Net Lease Bank Cap Rates Rise

Limited new branch expansions has led to a shrinking supply and a cap rate premium, explains Randy Blankstein of The Boulder Group.
Randy Blankstein, president of The Boulder Group
Randy Blankstein Image courtesy of The Boulder Group

Cap rates for the single tenant bank ground lease sector increased by 17 basis points to 5.47% in the first quarter of 2020 compared to one year ago. In the past three years, cap rates in the bank ground lease sector increased by more than 80 basis points while net lease retail cap rates compressed by 4 basis points. The continued increase in cap rates can be attributed to investor concern surrounding the future of consumer banking and a lack of new bank branch locations with long-term ground leases. For the purpose of this report, the bank ground lease sector is comprised of both national and regional banks.

In the first quarter of 2020, the supply of bank ground leases was heavily concentrated in short-term leases. For the second consecutive year, the median term remaining for the bank ground lease sector was below 10 years. Consequently, the premium in cap rates historically associated with bank ground leases has compressed considerably. In the first quarter of 2020, the premium for bank ground leases when compared to the overall net lease retail sector compressed from 97 to 68 basis points. From 2013 – 2015, this premium was 200-plus basis points.

While relocation and consolidation of existing branches is common today, new branch expansion remains very limited.  This is causing a decreased supply of long term leased bank properties that command a cap rate premium. In the first quarter of 2020, less than 10% of the overall bank ground lease sector was comprised of properties with 15 or more years remaining on their ground leases. As a result, bank ground leases with 20-plus years of remaining lease term commanded asking cap rates of 4.40% while ground leases with 15-19 years of term asked 4.79%.

Investor interest in bank ground leases will remain, as investors continue to value the credit quality of the tenants, passive nature of ground leases and favorable locations. However, demand for bank ground leases will remain fragmented between long-term credit investors and others who desire the underlying real estate of the bank property. Accordingly, in-place rental rates and bank branch deposits will be carefully scrutinized by bank ground lease investors.

Randy Blankstein is president of net lease advisory firm The Boulder Group