CHICAGO—Last year the cap rates for single tenant net leased banks sank to a historic low, but in the past 12 months investor demand has helped push those rates even lower, according to a new report from the Boulder Group, a net lease real estate firm located in suburban Chicago.
“The surprising thing is that banks were already getting a huge premium over the rest of the net lease market,” Randy Blankstein, president of Boulder, tells GlobeSt.com.
Median cap rates for bank ground leases descended to 4.35% in the first quarter of 2015, a 40 bps decrease since the first quarter of 2014. That widened the gap between banks and the overall retail market to 205 bps. Furthermore, this new record represents the lowest cap rate of all net lease sectors tracked by Boulder. Both national and regional banks, regardless of credit, comprise the bank ground lease sector.
The low cap rates generally preclude the involvement of institutional investors, Blankstein adds, due to their need to generate higher returns. “You really don't see that group interested in properties with cap rates below 5.5%.” But because investment grade rated companies dominate the bank sector, many private and 1031 investors look to it for safe and stable returns. And banks are one of the few net lease investments that typically provide long term leases and significant rental escalations in the primary lease terms.
A 30% drop in supply of bank ground leases over the past year also helped drive the cap rates down so low. “There was a bit of an arms race among banks in the past few years over establishing new locations,” Blankstein says, “and they kind of got ahead of themselves.” Currently, many banks have decided to curtail new construction and wait to see how online banking will impact the need for more retail locations.
But cap rates in this sector may still not have hit bottom. Blankstein points out that McDonald's ground leases have gone below 4%, and sometimes down to about 3.5%. “That shows that rates can compress even further” if the competition among private and 1031 investors gets even more intense.
The median rates for Chase Bank and TD Bank locations have already hit 4%. And last September, a Chase Bank in Thousand Oaks, CA sold for $4.85 million at a 3.97% cap rate, according to Boulder's report. The company did not handle that transaction.
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
