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Merging banks to put pressure on downtown real estate: Huntington, Sky to combine offices, but where?

January 8, 2007

Ohio-based Huntington Bank's plans to buy Sky Financial Group Inc. will mean more available office space in a downtown market already awash in it.

"People never merge without reducing their space," said Jeff Harris, president of locally based Meridian Real Estate. "[This merger] is not going to have a monumental effect overall, but it's just more square feet, another hole to be filled."

Columbus, Ohio-based Huntington Bancshares Inc. announced Dec. 21 that it agreed to purchase Bowling Green, Ohio-based Sky Financial Group Inc. for $3.6 billion. The transaction is expected to close in the third quarter of 2007.

Where the surviving entity will make its headquarters is still being debated, but a large vacancy downtown is almost assured. Also up for discussion is the fate of the 63 Indianapolis branches the combined bank will have.

Sky Bank is the sole occupant of the 75,000-square-foot Sky Bank building at 45 N. Pennsylvania St. Sky acquired and renamed the building via its October purchase of Indianapolis-based Union Federal Bank.

Huntington leases roughly 35,000 square feet in the south tower of Capital Center, at 201 N. Illinois St. Cindy L. Keitch, who runs Huntington's local operation, didn't return a call seeking comment on the future of the space. Area brokers said the bank signed a 10-year renewal last fall. The building is owned by Invesco, an international investment management firm.

Sky's Regional president, Mike Newbold, who will run the merged bank operation here, said he and Keitch are scheduled

to meet soon to discuss office locations.

"One thing we have on our plate is to decide what facilities would accommodate a merged staff," he said. The main goal, he said, will be to have everyone together, but where hasn't been decided.

Sky Bank's headquarters building was constructed in 1970. The merged bank might choose to stay in a building it owns, but the Sky headquarters has disadvantages. The amount of square feet per floor-about 9,000-is about half the size of a floor in Capital Center, which was built in 1980. Larger floor sizes are generally considered more efficient.

John Vandenbark, with the local office of Los Angeles-based CB Richard Ellis, heads up leasing in Capital Center. He declined to comment about Huntington Bank's space, but said banks in general play a huge role in the downtown office market.

Based on rough estimates of area leases, he said bank offices probably take 10 percent to 20 percent of the central business district's 11.4 million square feet of office space. Law and accounting firms are the other big users.

With the exception of mergers, banks are usually stable tenants because they have signage on buildings, he said. "They don't generally move a lot from one building to another."

In recent years, downtown's office vacancy rate hit a high of 18.5 percent in 2003. The percent of vacant space has hovered around 15 percent since then, and there's been virtually no new office space added. Some smaller spaces were absorbed as buildings were converted into condos or sold to owner occupants.

Perhaps the biggest blow to the downtown market came in 1998 when Banc One Corp. bought First Chicago NBD Corp. Both banks had namesake towers in downtown Indianapolis. One Indiana Square eventually lost out when Bank One vacated 270,000 square feet and consolidated operations in what was then called Bank One Center, a newer building that is the state's tallest. Chase Bank bought Bank One in late 2005 and the 48-story building at 1 E. Ohio St. was renamed Chase Tower.

"The continual pressure [from vacancies] and with fewer banks using fewer square footage, it helps keep rents downtown essentially stagnant," Harris said.

Many firms that traditionally had offices downtown have either downsized, moved to the suburbs, or opted to own, rather than lease, their office space.

The biggest hit for the downtown office market last year was Simon Property Group Inc.'s move to its newly built downtown headquarters. It vacated 172,000 square feet at the National City Center, putting more pressure on building owners and brokers to retain and attract tenants.
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