a location where the bank’s services are offered to retail customers who are physically present in the branch. In that sense, the market for a particular bank branch is just as local as any other walk-in retail establishment. Accordingly, I do indeed think it is fair to ask why that local bank branch itself (not the entire corporation, but that particular retail location offering banking services) would have higher revenues than the store if, as you claim, the local people would prefer to be doing business with the store over the bank branch. In other words, I think the fact that bank branches are so common is pretty good proof that people actually want bank branches in their neighborhoods, in the sense that they value the ability to walk into a local place to receive banking services.
No, you’re ignoring the fact that large national businesses such as banks often open local branches that serve as loss leaders purely for the sake of visibility and exposure. It’s not the customers who demand them from the banks, rather, it’s the banks who put them there in order to attract customers into a physical store so they can sell them other products such as mortgages, loans, investment advice, etc. It’s banking as more of a retail product. That is to say, Bank of America can afford to run local branches on Montague Street at a loss for years, figuring that the loss of revenue in that one location is made up for by the over-all increased exposure.
Additionally, banks oversature because they’re taking up space that otherwise might have been taken by a competitor: “The data suggests that instead of attracting the dollars of new customers, the big banks are hoping to take money away from one another — a pattern consistent with the cluster of branches at some corner locations and high-traffic spots.” — “A Bank for Every Block”, Aug. 9, 2006, NYTimes.
A local business, of course, cannot afford to run at a loss for years, but tries to be consistently profitable.
And, of course, this again leaves out the issue that of course a bank branch, even if unprofitable, will almost necessarily have higher revenues than a local business such as a bagel place, restaurant, deli or bakery. Of course bank branches have higher revenues — they deal in high-volume financial instruments such as mortgages, not in $1.65 cups of coffee or $16 tee-shirts.
January 6th, 2009 at 12:30 pm
One other point about bank blight: since most banks are closed by six PM during the week, much of the day Saturday, and all day Sunday, they don’t attract business in the evening and can’t create (in Jane Jacobs’ memorable phrase) “eyes on the street.” For a really thriving retail environment in a neighborhood, you’d prefer to see a mix of stores of different types that appeal to impulse and walk-in shoppers, as well as cafes and restaurants that stay open late. Walk down some of these streets filled with bank branches in the evening — they’re desolate.
January 6th, 2009 at 12:53 pm
Really? Often? That doesn’t make much sense as a marketing strategy–it is terribly expensive and doesn’t seem likely to be highly effective, except maybe in a handful of cases where the location would be extremely high profile. But perhaps you can provide some evidence for this claim.
A Bank on Every Block
Aug. 9, 2006
NY Times:
The figures tell the story of a rapid buildup of branches that may be difficult to sustain in New York. From 2002 to 2005, retail deposits grew an estimated 6.7 percent, to $470 billion in the New York metropolitan region, according to the findings of a Mercer Oliver Wyman study. The number of retail branches, meanwhile, increased at a 2.8 percent annualized rate, to 5,445. That implies that the average New York-area branch increased its deposits each year by about 3.72 percent, barely outpacing the area’s average annual rate of inflation, 3.3 percent.
Nationally, from 2000 to 2005, total retail deposits have risen at a 6.2 percent annualized rate, to $4.6 trillion, while the total number of retail branches has grown 1.3 percent a year, to more than 86,000. Deposits per branch grew about 4.8 percent a year, well above the national average annual inflation rate. And in some markets like Los Angeles, Miami, and Washington — which have both fast-rising income and population rates — those figures are even higher.
The data suggests that instead of attracting the dollars of new customers, the big banks are hoping to take money away from one another — a pattern consistent with the cluster of branches at some corner locations and high-traffic spots.
Residents Fear Bank Boom Is Leaving D.C. None the Richer
By Paul Schwartzman
Washington Post Staff Writer
Monday, October 15, 2007; A01
Banks choose densely populated neighborhoods where they can lure customers. New branches generate fees, market CDs and loans, and build up the bank’s name. “In New York, you have these huge branches that are a block long, and you walk by and won’t see more than three customers,” said Kevin Fitzimmons, a banking analyst. “But it’s advertising. Your customer may come in once every five years. It gives them comfort to know it’s there.”
January 6th, 2009 at 1:06 pm
Why exactly then should we then be concerned about the bank being there instead of the coffee shop? What exactly is wrong with people having a local place to do their important financial business?
I’ve already gone into this above, but I’ll recap a few key points:
1. Hours — banks do not operate with the same long hours as other retail businesses and so their presence effectively shuts down the street at nights and on weekends (i.e peak shopping periods) for retail traffic and gives shoppers nowhere to go. This also affects
2. Safety — again, since banks have limited hours, a street composed largely of bank branches is more deserted and has less employees and shop-keepers looking out for the neighborhood at night.
3. Volume and Convenience — on a day by day basis, people need and use coffee shops, laundromats, restaurants, groceries, etc. far more often than they do physical bank branches. And as regards “important financial business”, most of that is more easily and quickly done over the phone or Internet than by walking into a local bank branch.
4. Turnover and Community Ties — since banking is a cylical business prone to booms and busts (see, uh, now), the parent banks to save money will often very quickly shutter local branches, thereby decimating a neighborhood where they have moved into. Moreover, unlike local businesses, bank branches really do not have strong community ties since they are ulimately answerable to out of town parent companies.
5. Quality of Life — in general, I suppose there are some people who enjoy living in a neighborhood of banks far more than they enjoy living in a mixed use neighborhood of pubs, cafes, galleries, boutiques, and restaurants, but I personally am not one of them. Then again, de gustibus non disputandum.
January 6th, 2009 at 1:30 pm
DTM: it is terribly expensive and doesn’t seem likely to be highly effective, except maybe in a handful of cases where the location would be extremely high profile.
Well, yes. Welcome to my world. Everyone wants a presence in neighborhoods that are percieved as hot and NYC is full of retail loss leaders. A parallel from the arts world, also in my neighborhood: the Joyce Theater is a major venue for contemporary dance. Companies from all over the world lose money to play there, because having some sort of New York season is that important for ticket sales everywhere else they go.
I think in the case of banks and other retailers, this psychology is less clearly motivated but the same forces are in play. All of which would be fine except that for long-term residents of the neighborhood, the effects of this dynamic degrade the quality of daily life: I have to walk blocks and blocks with bags of laundry. There’s no cafe left in the neighborhood large enough to bump into groups of friends by accident or meet (or flirt with) strangers. This wasn’t the case before the neighborhood got ‘desirable’ and it is – Matt’s original point – the result of astronomically rising commercial rents.
January 6th, 2009 at 1:44 pm
Then there’s this scenario: Retailer gets rent raised, closes or relocates; space stays vacant; owner saves on upkeep and enjoys loss to reduce taxes. Lots of that in downtown areas of older cities.
January 6th, 2009 at 2:03 pm
Okay guys…
1) Matt is right.
2) His terminology is awful, and awful in a way that matters–as evident by all the cross-talk.
3) Gawd, but people need to read more Henry George and Jane Jacobs. They cover this kind of problem in detail.
January 6th, 2009 at 2:07 pm
Furthermore, the real estate phenomenon that Matt is talking about is a persistent feature of resource curses as well as being part of the drawbacks of allowing financial bubbles. Matt is talking about crowding out of sustainable investment from too much money sloshing around seek returns, or failing that, social prescence/power. When the house of cards fall, we get empty bank branches, no restuarants or grocery stores where they’d be valued and a hollowing out of the economy.
Cripes, conservative economists used to rail against Keynesianism by using precisely this kind of crowding out talk, but nooooOOOOooo, Libruls can’t talk the same about Big Business doing it to Small Business.
January 6th, 2009 at 2:11 pm
A related question: Why have real estate / housing costs rarely been included in broader indices of inflation even though these costs constitute a large component of most people’s cost of living.
Over the past several years low prime rates were justified, in part, by low inflation, even as housing costs escalated. I’m no economist, but it seems to me that the disinclination to consider real estate values in an appraisal of inflation promotes a bubble.
January 6th, 2009 at 3:25 pm
as a general matter things like rising commercial real estate prices are a bad thing. You might have a store that’s selling people products they want to buy at a price they can afford. And the store could be making money. But then up goes its rent and suddenly it’s not making money. So it tries to raise prices, but that just reduces the number of people who want to buy the products and it’s still losing money.
Depends on how the gains from rising rent are distributed and how the people who have more money due to their increased income from higher rents spend the money. If they spend more money at the store buying products they want to buy, even at a higher price, the store can benefit from the higher rents. It’s further possible for this case to generalize. Your whole argument assumes that demand for the goods the store sells isn’t increasing in a way correlated to the increasing rent, I’m not sure you get to assume that.
January 6th, 2009 at 4:27 pm
Dear Matt:
Well said. This kind of Henry George thinking has been too long out of fashion. George’s economics are due for a revival.
January 6th, 2009 at 4:59 pm
First, I don’t think anyone is advocating that every single retail location should be a bank.
No, nor is anyone advocating that there not be any banks. The best solution is a reasonable mix, without an over-agglomeration of any one usage.
Second, banks aren’t the only retail places that close in the evening. Indeed, we were originally talking about an unspecified “store”, and lots of those close in the evening too.
Well, perhaps this is my New York-centrism at play but in my neighborhood most stores don’t close until eight PM at the earliest, with some retail places staying open until ten and bars and restaurants staying open even longer. Banks however shut by five or six.
But in the meantime, I think banking consumers have every right to support local retail establishments that provide banking services to them in the manner they prefer.
Of course, but this is a strawman, since no one says they don’t have the right. The reason that banks crowd into a neighborhood isn’t generally pent up consumer demand, it’s because landlords prefer higher rent and can get it from banks.
Again, holding aside the idea that anyone is advocating having only banks in retail locations, I think this gets to the heart of the matter. Bank branches are not playgrounds for tech-savvy bohemians with lots of disposal income, just places where ordinary people go to do their necessary business. So, assuming you do lots of electronic banking, I can see how you would prefer for those ordinary people to have to go someplace for their banking besides your neighborhood so that you can have one more place to spend your disposable income.
Well, since I’m not actually a tech-savvy bohemian, I’m happy for the banking to be done in the neighborhood, but I also want other things in the neighborhood so all the “ordinary people” (I’m assuming this doesn’t include me?) don’t have to go elsewhere to get shoes repaired or pick up dry-cleaning or get groceries.
To use my Montague Street example above, on one block there’s a Commerce Bank, a Bank of America, a Sovereign Bank, a CitiBank, a Chase Bank, Altantic Liberty Savings, Flushing Bank, and an HSBC, occupying, to my rough count, about 70% of the available store frontage (if you want a Washington Mutual, you’re out of luck and have to walk one block west. But if the Chase Bank doesn’t please you, there’s also another Chase ATM storefront a mere one minute walk away around the corner). It doesn’t really seem as if the ordinary people are being driven out to do their banking elsewhere, is it? And if I did want to spend my disposable income on this block, I’d have the happy choice of spending it at the Duane Reade on one corner or the RiteAid on the other.
Of course you also mentioned laundromats above, which are another less-than-glamorous sort of place that can take space away from pubs and boutiques. But I gather while you do electronic banking, you don’t own a washer and dryer. So, pubs and boutiques AND laundromats are good, and bank branches are bad, because all that happens to fit your personal lifestyle and preferences.
Yes, my personal lifestyle of eating, drinking, socializing, shopping and wearing clean clothes? Put that way I do seem to live some kind of crazy alternative lifestyle, don’t I?
Got it.
January 6th, 2009 at 10:44 pm
Careful Matt.
Honestly trying to analyze rent as a completely unnecessary drag to both capital and labor in the public discussion fear, is to address the deepest darkest hidden reality of America. It’s one thing to tangle with Zionists, but don’t try to take on property ownership reform- they’ll take your head off.
January 6th, 2009 at 11:37 pm
1) I just want to thank Stefan for his comments.
2) It’s interesting, giving current events, that we’re still hearing the sacred chants of idealized-market worshippers (and not even the techno remixes. . . ). Remember we’re talking about people here.
3. Mrs S. & I narrowly escaped an outbreak of bankudzu by moving out of (the affluent Philadelphia neighborhood/shopping district of) Chestnut Hill just in time; here is a reasonably decent article about it in the local newspaper from back in ‘07, talking about just that rising rents – bank proliferation issue.
January 6th, 2009 at 11:40 pm
“Remember we’re talking about people here.”
Just to clarify, not ‘poor suffering people’ (although that is often true as well’, but ‘a system, no matter how theoretically and ideologically clear and beautiful, being run by and through people.’
January 7th, 2009 at 12:31 am
“and that this block you describe certainly doesn’t sound remotely typical to me even with respect to the NYC neighborhoods”
Of course, because over the top bankification is a localized phenomena, occuring in ‘hot’, affluent (-trending) commercial neighborhoods.
January 7th, 2009 at 1:23 am
“Sorry, but one last serial comment on that Chestnut Hill article:”
I didn’t say the article was perfect – we are talking a neighborhood newspaper; not the New York Times or something – but it did give a little bit of detail about one specific case.
Now of course it is possible the bank representatives are lying, but on the other hand their explanation makes perfect sense.”
Does it, though? I mean, sure, they are generating deposits. Granted, casual observation (I’m only a neighborhood away, and am often in the area – including, ironically, for banking) suggests bank business isn’t exactly booming (although some of that’s surely the times). But Chestnut Hill (which should have at least one additional & unnecessary final “e” in it’s name) isn’t quite Center City (downtown Philly) – do streetview in google maps for “8600 Germantown Ave. Philadelphia PA 19118″ and head south for a rough sense of the area.
And “Clearly the neighborhood has a need“? For banking, sure, ok. For that many banks in that few blocks? (If you actually were wandering around streetview, go back to map view of the area and search for “banks”, to get a sense of things: the listing’s not quite right, and they also omitted one). That seems uncertain to dubious; rather, the landlords and the banks have needs (respectively: sky-high rents; a bunch of new, almost-vacant branches for whatever reasons). Meanwhile, the same neighborhood, having already lost the Wawa (regional chain; think 7-11, always full), has now lost the grocery store. I don’t know. Certainly I’ve never heard an actual, non-bank-spokesman person insist that on some need for more banks there – rather, the opposite, although what that proves is uncertain.
January 7th, 2009 at 1:40 am
Of course, a disinclination to defer to random cheese shop owners’ bank-business expertise is only reasonable. But the loss leader/giant billboard theory isn’t obviously unreasonable (esp. considering various other business strategies in recent years). I don’t think it’s the whole story – affluent commercial/residential areas do seem like a good place to have a bank branch, esp the way things were going lately – but it’s not clear that something like that wasn’t a consideration.
January 7th, 2009 at 1:42 am
I’m not an economist, but I have a theory nonetheless. If this is well-known, please tell me what it’s called so I can read up on it. My theory is that house prices will always be high, because after people look after the essentials like food and alcohol and TV, they’re happy to spend the rest of their income on their house. Therefore the price of houses will rise to use up the non-essential money available to people. So if the nation becomes rich, the price of houses will increase. It will never be the case that people can afford houses and they have a lot of leftover money as well. Housing unaffordability for poor people comes about because the rich people are buying the houses and pushing the price up. That’s not evil of them, it’s just sensible. But it does mean that the only sensible way to make housing affordable is income redistribution (taking from the rich and giving to the poor) and certainly not tax cuts (giving to the rich). Rising house prices are not a cause of increased wealth, they’re a symptom of increased wealth.
January 7th, 2009 at 2:35 am
“So I guess it takes a lot to be a sufficiently “hot” neighborhood.”
hot & affluent are presumably necessary, but not sufficient.
“That is also nothing close to what Stefan described, which was eight banks on a single block.”
Philly vs. NY. As a former New Yorker, sometimes it seems like Philly’s a bit of a scaled-down version. Little(r) natural history museum, little(r) Chinatown, little(r) zoo, little(r) downtown, etc. Granted, a bit of an unfair yardstick, but . . .
What’s interesting – if my CHL article gets the basic facts right – is we’re talking the same dynamics Stephan describes for Montague St. – in fact, from local businesses to (high-rent) national non-bank chains to (high-rent) banks.
“And again it is by no means obvious to me that Chestnut Hill, as described, would not satisfy the “reasonable mix” test.”
Well, it’s not wall-to-wall banks; indeed, I’ll agree that it’s still is a “reasonable mix” (so far!) -it does have the high-end end of a fairly substantially commercial corridor. But it’s increasingly, incrementally, less of one. (To be fair, there’s other things going on alongside rising rents – the current economy, of course, and etc.) And it shows – there’s that much less to do; it’s becoming that much less walkable. Still a lot left, to be sure – but other places where the balance is more on the bank/cell phone store/etc. end . . . esp. since it’s easy to see how you could start getting a kind of feedback loop.
—-
“the article got a quote from a cheese shop owner. And while I have no reason to doubt his honesty, I am not inclined to defer to his expertise on this issue . . .”
Of course, there’s also that WashPo quote Stefan has in #25, from “In New York, you have these huge branches that are a block long, and you walk by and won’t see more than three customers,” said Kevin Fitzimmons, a banking analyst. “But it’s advertising. Your customer may come in once every five years. It gives them comfort to know it’s there.”” Now, you don’t seem inclined to defer to his assumed expertise either, because the preceding sentence mentions that “New branches generate fees, market CDs and loans, and build up the bank’s name. The last part actually supports the advertising argument. As in fact, does the rest – look, nobody’s saying these branches aren’t doing any business (the contrary, really); the argument’s about whether there’s some vast, pent-up demand for 90s starbucks-saturation level banking driving this sort of thing- look, let me just quote what Stefan said back in #20:
“large national businesses such as banks often open local branches that serve as loss leaders purely for the sake of visibility and exposure. It’s not the customers who demand them from the banks, rather, it’s the banks who put them there in order to attract customers into a physical store so they can sell them other products such as mortgages, loans, investment advice, etc. It’s banking as more of a retail product. That is to say, Bank of America can afford to run local branches on Montague Street at a loss for years, figuring that the loss of revenue in that one location is made up for by the over-all increased exposure.
Additionally, banks oversature because they’re taking up space that otherwise might have been taken by a competitor: [NY Times quote arguing the spatial distribution supports this]”
—
“Of course commercial rents were rising in the vast majority of NYC. So I guess it takes a lot to be a sufficiently “hot” neighborhood.”
Looking through the thread, there’s Stefan in Brooklyn Heights, me talking about Chestnut Hill in Philly, and tim b, describing the same kind of thing somewhere else in NY. There’s also those two articles in #20 describing what sound like other cases of ‘bank sprawl’ in certain kinds of locations. (including, specifically, locations that already have – or could have – competing branches.) Not the firmest data set, sure, but not just a single bit of anecdata . .
January 7th, 2009 at 3:08 am
“The far more reasonable hypothesis is that banks are putting retail locations in retail areas for the purpose of serving retail customers.”
I’m not sure there’s substantial disagreement here. (see quoted bits in my comment right above.)
“If all the branches are collecting enough revenues from deposits and such, then yes that is an adequate explanation of why there are that number of branches.”
Well, what’s “enough”? I think the main argument here is whether we’re talking strict supply and demand-ish stuff, or more tactical/strategic stuff.
“And talk is cheap. So while various people might say they like having X or Y in their neighborhood more than Z, if they actually spend more money in Z, that tends to be a more reliable indication of what they actually need.”
Well, if X went out of business or moved because of (for example) rising rents, that might not be as reliable a measure. And the premise seems a bit shaky -we’ve spending a whole lot more money paying off the mortgage than to any other individual institution, but when it comes to what I want down the street, the pizza place/indy bookstore/cafe/food co-op all win hands down.
And thinking in terms of attractive, pleasant, walkable people-drawing communities, past a point, they’re a whole lot more valuable than yet another bank. Look, there are some pretty natural places for banks to be: big clusters in central/downtown business districts, sure, and certainly one or more in busy, non-low-income shopping areas . . . we’re talking about runaway high-rent Z sprawl; (here banks, could be other things) in neighborhoods that had been more coffeeshop and laundromat (or even boutique) kind of places.
January 7th, 2009 at 10:38 am
Stefan made the rather strong claim that these branches were “often” operating at a loss, but somehow that all made sense for banks as a marketing scheme. That is the claim I view as unsubstantiated.
I’m not sure that “often” as compared to, say, “always” is actually such a strong claim, but that aside, here’s another perspective on the issue of whether banks are actually making money off the expanded physical branches:
Not everyone, however, is convinced that it makes sense to build more branches. New York City-based First Manhattan Consulting Group (FMCG), for example, says that its studies indicate that only about 20% of de novo, or newly expanded banks consistently achieve success.
“A review of three-year-old branches shows that they have grown on average to $12 million in deposits,” notes an FMCG paper titled De Novo Branching: Pathway to Profitable Growth? “The average hides the real story, however. The best 20% of banks in the de novo game captured $30 million in deposits. The bottom 20% did almost 10 times worse, accumulating only $4 million in deposits.”
….Some equity analysts, like Thomas J. Monaco, don’t always favor branch expansion as a path to profitability. Monaco, the senior vice president and director of research with Moors & Cabot Capital Markets, a Boston-based securities broker-dealer, says that Commerce, for example, hasn’t been getting the kind of deposit growth that justifies the branch expansion.
He notes that during the three months ended December 31, 2004, 40% of Commerce’s deposit growth came from municipal activity instead of “retail” or personal transactions. And for the prior quarter, municipal deposits accounted for 50% of the bank’s growth. “The problem is that you don’t need a local physical presence for municipal relationships,” says Monaco. “Why is Commerce adding so many branches when retail growth just doesn’t justify it?”
http://knowledge.emory.edu/article.cfm?articleid=897
January 7th, 2009 at 10:50 am
Another article addressing the issue as to whether the demand is actually from the customers and townspeople — and no cheese shop owners are quoted, but instead people like the Newton economic development coordinator and the president of the neighborhood association, who presumably have some familiarity with their community’s economic and commercial needs:
Bank branches taking root, to the concern of many:
Critics say their proliferation due to market demands cuts into town’s retail diversity
By Megan Woolhouse, Globe Staff
September 6, 2007
NEWTON — Newton Centre is home to popular coffee shops, ice cream parlors, and restaurants, but one particular kind of business has come to dominate the city’s commercial district.
Banks.
There’s Bank of America and Wainright and Citibank; Sovereign, Citizens, and Banknorth; and more. Eleven in all, including three on one block of Beacon Street alone.
“It’s ‘Bank Row,’ ” Alderman George E. Mansfield said recently. “It’s displacing retail uses, some of the businesses that brought customers to Newton Centre in the first place.”
It’s not just Newton. In Needham, Wellesley, and other affluent communities, bank branches have come to outnumber coffee shops and hair salons. According to the Massachusetts Bankers Association, the number of bank branches in Massachusetts has grown 20 percent since the 1980s to 2,200.
Joyce Moss, economic development coordinator for Needham, said…”Do you ever want 50 stores of one type in one town? No,” Moss said. “The question is, what can you do about it and what’s wise to do about it?”
Babson College finance professor Ralph C. Kimball said the trend is surprising because industry consolidation has left fewer banks to choose from, and more people are now banking online. He said growth in the number of retail branches shows customers like the convenience of a nearby bank branch, where they have the option to conduct banking transactions in person and can avoid ATM fees. As for the banks, they like retail operations because they draw customers — and profits from bounced check and credit card fees.
They also like the marketing value of having a physical presence in some of Boston’s richest suburbs. “It’s a competitive effort to create a neighborhood effect,” Kimball said.
….In the wealthy enclave of Bronxville, N.Y., outside of Manhattan, local officials said they were so overwhelmed by the sheer number of banks, they enacted a zoning restriction that allowed new bank branches only on the second floor of most buildings….”There was a real hue and cry to stop with the banks,” [Mayor Mary Marvin] said. “You can’t have every sixth or seventh building a branch of a bank.”
….Lisa Gordon, president of the Newton Centre Neighborhood Association, said the number of bank branches grew slowly and “was a little insidious.”
She wishes a movie theater or a bakery would move in. And she often contacts her favorite restaurant owners herself to tell them about shop vacancies when she sees them. She said there’s great anticipation whenever a storefront goes empty, with everyone wondering what will open next.
“It’s sort of exciting,” she said. “A bank isn’t all that exciting.”
http://www.boston.com/news/local/articles/2007/09/06/bank_branches_taking_root_to_the_concern_of_many/
January 7th, 2009 at 2:10 pm
Stefan: Well, since I’m not actually a tech-savvy bohemian . . . .
DTM: The fact of where we are having this conversation suggests otherwise.
I’d hardly say that participating in a blog comments section on public policy in the year 2009 makes me either tech-savvy or a bohemian. We’re not exactly on the cutting edge here.
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