NORTHBROOK, ILL. — Cap rates for the single-tenant bank ground lease sector descended to a new historic low of 4.35 percent in the first quarter of 2015, according to The Boulder Group’s latest Net Lease Bank Ground Lease Report. The compression of cap rates signifies a 40 basis point decrease since the first quarter of 2014 and represents the lowest cap rate across all net lease sectors that The Boulder Group tracks. The bank ground lease sector comprises both national and regional banks that leases their land from a third party.
Investor demand for bank ground lease properties remains strong, as banks are one of the few single-tenant net lease properties offering long-term, absolute net leases and rental escalations in the primary lease terms.
Additionally, many private and 1031 investors look to this sector for safe and stable returns, as 90 percent of bank ground leases are leased to investment grade-rated companies.
While overall demand has increased over the past year for net lease properties, the supply of bank ground leases has decreased by 30 percent since the first quarter of 2014. The shortage can be attributed to the limited retail expansion plans for banking institutions.
The lack of new supply has led to increased competition among buyers. In the past 12 months, the spread between closed and asking cap rates decreased to 17 basis points. Additionally, there was a 205 basis point premium in cap rates for bank ground leases when compared to the retail net lease market.
The Boulder Group attributes the overall cap rate compression for this sector to the supply shortage and high demand for assets with rental escalations and absolute net leases priced between $2 million and $5 million.
Bank ground leases with more than 20 years of lease term remaining are in the highest demand among net lease investors, according to the report. From the first quarter of 2014 to the first quarter of 2015, these ground leases experienced the greatest cap rate compression in this sector (40 basis points). (It is rare for a bank ground lease to have a lease with more than 20 years remaining as the vast majority of new leases are for 20 years.)
Investor demand for bank ground leases is expected to remain strong as buyers are attracted to the low-risk nature this type of investment. Transaction volume is expected to remain concentrated in properties with long-term leases. However, shorter term ground leases with strong bank branch deposits will generate significant interest. With a shrinking supply of bank ground leases, competition among buyers seeking assets leased to investment grade tenants with rental escalations will continue.
Based in the Chicago suburb of Northbrook, The Boulder Group is a boutique investment real estate service firm specializing in single-tenant net lease properties. In 2010-2014, Real Capital Analytics ranked the firm in the top 10 companies in the nation for single-tenant retail transactions.
— Staff Reports