U.S. net-leased, bank-occupied properties that have significant remaining lease terms “continue to command premiums, as do bank properties subject to ground leases,” according to a new report from Avison Young. Further, through the second half of this year, average closed cap rates rose by 5 basis points over the first half of 2018.
That asking cap rates versus sold cap rates show little correlation by tenant or geography, the report says, “indicates that the quality of the underlying real estate has begun to heavily influence investor decision-making.”
The report also finds it noteworthy that the net-lease bank market (average cap rate 5.72) “trades very favorably” compared to the net-lease retail market overall (average cap rate 6.44). This indicates that, “even in times of uncertainty, strong tenant credit and well-selected real estate offer significant upside to risk-averse investors.”
About six months ago, Randy Blankstein, president of The Boulder Group, made similar observations to Commercial Property Executive: “Investor demand for bank ground leases will remain concentrated in assets with long-term leases, strong branch deposits and in-place rents comparable to the surrounding area.”
And this is not a small sector. Based on FDIC data on the number of bank office and branch locations nationwide—more than 90,000—and AY’s data set for this paper, Asher Wenig, the report’s author and senior director of net-lease sales with AY, estimates that the nationwide total of net-leased, bank-occupied space is roughly 468 million square feet.
Cap rate spreads between on-market and sold bank-occupied properties vary substantially across the country, from -14 basis points in the South (5.79 percent on-market to 5.65 percent sold) to +94 basis points on the West Coast (4.25 versus 5.19 percent). Wenig explained this to Commercial Property Executive: “In the South, the average remaining lease term of the properties sold was significantly higher than the remaining lease term of properties on the market. Investors are showing continued risk aversion by choosing to pay lower cap rates for secure long-term investments.”
“In the West,” he continued, “the market is flooded with short-term product asking for long-term cap rates and long-term product looking for record low average cap rates, sub-4 percent. … The West Coast buyer has been willing to pay less for a more speculative, short-term investment in that region. Although they’re getting a ‘discount,’ the cap rates are still lower on the West Coast compared to the other four regions.”
The report notes that average sold cap rates specifically for Bank of America were heavily influenced by six sales on the West Coast, which reduced this figure significantly.
Again, Wenig explains: “The increase in West Coast sales caused a compression in average cap rates for Bank of America. The Bank of America net-lease properties in California traded at an average cap rate of 4.84 percent, compared to the remaining comp set trading at a 5.96 percent average, a 112 basis point spread.”
Image courtesy of Avison Young