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Creating Value through CRE Optionality and OptimizationThe 11th Annual JLL Banking Executive Forum met in Kiawah, South Carolina, on May 5th and 6th, 2015, drawing a record number of attendees who engaged with thought leaders on hot-button issues.

The forum kicked off with a keynote presentation on Changing Consumer Behavior led by Dr. Jonah Berger, professor at the University of Pennsylvania Wharton School of Business and author of the best-selling book, Contagious: Why Things Catch On.

Throughout the forum, featured presenters included:

- Ben Pring, co-author of Code Halos: How the Digital Lives of People, Things and Organizations Are Changing the Rules of Business, and JLL International Director David Kollmorgen on Beyond the Data: Gaining Insights, Productivity & Competitive Advantage with Business Intelligence

- Andy Tilmont, Managing Director of CRE US at BMO Harris Bank, Michael O’Connor, Regional President and Director of CRE at Webster Bank, and JLL Managing Director Guy Ponticiello facilitated a session on How Capital Markets Are Enabling Optionality

- Scott McCage of Gensler on Marrying Digital & Physical in Design: Lessons from Retail for Brick-&-Mortar

- Martin Clarke, Northern Trust, SVP of Global Corporate Services Group, on Next Steps: Innovation & Ideas

We hope to see you at our 2016 Banking Executive Forum!

Joe Brady

Chairman, Banking Industry Group

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Perspectives on Changing Consumer BehaviorKeynote session with Dr. Jonah Berger, professor at the University of Pennsylvania Wharton School of Business and author of the New York Times and Wall Street Journal best-seller Contagious: Why Things Catch On

Dr. Berger opened the forum with a provocative question: With consumer behavior shaping the way retailers use space, what will the bank of the future look like? The way people do their banking has changed, evidenced by the fact that 52 percent of consumers with a smartphone completed at least one mobile banking transaction last year. What’s more, customers in the digital age are using and viewing retail spaces differently than ever before.

He discussed how leading companies recognize that retail space is a valuable opportunity for customers to enjoy a great experience with the brand, noting that Apple was one of the first companies to view its retail spaces this way. Observers initially predicted that Apple’s approach would fail, but instead the tech giant demonstrated that the value of a retail space could extend well beyond the transactions it generates within its walls. Eyewear maker Warby Parker decided in recent years to support its popular online-buying model with a showroom and pop-up stores, using the physical locations to attract foot traffic and generate positive word-of-mouth. The strategy worked, not only proving profitable at the stores but also sending more customers online, where the bulk of the company’s business remains. Likewise, clothing retailer Abercrombie & Fitch and many others across industries have demonstrated that a physical space can help build “the church of the brand” and give both devoted and prospective customers a key point of contact — an experience akin to fans attending a sporting event.

Dr. Berger asked forum participants to consider the importance of retail’s ability to confer social currency. Customers like to be treated as special, having exclusive insider access or being “in on a secret.” Just as nightspots in New York City capitalize on this, with establishments such as the Please Don’t Tell bar eschewing signage and advertising, and making the secret an important marketing tool, so can consumer brands search for ways to create a similar sense of exclusivity. Vanguard, for example, uses its MoneyWise newsletter, and Coke recently has personalized its product, taking advantage of available space to put people’s names on bottles.

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Berger went on to note that brands should search for the inner “remarkability” of their product or brand and “show” these traits rather than talk about them. For example, US domestic blender company Blendtec posts videos on YouTube of its blender successfully blending items including an iPhone, resulting in more than 200 million views and a 700 percent increase in sales. Google focused on “showing not telling” with an ad that portrayed an unseen user typing words into its search box, starting with a simple inquiry about studying abroad in Paris. Through search questions, it told the story of the user falling in love with a French girl, getting married and having a baby. Touching on viewers’ emotions, rather than simply hyping a product’s function, is a powerful consumer trigger.

When people care, they share — “top of mind” leads to “tip of the tongue,” helping to drive word of mouth. A trigger can be anything that reminds people of your brand and makes them likely to talk about it or take action. Cheerios takes advantage of the fact that more people discuss its product on social media in the morning, when they are consuming it, and gets more word of mouth than Disney World, because people experience Disney World less frequently. GEICO has used its commercial with the tag line “Happier than a camel on hump day” to great effect on Wednesdays — a day of the week when social media use spikes — making it the second-most shared ad of 2014. Some products or brands are triggered in the minds of customers by other products. For instance, peanut butter and jelly serve as triggers for each other. For banks, the question is, “What’s your peanut butter?” Kit Kat linked its brand with coffee in advertising after learning that some customers like to consume them together. Brands can seek opportunities to use these natural associations as levers and take advantage of something already popular in their environment.

To understand what kind of business you’re in and how that business could be reimagined, focus on the consumer first, rather than the product. Customers’ needs should guide strategy. In this respect, social media is not only an influencer for brands, it’s a critical market research tool, as customers are constantly giving their opinions and preferences. What do people want out of financial services that they are not already getting? The answer is an opportunity to reimagine the retail space to meet customers’ needs.

Key Takeaways

• Physical spaces help to create and manage “the church of the brand,” providing benefits far beyond simply generat-ing transactions.

• Forum participants agreed that the benefits of physical retail locations include visual inspiration, trust, a sense of safety in light of people’s enduring concerns with online security, the ability to cross-sell, an aid in building brand loyalty, and a way to strengthen brand perceptions.

• Brands need to identify their inner “remarkability” (what makes you surprising, novel or interesting?)—then show it, rather than “tell” it.

• When people care, they share: “Top of mind” leads to “tip of the tongue,” helping to drive word of mouth. Anything that reminds people of your brand and makes them likely to talk about it or take action is a desirable “trigger.”

• Focus on the customers’ needs—rather than the product—to guide strategy and help reimagine your business, using social media as a critical market research tool.

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Beyond the Data: Gaining Insights, Productivity and Competitive Advantage with Business IntelligenceSession led by Ben Pring, co-author of Code Halos: How the Digital Lives of People, Things and Organizations Are Changing the Rules of Business and co-lead of Cognizant’s Center for the Future of Work, and JLL International Director David Kollmorgen

Author Ben Pring opened the session by illustrating what’s at stake for businesses configured for the past and unpre-pared for progress. Unless they adapt to meet their full potential value, they face the risk of extinction: Kodak filed for bankruptcy protection in 2012, despite the fact that more than 10 times as many photos were taken in 2014 as in 1992. More news is generated and consumed on a daily basis than ever before, yet traditional media is in dire straits. We’re watching more movies at home than ever before, yet Blockbuster has gone bankrupt. U.S. book sales increased 27 percent in the early part of this decade, yet bookstore chain Borders collapsed. As Pring noted, “We are in an era when everything is up for grabs,” powered by connectivity. Pring discussed the catalyst of change as bringing con-sumer IT to the enterprise with the new Social, Mobile, Analytics, and Cloud technologies — the “SMAC” Stack—that are transforming work. Overall spending on SMAC is growing and is expected to reach $720 billion by 2016, while technology spending is shifting to the business side, particularly to marketing as technology is so critical to the customer experience.

The Effect of Change: The Rise of the Code Halos

Forum attendees considered the fact that companies such as Google, Pandora, Twitter, Facebook, Netflix, iTunes, Spotify and Amazon give the impression that they are reading consumers’ minds because, in a sense, they are. Their savvy consumerization of SMAC has resulted in the emergence of what Pring described as “code halos”: intricate profiles of users and customers based on algorithms derived from their digital interactions. In what Pring terms the New Code Rush, everything is becoming smart and connected, and as he cautioned, “There isn’t a single industry or company that won’t be affected.”

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The way “code halos” know us contrasts sharply with a physical store, where customers’ preferences are often unknown upon entry. But even this situation is changing as consumers increasingly carry their virtual worlds into the physical world, blurring the lines and providing even more data and access for businesses. Customers are also beginning to expect the physical world to provide the same kind of personalized experience they find online. For instance, Disney invested $1 billion in a smart digital solution for visitors, including bracelets that guide and track them around the park, link them up with tickets, serve as room keys, record payments, and more. Traditional industries are also responding with new approaches: Snapshot, the insurer, uses a mobile device to track driving behavior and bills based on the resulting analytics. Code halos are not only a sales interface—they can also be used to manage people. Pring discussed the notion of code halos around employees having a huge impact for HR departments in terms of recruitment, retainment and productivity.

The Impact on Banking

The banking “venue” is changing from branches and ATMs to smart phones, but branches – physical spaces – still drive customers’ choice of banks, with 64 percent of bank customers identifying branch convenience as the primary differentiator when selecting a bank. Sixty-one percent of customers still visit a branch at least once each quarter, though in-person interactions are declining. According to a McKinsey and BCG Survey, average projected retail banking interactions in 2016 amount to 300 on a mobile device, 102 on a desktop computer, 90 via a call center, 50 by ATM, and just two in person at a branch. The mandate is to create a hybrid branch that combines the best of the old (physical) with the best of the new (digital).

Because 90 percent of customers visit a branch each year, it remains a key channel for building relationships, but branches are changing physically to emphasize their evolving roles. For instance, more are adding private offices to facilitate one-on-one sessions. Sixty percent of branch personnel now are advisory staff – up 10 percent from 2010. And all service channel lines need to be represented – 70 percent of business banking clients visit a branch each quarter, 55 percent of commercial banking clients, and 35 percent of private banking clients.

Customers may ask, “Why doesn’t my bank provide me with suggestions, like Amazon does?” But while banks may possess all the right data to personalize the customer experience, financial data calls attention to the Achilles’ heel of code sharing: Banks must take into account the likelihood of customer resistance to information sharing, given the security issues. Banks need to understand the ethical issues and act ethically to resolve them, managing the code halo to strike the right balance between customers being known and retaining privacy. In effect, this is a new competi-tive battleground. Customers are generally happy to share information online so long as what they give is perceived as being commensurate with what they get. One solution is to provide a personal dashboard that allows an individual to decide which dials to turn up or down to manage the exposure of information.

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Key Takeaways

• Technologies in the SMAC (Social, Mobile, Analytics, Cloud) Stack are transforming work and the customer experience. Businesses face extinction unless they adapt and use these technologies to deliver what customers want and expect.

• Customers have code halos based on their digital interactions, and savvy businesses are using them to provide highly personalized sales and service.

• To manage the “new code rush” in which everything is becoming smart and connected, recognize that data is the new gold and reimagine your code using the SMAC technologies that allow commerce to be conducted in new ways. Find the squeaky wheels within your process anatomy; look for processes that shape more than 20 percent of cost or revenue; and work to re-code moments of engagement, internal or customer-facing — remembering that the customer or sales interface is the most crucial place to focus.

• Banks have the data to create code halos, yet the industry does not create or employ them to the same extent others do. A new competitive battleground exists for banks to manage and responsibly capitalize on the code halo by striking the right balance between customers’ desire to be known and to retain privacy.

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How Capital Markets are Enabling OpportunitySession led by JLL Managing Director Guy Ponticiello, with Andy Tilmont, Managing Director of CRE US at BMO Harris Bank, and Michael O’Connor, Regional President and Director of CRE at Webster Bank

JLL Managing Director Guy Ponticiello opened the discussion of portfolio optimization with some key statistics: In 2013, 53 percent of banking transactions were conducted online rather than in a branch, and the number of banking branches in the U.S. returned to pre-recession levels. However, the industry is currently in the midst of a strong recovery and is poised for growth, and 92 percent of those surveyed by JLL believe that their branch networks will be larger in five years. Forum participants were asked to consider what those networks will look like and how will they be configured.

Executives from BMO Harris and Webster Bank offered firsthand examples of how their organizations are navigating the current climate and structuring deals, framing the issues in a series of comparisons: In terms of how their portfolio is structured, for example, BMO Harris recently shed 60 branches and took write-offs, creating the option to monetize its assets and reinvest in new mobile initiatives. The bank plans to create a greater number of smaller outlets to serve the needs and desires of consumers and will accomplish this in part by repositioning 5,000 square feet branches to 1,500 square feet facilities. It is also questioning whether it wants to own assets 10 years now from now, noting many vacant assets from 6,000-8,000 square feet.

Webster Bank has already determined how it wants to proceed with real estate in the next 10 years, and will not consider a space more than 2,000 square feet. An important component Webster considers when selecting locations is what shape retail will take for the bank, including what zoning allows. Webster is intent on keeping operating costs low but is willing to take some risks. Currently, Webster Bank has 165 banking centers and plans to maintain a total around that number, with any major growth coming through mergers and acquisitions, rather than building.

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On the question of leasing versus owning, BMO Harris aims for 80 percent lease and 20 percent own in Canada, and 90 percent own and 10 percent lease in the United States. The bank wants to limit large branches (and their larger operating costs) and convert some large branches to smaller ones, to fund other spaces and cut operating expenses. Webster currently averages about 60 percent lease and is leaning toward a model of increasing that percentage and getting out of ownership of properties.

When it comes to trying out new models such as cafes or supermarkets, Webster Bank’s Michael O’Connor reported that the bank sees the value in looking “more like Apple and less like the Federal Reserve” and has tested some initiatives, but found traditional storefronts still perform much better. Andy Tilmont of BMO Harris said he sees lots of security and government hurdles to the new models. “If we’re going to divide a branch and have a neighbor, we also want someone who has ties to the brand,” he pointed out, noting that educating and getting to know consumers is the bank’s current focus.

In terms of new technologies, Tilmont noted that BMO sees advances like virtual tellers as stepping stones to other technologies and changes ahead, and “there’s still a long way to go.” He expects a paradigm shift in the next five to 10 years. O’Connor noted that Webster Bank doesn’t have a presence in markets such as New York and Chicago and does not place an emphasis on chasing trends or being an early adopter, preferring to wait and see how new technol-ogies are accepted and used by others first.

Key Takeaways

• The banking industry is currently in the midst of a strong recovery and is poised for growth, with 92 percent of those surveyed by JLL believing that their branch networks will be larger in five years.

• The market for sale leasebacks is extremely favorable for credit tenants with upwards of $8 of investment chasing every $1 dollar of opportunity.

• Forum participants were invited to think about what will those networks look like and how will they be configured by comparing how Webster Bank and BMO Harris are navigating the current climate and structuring their portfolios.

• Banks are still gauging which tech trends are going to catch on. Participants agreed that a paradigm shift is likely in the coming decade, but the shape of it cannot yet be determined.

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MARRYING DIGITAL & PHYSICAL DESIGNA.K.A. GETTING TO HAPPY

Marrying Digital and Physical in Design: Lessons from Retail for Brick and MortarSession led by Scott McCage, Retail Lead and Senior Associate, Gensler, and Joe Brady, JLL, Chairman, Banking Industry Group

Gensler’s Scott McCage asked attendees to consider two critical target audiences for the banking industry: millennials — a group with well-documented cynicism about banks — and the mass-affluent, who encompass 13 million households and $7.5 trillion in income-producing assets, and who range from young and established professionals to pre-retirees and retirees. The needs and values of these audiences and sub-groups vary widely, running the gamut from products that make life simpler, to the need for a financial advisor, to help with retirement- planning. With this diversity in mind, he challenged forum participants to envision the bank of the future: a place focused on the customer that can provide a combination of convenience and comfort, allowing consumers to connect, explore, learn and make decisions. “It is an experience that cannot be found online,” McCage noted, “because it is personal and human.”

Noting that there are 124.5 million square feet of excess bank branch space in the U.S., worth approximately $2.49 billion, McCage offered forum participants some key insights to consider when repurposing existing space or considering branch innovation:

- Traditional notes of wealth management or “stodginess” are off-putting to today’s target customers. They prefer good expertise, clean communication and multiple ways of accessing information.

- They’re a tech-savvy, self-reliant group who seek mobile tools and knowledge.

- Bricks and mortar provide critical credibility.

- Their top priority is return on investment, followed by expertise and trust.

- Privacy remains an absolute.

- The courtship period before needing a financial advisor is long.

- Social media influences their decisions and thinking, including how they settle on a financial advisor.

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McCage also challenged participants’ thinking with some off-beat strategies for repurposing space or using it to strengthen the brand, including: carving out and subletting it; creating a business incubator in-house and allowing small businesses to use unnecessary space and equipment; and curating pop-up retail outlets modeled on Deutsche Bank’s example, with more than a half-dozen sofas, an espresso bar and a library. Other ideas included installing an R&D innovation lab, a financial presentation or hospitality center, or designing a community hub with a clear purpose to be an asset for the community rather than a sales mechanism, showcasing activities ranging from job-skills sessions to performances and art shows, or offering free meeting space for small businesses, nonprofits and community groups.

Regulations and scalability pose challenges to these types of efforts, and many of the ideas are best suited for urban spaces, leaving questions about how to handle rural ones. It also remains to be seen whether banks will generate sufficient traffic from these new spaces and, because it takes time and resources to manage them, whether they will ultimately achieve their financial potential. However McCage captured attendees’ imagination with examples including the PNC Community Hub – branded differently than PNC Bank; State Farm Next Door, a financial presentation center with a space designed to introduce to services and products; and Virgin Money, a hospitality suite-club-lounge, which has increased deposits in the vicinity ten-fold.around that number, with any major growth coming through mergers and acquisitions, rather than building.

Key Takeaways

• Millennials and the mass-affluent comprise two critical target audiences for the banking industry, but the needs and values of these audiences and sub-groups vary widely.

• The bank of the future needs to be a place focused on the customer that can provide a combination of convenience and comfort, allowing consumers to connect, explore, learn, and make decisions.

• Excess bank branch space invites creative solutions to using the space and strengthening the brand.

MARRYING DIGITAL & PHYSICAL DESIGNA.K.A. GETTING TO HAPPY

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Next Steps: Innovation and IdeasSession led by Martin Clarke, Northern Trust, Senior Vice President of Global Corporate Services Group

Northern Trust’s Martin Clarke led the group through a summary of the day and a discussion of how to take the Forum forward.

Key Takeaways

• It is essential to think about the brand statement of real estate and not just its profitability.

• A new competitive battleground exists for banks to mine data and responsibly capitalize on the code halo — for example, to provide suggestions to customers, just as Amazon and others do online — by striking the right balance between customers’ desire to be known and to retain privacy.

• Privacy remains a critical consideration, and regulation makes it challenging to share information.

• It is time to move away from the mindset of branch profitability and toward the mindset of market profitability.

• A central challenge for banks in the current climate is reducing cost and excess space while enhancing the customer experience.

• Multi-channel is critical: delivering the entire bank through digital, mobile and physical spaces.

• Banks are repositioning branches vs. reducing them. Will that remain the case over the long term?

Suggested Topics for Future Discussion

• Integration of real estate services with business and hospitality services

• Adapting to the behavior and buying patterns of millennials

• Agility: How to manage the business differently in the short term

• Change management, especially associated with mobility

• Are we at the tipping point of working in the office vs. remotely?