Bank Properties Lead Net Lease Market

By Randy Blankstein, President, The Boulder Group: Cap rates in the single-tenant bank ground lease sector compressed by 85 basis points over the past year to a 5.0 percent cap rate.

 Cap rates in the single-tenant bank ground lease sector compressed by 85 basis points over the past year to a 5.0 percent cap rate. This represented the lowest cap rate levels in this sector since 2004. The cap rate compression was caused by increased demand for bank ground leases which on average have an overall lower absolute dollar amount than fee simple assets. Further contributing to such compression is the lack of net lease assets leased to investment grade tenants with reoccurring rental escalations; bank ground leases typically have multiple rental escalations in the primary term and renewal options. Additionally, bank ground leases historically have low default rates, require zero landlord responsibilities and have a price point that appeals to wide array of non-institutional investors. Due to the absolute dollar size and lower yields associated with this asset type, the acquisition of bank ground leases are favored by individual investors and 1031 exchange investors rather than institutions. As a result of the aforementioned attributes, bank ground leases are commanding a 225 basis point premium to the total net lease retail market sector.

Online banking has become more prevalent causing investors to have concerns regarding bank properties; however there have been limited closures of free standing locations. As the presence of online baking continues to grow, the construction rate of new bank branches has slowed when compared to the past few years. Although the increased usage of online banking has caused some financial institutions to reduce their traditional bank branches, the vast majority of new locations are relocations of inline branches moving to nearby freestanding branches. The advantages that free standing bank branches have over inline locations include superior security and convenience, higher visibility and the ability to offer multiple drive-through lanes. Free standing bank ground leased assets historically have the lowest default rates in the net lease sector and remain in high demand amongst investors despite the evolving bank branch industry model.

Transaction volume in the bank ground lease sector remains concentrated in properties with long term leases; however shorter term ground leases with strong bank branch deposits will generate significant interest. Expect investor demand to remain high with interest rates at their current level. Bank ground leases should remain a viable option for typical fixed-income investors. The bank ground lease sector will continue to demand a premium to the net lease retail market as individual investors seek investment grade tenanted properties with multiple rental escalations in the primary lease term.