The Bank Ground Lease Sector is Bifurcating

National asking cap rates in the single-tenant bank ground lease sector increased to 5.47% in Q1, according to the Q12020 Net Lease Market Report from The Boulder Group. That was a 17-basis point year-over-year increase.

In many ways, the bank ground lease sector is a tale of two markets. In Q1, much of the supply of bank ground leases came from older buildings with less than ten years remaining, which pushed cap rates higher overall.

On the other side are the new branch locations, which are in limited supply as banks have reduced their national expansion plans. The result is that the premium in cap rates historically associated with bank ground leases has compressed considerably, according to The Boulder Group.

In Q1, the premium for bank ground leases when compared to the overall net lease retail sector shrunk from 97 to 68 basis points. Between 2013 and 2015, that premium was more than 200 basis points.

Not surprisingly, investors valued long-term leases in Q1. Less than 10% of the overall bank ground lease sector consisted of properties with 15 or more years remaining on their ground leases. Bank ground leases with more than 20 years of remaining lease term commanded asking cap rates of 4.40% while ground leases with 15 to 19 years of term asked 4.79%.

While the coronavirus has impacted the market, Randy Blankstein, president of The Boulder Group, thinks the bifurcation of the bank market between the five or six top brands and everyone else also had an effect.

“There’s a long-term consolidation going on,” Blankstein says. “Everyone is focused on the main brands.”

People are also concerned about the long-term viability of bank branches over the next ten or 20 years, which can also make them skittish about investing. With questions about banks having fewer branches and drive-throughs, it’s hard for investors to gain the certainty they need.

“People are trying to get a handle on what banking preferences look like,” Blankstein says. “I think there are going to be fewer bank branches.”

But Blankstein doesn’t see a dramatic decline in bank branches. “I think it’s going to go down slightly because I think people are going into the branch less than they used to,” he says. “People don’t go as much as they used to, but they want to know when there’s an issue, or they need to open a new account they have a place to go into.”

Most of the new locations seen in the bank sector can be attributed to relocation or consolidation of existing branches, according to The Boulder Group.

Blankstein says that banks are trying to make their branches more modern with a sampling of new services. “I’m not so sure how some of the new concepts are going to go,” he says. “Capital One has turned some location into a cafe. I think the jury is still out on that. Is it going to get millennials in? Will they feel a need to hang out there?”