New construction is sought after, but rarely found these days

CHICAGO—Cap rates for single tenant net leased banks have sunk to their lowest level in years, 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 drug stores like Walgreens had also hit historic lows, but the data show that investors find banks the most appealing, and over the last four years the gap in cap rates between banks and other retail has widened to about 200 bps. Prior to the recession, that gap was usually about 50 bps.

“Banks typically the only net lease investments that offer leases of over 15 years, investment-grade tenants and include built-in rental escalations,” Randy Blankstein, president of Boulder, tells “A lot of people worry about inflation down the track and rental escalations alleviate that concern.”

Boulder included ground leases from national and regional banks in the study, and found that 95% had an investment-grade rating. Overall cap rates sank from 5.0% one year ago to 4.75% in this year’s first quarter. Rates for PNC fell from 5.25% to 4.5% and those for TD Bank fell from 5.0% to 4.35%. And “bank ground leases with twenty or more years of lease term remaining experienced the greatest compression of 52 bps in the past twelve months,” according to Boulder’s new report.

“Many banks prefer to buy their own properties, which takes a lot off the market,” Blankstein says. Furthermore, like many other retail operators, in the aftermath of the recession bankers have decided to remain cautious about building new outlets, and instead content themselves with cheaper, less risky options, such as renovating existing locations. These strategies put a restraint on supply and increase competition for the remaining product.

“It’s a combination of all these factors which brought the rates down.”