Net Lease Investors Eye Secondary Uses When Evaluating Bank Branches

For net lease investors interested in owning properties leased by banks, the major brands are the attractions.

“Chase [Bank] is the cream of the crop,” says Randy Blankstein, president of The Boulder Group. “TD [Bank] still trades at lower cap rates because a lot of their expansion occurs in growth markets like Florida.”

But big names are only part of the allure. “People are not just looking at the brand,” Blankstein says. “They’re looking closely at the footprint.”

In older bank properties from the ’50s, 60’s and 70’s, there’s often a secondary office floor. “People just don’t like the footprint,” Blankstein says. “They don’t want the second floor for processing. It [processing] has largely been consolidated somewhere else in the country. I think people are skeptical of the older floor plans. That’s just not where people want to be.”

If the footprint is right, the landlord has a lot more flexibility. It’s possible to repurpose the bank, and its drive-through into another use. “People want a brand that can be repurposed,” Blankstein says.

For instance, Starbucks recently converted a bank into a store in Arlington, Va. That branch, which is the coffee chain’s only drive-through location in the county, consistently has lines stretching to the street since COVID-19 shut down many of its other stores in the county.

“The main reason people want to backfill banks is that they can backdoor zone into something that’s already preapproved for a drive-through,” Blankstein says. “You don’t have to go through zoning and get a drive-through from scratch, which is much more difficult, especially in older established communities. You’re just repurposing a use, and there are already existing traffic patterns.”

By using existing zoning, a Starbucks or a Chick-fil-A can secure a drive through without a neighborhood fight.

“There’s certainly been a lot of people who are looking to reuse bank branches,” Blankstein says. “It saves a lot of time.”

Blankstein says this is why investors drill down into locations, mainly when a secondary brand occupies a bank branch.

“A lot of them are older,” Blankstein says. “They tend to have better locations in some of the more mature markets. So, they have pretty good residual uses.”

But despite the attraction of secondary uses, net leases investors can’t ignore the most profitable use of these buildings.

“If you still have a long lease on it, most people aren’t buying for the residual use,” Blankstein says. “They’re buying for the likelihood that they’re going to renew. So you have to drill down on the rent and the business plan.”

One thing worth drilling down on is the location of the bank. Blankstein says investors want to get out of strip centers and into freestanding places.

“They want the visibility,” Blankstein says. “They don’t want to be dependent on some of these strip centers, which have transient tenants.”