Bank Cap Rates Compress in Q1

In the first quarter, single-tenant bank ground lease national asking cap rates decreased 12-basis points year-over-year to 5.35%, according to the 2021 Net Lease Bank Ground Lease Report from The Boulder Group.

Randy Blankstein, president of The Boulder Group, says the investment-grade credit of the tenants and the low-interest-rate environment have combined to drive rates down. In Q1, bank properties with leases of more than 18 years commanded median cap rates of 4.30%, a 10-basis point decrease year over year.  Banks with leases of 14 to 17 years commanded cap rates in the 4.8% range, while those with leases from 10 to 14 years fetched cap rates of 5.07. With leases lasting less than ten years, cap rates were 5.90%.

While long-term leases garner the lowest cap rates, Blankstein says short-term leases with strong underlying real estate fundamentals have value among investors who are willing to take on more risk through potential re-tenanting or redevelopment of a property.

“You have to dig one step deeper [with banks] than a traditional net lease, like a Dollar Store or thing of that nature where you understand there is a high renewal probability involved,” Blankstein says. “Here, it’s a little trickier. You want to make sure you have the right floor plate and one that’s probably built in the last 10 or 15 years.”

Cap rates differed by bank. Bank of America cap rates rose eight basis points to 5%, and PNC cap rates rose 12 basis points to 4.7%. On the other hand, Chase’s cap rates fell seven basis points to 4.6%, and TD Bank fell 10 basis points to 4.4%. Cap rates for other banks fell five basis points to 5.25%.

“Chase has overperformed since the financial crisis,” Blankstein says. “Occasionally, you’re also competing with Chase, who is buying their own branches. TD has a lot of Florida locations, and clearly, Florida locations are in favor from a low tax and population growth perspective. Florida has been overperforming in the last year and a half from a demographic growth perspective. So that premium has increased.”

The Boulder Group Bank pointed out that assets with the longest leases typically display the most attractive traits, including relocation branches and modern prototypes. As banks implement mobile strategies, branch closings are becoming more common.

But the space still has respect among investors.

“It’s obviously an essential business,” Blankstein says. “People still need the bank, even during the pandemic. The credit ratings are strong.”