Bank cap rates are historically lower than other retail, but have now sunk even farther

CHICAGO—Cap rates for single-tenant bank ground leases have sunk to their lowest level since 2004, according to a study recently released by The Boulder Group, a commercial real estate services firm located in suburban Chicago. Last month, reported that cap rates for the single-tenant net-leased market were at historic lows during the first quarter of 2013, but the rate for banks has plunged even lower than other types of businesses.

The bank cap rates compressed by 85 basis points over the past year to 5.0%, The Boulder Group found. Cap rates for other retail remained above seven percent. “The cap rate compression was caused by increased demand for bank ground leases which on average have an overall lower absolute dollar amount than fee simple assets.”

Furthermore, few net-lease assets have investment-grade tenants with built-in rental escalations. These types of leases are fairly common among banks, however, which also have very low default rates, making the properties quite attractive to investors.

“The market for bank ground leases with investment grade tenants remains strong as investors are attracted to the typical long-term leases with rental escalations.” said Randy Blankstein, president of The Boulder Group.  Jimmy Goodman, partner of The Boulder Group, added, “High net worth individuals are attracted to net-leased assets as they over a more favorable return then most financial securities.”

Many banks have leases which can stretch out for decades. For example, The Boulder Group recently completed the sale of a free-standing single-tenant Fifth Third Bank located at 240 Skokie Boulevard in suburban Northbrook for $3,925,000. This Fifth Third had a lease with fifteen years remaining at the time of sale and included multiple rent escalations. The property was first developed in 2004.

And in April, the firm completed the sale of a single-tenant Associated Bank ground lease located at 622 Machesney Road, Machesney Park, Illinois for $1,180,000. Associated Bank is the sole occupant of the 3,358 square foot retail building located on one-acre parcel. The ground lease was extended an additional twenty years and features multiple rental escalations in the primary term.

Although online banking has had an impact on retail locations, Boulder officials say few freestanding bank locations have been closed. Unlike in-line retail locations, the freestanding ones have great visibility and typically include drive-thru lanes, keeping them convenient for customers.

“Freestanding bank ground leased assets historically have the lowest default rates in the net lease sector and remain in high demand amongst investors despite the evolving bank branch industry model,” the Boulder study said.