Lease Benchmark Report

Banking

With managing Payment Protection Program (PPP) loans and applications, funding entrepreneurs, and financing the housing boom, banks have been busy over the past few years. Moreover, the rise of fintechs seeking to disrupt the payment, lending and overall banking industries has been a catalyst for significant innovation.

From mobile banking to peer-to-peer payments, banks have invested significantly in their digital transformation to meet the needs of their modern customer and stay relevant in a fast-evolving sector. So far, it’s working. Bank and credit deposits continue to rise with the banking system holding about $3 trillion in “excess” deposits, according to the Office of the Comptroller of the Currency. While the growth in deposits may slow as businesses and consumers alike put cash to work, the banking industry remains in high-growth mode.

Average lease liabilities are up 20% over pre-pandemic levels, with banks remaining heavily involved in real estate leases for local branches and office space. Being knitted in, visible and accessible in the communities they serve remains a critical priority for banks, and while we may see some underperforming locations shed in the coming years, leases are likely to remain stable or expand.

Financial Services

Financial services companies, including credit card companies, insurers, real estate and financial advisors, have similarly seen a surge in demand as consumers and companies make significant shifts in their financial planning throughout the pandemic.

First by force, but increasingly by customer demand, financial services are going digital. Not only do customers now file and process insurance claims via an app, but they also meet with their wealth managers and settle credit card challenges remotely. The digitization of financial services, and rise of fintech disruptors, continues to raise questions around the amount of leased space and equipment required to usher forth the future of finance.

Whether it’s reconsidering branded high rises, optimizing building leases or shedding dated technology and equipment, financial services firms are reshuffling. Average lease liabilities and the number of building leases have increased notably from pre-pandemic levels, but more optimization may be ahead as companies seek to optimize costs in a digital industry.

Higher Education

Higher education has faced significant challenges over the past few years–from rising costs and political battles to student mental health and safety. As the costs of education rise–for administrators and students alike–the shift to remote and then hybrid education has put the overall value in question.

After decades of building and expanding, The Chronicle of Higher Education reports many campuses are “overbuilt” and starting to slow down, realizing they may have more space than they need.

At the same time, new types of higher education organizations and schools are growing to support new and emerging industries. From skilled trades training aided by virtual and augmented reality to digital-based schools, the industry continues to evolve, and so do leasing needs. As major campuses reconsider their owned and leased asset needs, average lease liabilities are on the rise, increasing 6% from 2019 to 2022. Building and office-related leases are increasing, but the largest growth is in equipment leases as schools invest in technology and tools to put in the hands of hybrid learners.

Manufacturing

A recent Federal Reserve survey showed dire pressures on manufacturers, with one company calling the supply chain “chaos” and another noting material costs were “out of control.”

Over the past two years, there have been countless examples of goods in high demand–from cars to furniture to medical supplies–that manufacturers cannot fulfill due to unavailable or inaccessible raw materials or lack of access to workers.

The pandemic persists, and the global conflict between Russia and Ukraine has raised raw material prices again, creating more volatility in the supply chain. Indeed, with every touchpoint along the supply chain strained and squeezed, costs are also rising for manufacturers across the board.

Average lease liabilities are up 53% from pre-pandemic levels, while the average number of building and equipment leases is down. Land leases, however, were up precipitously as manufacturers work to expand and optimize production through automation, location and flexibility. Looking ahead, manufacturers will continue to fight for talent and the ability to fulfill orders, and we expect to see equipment leases rise as companies look to technology to help them solve their workforce challenges.

Restaurants

Restaurants have been at the front line of many of the pandemic’s most significant challenges. The industry was already known for razor-thin margins, then forced closures, limited capacity rules, and staffing shortages caused an additional strain.

Labor costs have been particularly challenging for restaurants during the Great Resignation, with many workers leaving restaurant jobs for better paying or more flexible work. When it comes to costs of goods, prices are increasing, but not at the same rate as consumers’ costs at the grocery store. Baird Equity Research reports that grocery inflation continues to outpace restaurant costs, and the gap is at its widest since 2011. Weighing potential cost increases is likely to be a key consideration for restaurateurs in the year ahead.

The good news, however, is that the industry’s leasing trends show tremendous momentum and optimism. Average lease liabilities have not only returned to pre-pandemic levels but are 32% higher than in 2019. Building and equipment leases have increased notably, as restaurants seek new locations, expand presence to build ghost kitchens and enable delivery partners, and bolster point of sale and other in-store technology to improve the diner experience.

What’s Next

The past two years have tested companies across every industry. Strategies were made obsolete, crisis plans took priority over growth plans, and as businesses emerged from the height of the pandemic, they found a new marketplace. Rising costs, labor challenges amid the Great Resignation, disruptive technology and new priorities around flexibility and speed are defining what’s next.

Nearly every business decision to address these trends could have an impact on leases. Entering a new market may require taking on new office or factory leases and adding to your team may involve leasing additional equipment.

Leasing trends can be a signal of growth, stagnation or decline across an industry—or simply a reimagining of strategy in a post-pandemic world. While we may never go back to the “old normal,” we are only in the early days of seeing the outcomes of this watershed event in history, and so the new normal has yet to be written.

The transition date to adopt the new lease accounting standard has passed, and for companies that have adopted ASC 842, the opportunities to optimize are plentiful.

About the Lease Benchmark Report

LeaseQuery’s Lease Benchmarking Report is an annual analysis of more than 2,000 public, private, and nonprofit organizations’ financial information as they implement the new lease accounting standards. The index is designed as a benchmarking resource to help companies assess and communicate changes to their stakeholders.