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ground lease cap rates

Ground Lease Cap Rates Report

Date May 12, 2017

Ground lease cap rates compressed by 12 basis points to 4.63% in the first quarter of 2017 when compared to one year ago. Furthermore, the supply of bank ground leases on the market decreased by 17% year over year. Over the same time period, cap rates for the net lease retail sector increased by 1 basis point. This resulted in the cap rate premium associated with bank ground leases to expand by 13 basis points to 156. The increase in premium is primarily due to a shrinking supply of new bank branches. For the purpose of this report, the bank ground lease sector is comprised of both national and regional banks, regardless of credit.

A controlled expansion nationally by banks has resulted in limited new construction bank assets. As a result, the median remaining lease term was approximately 13 years despite initial bank ground lease terms which are typically 20 years for new construction branches. Bank ground leases with the longest term leases are in the highest demand amongst investors. In the first quarter of 2017, the median asking cap rate for bank ground leases with 20 or more years remaining of lease term was 4.38%. In the first quarter of 2017, 80% of the bank ground leases on the market had 10 years or more remaining on their lease term.

While investor concern lingers regarding the future need for the current concentration of bricks and mortar bank locations, investors are still drawn to the net lease bank sector. Investor demand is related to the credit of the tenants, the rental escalations typically associated with ground leases and no landlord responsibilities. In the first quarter of 2017, over 90% of the bank ground leases in the market had investment grade ratings.

Investor demand for bank ground leases will continue as private and 1031 investors are drawn to the net lease bank sector due to the typical lease structures and credit of the tenants. In the current cap rate environment, some investors will alter their investment criteria to include shorter term ground leases with above average branch deposits and strong real estate fundamentals.