Hot in the City: What the Urban Revival Means for Banks

Ron Tilton gazes down the 16th Street Mall in Denver's lower downtown, or "LoDo," district on a sparkling winter afternoon, marveling at the growth that has come to his city. In the foreground, glimmering office and residential buildings rise adjacent to a new $500 million transit hub. Behind, just across the South Platte River, lies a sea of rooftops called Highlands—much of it newer construction.

"Twenty years ago, this was all fields," says Tilton, FirstBank's president for the Denver market, sweeping his hand over the panorama. "Today, it's this very vibrant urban area."

Roughly 1,300 new residential units were completed in 2013 within a 1.5 mile radius of downtown, according to local development authorities. Another 6,000 units are under construction. With the people have come retailers, restaurants, corporate tenants and, for banks, plenty of opportunities for new business.

Jonathan Lorenz, chairman of the $2.8 billion-asset CoBiz Financial’s Colorado Business Bank and Arizona Business Bank, says he's financed plenty of apartment construction and commercial real estate near downtown and is cashing in on new business-lending relationships.

"It's going to get overbuilt and ahead of itself at some point," Lorenz says. But any potential slowdown will likely be more of a breather than a halt, he quickly adds.

"I think this is a movement that's here to stay. Young professionals are gravitating to the city. It's a very vibrant, addictive lifestyle."

Denver, which saw its population jump 2.3% in 2012, isn't the only urban center experiencing a boom. For the first time since the 1920s, central cities have been outgrowing their suburbs. In total, 16 of the 20 largest U.S. cities experienced growth rates faster than their surrounding suburbs between 2010 and 2012, according to census data.

The list includes "primary" markets such as New York City, which gained 161,000 people during those two years - nearly equaling the 166,000 it added during the entire previous decade—and Los Angeles, which added 65,000 in the same two-year period. Even Chicago, which lost 200,000 residents between 2000 and 2010, bounced back to gain 19,000 residents between 2010 and 2012.

Cities considered to be "secondary" markets—regional hubs like Denver, Atlanta, New Orleans and Charlotte—also have been outstripping their surrounding suburbs' growth rates by comfortable margins.

Leigh Gallagher, author of the book, "The End of the Suburbs: Where the American Dream is Moving," and an editor at Fortune, says Americans are seeking a greater sense of community in their living arrangements, and more pedestrian-friendly environments.

The shift represents a "180-degree turn, a phenomenal change that's already having quite an impact" on the economy and, potentially banks, she says.

In Minneapolis, city dwellers who not long ago had to trek to the suburbs for toothpaste or their weekly groceries now have a Target and two high-end supermarkets downtown. "I like being in the city," says Melissa Krasnow, a 30-something attorney who lives with her husband and son in downtown Minneapolis.

"I like having sidewalks and parks. I can walk to the grocery store. I can walk to work, and don't have to worry about driving in rush hour each morning," she says. "I wouldn't have it any other way."

The demographic changes are occurring across the generational spectrum in barbell effect. Retiring baby boomers, eager to ditch the house-and-yard upkeep of suburban life and inject more culture and walkability into their lives, are moving to the city. On the opposite end, millennials—young adults below age 35—are drawn to a faster-paced urban lifestyle and, after the Great Recession, are less willing (and in some cases less able) to embrace the old American dream of homeownership.

The betting is that there's some staying power to this movement, with potentially far-reaching effects on the economics of urban areas. To wit, large employers already are returning to cities, eager to tap into the creative, young workforce and its new ethos of collaboration and networking.

For banks, the scenario promises the opportunity for more—and different kinds of—lending, deposit-gathering and other activity in cities.

"You have two huge demographic groups that are both pushing their ways urban," says David Hendrickson, a managing director for Jones Lang LaSalle, the real estate broker. He notes a surge in the building of apartment, condo and mixed-use facilities around the country. "It's a real game changer."

However, not everyone is convinced we're on the cusp of a landmark shift in living patterns—let alone anything that demands a big, strategic response from banks. While the revival of the core is evident, it's difficult to bank on long-term demographic predictions. Less than a decade ago, it was the exurban subdivisions that were all the rage.

Joel Kotkin, a fellow in urban studies at California's Chapman University and executive editor of newgeography.com, calculates that about 2 million millennials moved to the cities between 2007 and 2012—nothing to sneeze at, but not earthshaking, either. Already, he adds, data show more 30-somethings are returning to the 'burbs.

"People do not maintain the same preferences all their lives; their needs change as they get older," Kotkin writes on his blog. "Each stage leads them toward somewhat different geographies."

Boomers, too, might not prove to be as willing to uproot themselves from the suburbs as many believe—and the suburbs certainly won't be giving them up without a fight. While cities are adding more suburban-style amenities like big-box stores and cleaner streets, it's also true that inner-ring suburbs are becoming more like cities, by adding multifamily properties and promoting more pedestrian-friendly development.

For banks, the budding movement of people and businesses to the cities is playing out against a backdrop of sluggish economic growth, harsher regulatory oversight, rapid technological change and earnings pressure. Cost controls are a priority, which dovetails nicely with the behavior of younger city dwellers, who generally are comfortable accessing their banks online or via mobile devices rather than visiting branches.

"Whatever growth we're seeing in cities clearly matters less than it would have a decade ago, simply because of the adoption of digital channels," says David Stein, executive vice president and head of retail banking for Green Bay, Wisc.-based Associated Banc-Corp, which competes in Chicago, Minneapolis and Milwaukee.

Clayton Baker, head of consumer financial advisory services for Ernst & Young, acknowledges the recent bump in urban populations but says he knows of no set "urban strategy" for banks, no blueprint to follow for success. Banking is banking, to a certain extent. "There isn't just a model you can overlay on an urban market," he says.

Many banks tend to define the world in terms of silos and broader regional markets, and are content to let things play out—for now, at least—without specific plans for the urban core. "We really don't think of Denver as just the city," says Mike Matthews, Wells Fargo's market president there. "We think of it as the entire metro area."

Even those that are intrigued by the growth of the cities are moving cautiously. Anecdotal evidence suggests that banks are being scrutinized by regulators who are on the lookout for the next lending bubble and are worried it could come in urban real estate.

"We put out a caution to our lenders two years ago: When it comes to multifamily, you've got to be very careful," says Joseph Hoesley, vice chairman for commercial real estate at U.S. Bancorp, which has been lending to more city projects in recent years.

"There's a huge wave of [multifamily] units coming to the cities," Hoesley says. "But you want to step back and not get caught up in frenzy that everyone is going to move downtown, only to find out that no one between ages 25 and 35 will ever want to buy."

Even so, the recent population surge in the central cities, with its barbell pattern of the young and not-so-young, offers bank executives some intriguing food for thought.

Bruce Katz, founding director of the Metropolitan Policy Program at the Brookings Institution, says the growth of the urban core promises greater demand for multifamily housing, restaurants and cultural amenities, while decreasing the demand for single-family residences, cars and other suburban staples.

New or expanded lines of business, including lending for mixed-use developments, health clubs or condo associations, could be attractive. An influx of boomers also presents more opportunities for trust, private banking and wealth management services in urban venues, while millennials are ripe for targeting as long-term retail customers.

Katz says banks that think proactively stand to benefit. "You're going to see a lot more high-density expansion in the urban core," Katz says. "Some banks will recognize that things are shifting, and adjust to get first-mover advantage."

At $13 billion-asset FirstBank, based in suburban Lakewood, Colo., management has "been talking about downtown [Denver] in a very intentional way" for more than a decade, Tilton says, and is now seeing a payoff. In recent years, the bank has been "making more residential loans downtown—more multifamily and condo loans—than we ever used to."

It also has helped finance two of three new downtown office buildings under construction, and in March opened a branch near Denver's new transit hub.

"It's been a big change for the bank, but we follow the activity," Tilton says.

While the number of bank branches has fallen by more than 3% nationally since 2009, FDIC figures show that branch counts in city centers have grown in markets ranging from San Francisco to Cleveland to Washington D.C.

TD Bank, the $217 billion-asset company based in Cherry Hill, N.J., has added 65 branches to its network over the past two years—most of them in hotly competitive cities like Manhattan and Miami.

TD is "happy to take the fourth corner of a major intersection when the other three corners are occupied by major institutions," says Bharat Masrani, chief operating officer of its Toronto-based parent company.

"That might sound counterintuitive, but our model"—which includes extended hours, free coin counters and treats for the dog—"works particularly well when we have a lot of competition around us," Masrani says.

In Boston, where the population in 2010 crossed 600,000 for the first time since the 1970s and has grown more than 5% since, five suburban banks have opened city outposts in the past three years.

"We're not talking about them moving to a suburban-like part of Boston. We're talking downtown, Back Bay, South End, the Seaport District—the core parts of the city," says David Floreen, a senior vice president with the Massachusetts Bankers Association. "They're seeing real opportunities for new residential and business lending."

In Chicago, Wintrust Financial is one of several suburban banks attacking the core city's diverse market. CEO Ed Wehmer's goal: a branch in each of the city's 50 wards.

"The city is the growth market," he says. "All of the residential construction we've funded recently has been in Chicago."

Many midsize banks that lack the resources to cover an entire city are opting for more-targeted, piecemeal branching strategies. In Chicago, for instance, Associated aims to "saturate" only select areas of the city, such as the North Loop, where it has a cluster of four branches.

"It's hard to completely blanket a city like Chicago," Associated's Stein says. "We'd rather be a local market leader than have a branch sitting in some random neighborhood with no other Associated branches nearby."

Wehmer says that's a mistake. Competing in the Chicago retail market, he argues, requires hand-to-hand combat in 50 different wards, each with its own nuances and each requiring a physical presence.

Some bankers "think they're dealing with one homogeneous group," he says. "But this isn't the suburbs. There are subtleties and centers of influence in each of those wards. Each one has its own flavor—German, Polish, Lithuanian, Hispanic.

"You can't succeed by giving a generic response to those consumers," Wehmer adds. "Your service needs to be localized, but you also need reach."

Many banks are relying on technology to address their distribution issues. Daryl Byrd, CEO of Iberiabank, notes that post-Hurricane Katrina New Orleans has experienced an "off-the-charts" explosion of people, projects and lending opportunities.

But branch transaction volumes are falling, while mobile transaction numbers are soaring. So in recent years, Iberiabank has pruned its branch network in the city while adding more remote ATMs.

"The city offers tremendous opportunities for us," Byrd explains. "But we need more access points. We don't necessarily need more branches."

Dan Latimore, a senior vice president at the advisory firm Celent, says many of his bank clients are treating cities, with their preponderance of young, hip customers, as a laboratory for testing—and promoting—broader cost-saving strategies, such as smaller branches or mobile apps.

Banks "are fascinated by, terrified by and perplexed by millennials," Latimore says. This is a segment of customers, he notes, who are just beginning to form lifelong "habits and expectations for managing their financial lives, and their concentration in the city provides an opportunity to train them to get by with a 400-sq.-ft. branch."

Last year, Wells Fargo opened an experimental 1,000-sq.-ft. "neighborhood bank" branch in Washington D.C.'s "NoMa," or North of Massachusetts, section. The location is less than a mile from an existing branch, "but in an urban environment, a mile can feel like five miles," says Jonathan Velline, the company's head of ATM banking and store strategy.

The new branch is heavy on ATMs with touch screens, and employs just five people, equipped with tablets, who mostly help customers navigate the technology. A small back room is available for more personal needs. "We're trying to find the right balance of density, costs and formats for the city," Velline explains. "We can open two neighborhood banks for the cost of one traditional branch."

There are ways to play the growth of the cities that have little to do with distribution. U.S. Bancorp's community development bank, for instance, makes and facilitates equity investments in urban projects, typically mixed-use developments that receive federal or state tax credits. Over the past year, it has arranged about $100 million of such investments in St. Louis alone.

"It used to be that the cities were about corporate downtown workers who lived in the suburbs," says Zack Boyers, the unit's St. Louis-based chairman and CEO. "Now it's about a more entrepreneurial, creative class that wants a denser, more walkable living experience."

That's fueling a boom in multifamily construction that promises to change the face of cities, (and some inner-ring suburbs), as well as bank loan books. Today's multifamily buildings are pricey, with large windows, common meeting spaces and health club facilities. They also must be wired for the Internet. Such amenities can add millions to the cost.

After getting burned on exurban developments during the financial crisis, bankers say they are eyeing urban real estate markets closely, looking for signs of overcapacity. A recent surge of new apartment buildings in Washington D.C., for instance, has sparked some concern about rental rates there.

Likewise, the 5,000 new apartment units that hit the Chicago market in 2013, to be followed this year by even more, are sparking worries of a glut. "It feels like a lot," Jones Lang LaSalle's Hendrickson says. "But with the population growth we're seeing, it's totally sustainable. I think we have a lot more demand left."

To cut their risks, lenders like U.S. Bancorp are hitching themselves to savvy developers, rather than seeking business on their own.

"We'll never say, 'Chicago is hot. Let's finance something there,'" Hoesley says. "We go where our clients go. They know the markets better than we do."

The influx of people into the city also is generating new commercial-banking opportunities. A decade ago, technology and pharmaceutical firms buried themselves away in suburban office parks to protect intellectual property. Today, collaboration and networking are the buzzwords, and proximity to young workers raised on those ideas is considered crucial.

In 2013, Google moved its 500-employee Chicago headquarters to the once-dicey West Loop meatpacking district, while the company's 2,000-employee Motorola Mobility unit has relocated from suburban Libertyville, Ill., to the Merchandise Mart, an iconic city building along the Chicago River. (Google announced plans in January to sell Motorola Mobility to Chinese computer maker Lenovo.)

Boston has welcomed new facilities from pharmaceutical giants Pfizer and Novartis. Employers "want to be near that talent pool, which means being in the city. And workers also want to be closer to their jobs," Katz explains. "It's a virtuous circle."

Smart banks are working that corporate proximity to their advantage. In 2009, DaVita Healthcare Partners, a large kidney-care firm, moved its headquarters to Denver from El Segundo, Calif., seeking what CEO Kent Thiry called "an environment where our people could live great lives."

CoBiz established and nurtured a relationship with DaVita after it came to town, and it paid off. Today, Lorenz's bank finances the construction of new kidney dialysis centers for physician groups around the country, providing both growth and diversification to its loan book.

"We've developed a great niche with them, but we never would have had any contact with DaVita if they hadn't moved here," Lorenz says. "The growing strength of the urban core allows you to attract these businesses."

Where is all this change headed? No one knows for sure. Katz says the growth of cities is "less a leading trend than the outcome of big, disruptive market and demographic forces" that are changing the way companies and people live and work.

"The bottom line is that the landscape of the United States is going to look very different in 10 or 15 years," Katz says. "You're going to see a lot more reinvestment in the core, more people living in the city and a lot more urbanization in the suburbs, too."

Banks that play this wave of urban growth right could have an advantage in the years ahead.

John Engen is a freelancer. He is based in Minneapolis.