This Bank of America property in Glenview, IL, which recently sold with a cap rate of 4.5%, is the type of bank location most sought after by investors.
CHICAGO—As recently reported in GlobeSt.com, the retail side of banking is undergoing a profound change as customers adopt the use of mobile apps. Banks don't need as many branch locations and many have begun to also shrink the footprint of their remaining outlets. But investors, attracted by the superb credit rating of many banks, still have an appetite for these properties, according to a new report from the Boulder Group, a net lease firm in suburban Chicago.
“It's a bifurcated market,” Randy Blankstein, president of Boulder, tells GlobeSt.com. “We are seeing less new construction and the trend is certainly for banks to get smaller,” but investors still consider properties leased by big players such as Chase and Bank of America to be safe bets, partly due to their ability to fully utilize the new technology.
In the first quarter of 2017, over 90% of the bank ground leases in the market had investment grade ratings, but properties within the top metro areas are especially sought after, he adds. “It's a tale of two markets.” And the takeaway lesson from Boulder's new report is to evaluate bank-leased properties on a “case by case basis.”
The supply of bank ground leases on the market decreased by 17% year-over-year, according to the company's new research.
But cap rates for the single tenant bank ground lease sector compressed by 12 bps to 4.63% in the first quarter of 2017 when compared to one year ago, Furthermore, by comparison, over the same time period, cap rates for the net lease retail sector increased by 1 bp. “This resulted in the cap rate premium associated with bank ground leases to expand by 13 bps to 156,” the study says.
It's not that banks have stopped opening new branch locations, but they are doing so in a controlled way. “As a result, the median remaining lease term was approximately 13 years despite initial bank ground lease terms which are typically 20 years for new construction branches.” Bank ground leases with 20 or more years remaining of lease term are in the highest demand amongst investors. In the first quarter of 2017, the median asking cap rate for such bank ground leases was 4.38%.
“In the current cap rate environment, some investors will alter their investment criteria to include shorter term ground leases with above average branch deposits and strong real estate fundamentals,” the study concludes.
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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.
