CHICAGO—As reported in Globest.com, cap rates for single tenant net leased banks recently sank to a historic low as investors continue to choose the security that comes from the investment-grade companies in the space.

In addition to the robust demand, there has also been a 30% drop in supply of these ground leases over the past year, helping to lower cap rates even further. Median cap rates for bank ground leases descended to 4.35% in the first quarter of 2015, a 40 bps decrease since the first quarter of 2014. That widened the gap between banks and the overall retail market to 205 bps.

Guy Ponticiello, a Chicago-based managing director at JLL, leads its corporate finance and net lease group, a national practice group, and helps corporations align their real estate occupancy strategy with their financial objectives. He is also works extensively with investors and developers in the sale of net lease properties. He spoke with GlobeSt.com on how he sees the retail banking sector and what he advises clients interested in such properties.

Has this industry recovered from the financial meltdown in 2008?
“Under the weight of the Great Recession, retail banking was forced to streamline operations and reallocate capital but the industry is once again on solid ground. While nearly 5,000 bank branches closed following the downturn, the number of bank branches currently in the US is within striking distance of pre-recession levels at 95,000. Bank branches per capita have even increased by 1.3% since 2003—yet another indication of stabilization within the market.”

What challenges does the retail banking world face?
In 2014, more than 86% of bank transactions no longer required the service of a traditional bank teller. Theoretically, customers can do their banking anywhere—from a phone or mobile device. But they still want personalized service when they want it and they still value the reputation of the institution almost as much as quality service. Banks would do well to implement strategies to ensure strong brand recognition.

And what do you think will happen in this sector in 2015?
A lack of investment-grade product and limited new development of bank branches is causing significant value appreciation in the industry as well as record levels of transactions. In 2014, more than $1 billion worth of bank branches traded, an increase of 30% over the previous year. Sales volumes in 2015 are not expected to be as strong as in 2014, but will remain robust. Institutional investors are buying national and regional sale-leaseback portfolios, while private investors are snapping up single branches. Low-cost debt is also facilitating greater yields.

Where are the best places for investors to be?
Markets such as California, Texas, Florida and New York are considered the retail banking “hotspots” with aggressive pricing and significant cap rate compression. Branches there, featuring high credit tenants and longer term leases of between 10 and 15 years, are boasting a 25- to 50-bps premium relative to the respective country at large. Pricing is driven by interstate migration, with the population attracted to higher employment and warmer temperatures. While cap rates are expected to soften, in line with long-term Treasuries, pricing is forecasted to continue its upward trend.

And what will happen in this sector over the long-term?
Your local bank branch has been forced to evolve over the past few years, featuring smaller footprints and more flexible space. In the future, pop-up branches and mini-bank branches will be increasingly popular. And your proximity to your banker is expected to increase as well: a recent study by EHS Design revealed that 92% of banks believe branch networks will expand in five years.