Net Lease Bank Investors Turn Selective

By Randy Blankstein

Cap rates for the single-tenant bank ground-lease sector increased by 21 basis points (bps) to 4.84 percent in the first quarter of 2018, compared to one year ago. At the same time, the supply of bank ground leases on the market decreased by 18 percent. While bank ground-lease cap rates were on the rise this past year, the cap rates for the overall net lease retail sector compressed by 9 bps. Accordingly, the significant cap rate premium historically associated with the bank ground-lease sector compressed to 136 bps from 156 bps. For the purpose of this report, the bank ground-lease sector comprises both national and regional banks, regardless of credit.

Due to limited bank branch expansion, the market has not seen an ample supply of new construction or properties with long-term leases. In 2018, the median remaining lease term for bank ground-lease properties was about 10 years, down from 12 years only one year ago. The typical bank ground-lease investor prefers longer-term leases, which in turn has lowered the demand for this asset class due to the current supply of shorter leases. In 2018, the spread between asking and closed cap rates was 31 bps, an eight basis point increase over the prior year. This can be attributed to diminishing investor demand for the bank ground-lease sector, as banks including SunTrust and Regions have announced branch closing plans nationwide.

While investor concern lingers regarding the future need for the current concentration of brick-and-mortar bank locations, investors are still drawn to the net lease bank sector due to the credit of the tenants within the sector and rental increases typically associated with bank ground leases. Additionally, after years of bank branch closing announcements, banks including Chase and Bank of America announced aggressive retail banking expansion, which will include the opening of more than 800 new locations.

Investor demand for bank ground leases will remain concentrated in assets with long-term leases, strong branch deposits and in-place rents comparable to the surrounding area. Investors, both private and 1031 based, will carefully review opportunities and price acquisitions accordingly. The expectation is that cap rates for the bank ground-lease sector will increase in the near term, as there is a limited buyer pool of investors willing to accept the historically low cap rates these assets commanded in previous years.