WMRE 2022 Midyear Outlook: Early Education

July 29, 2022 – By Sands Investment Group (SIG) – Despite rising interest rates, inflation, and geopolitical instability, SIG Early Education investment experts remain optimistic about the market for the remainder of 2022. With the overall market uncertainties, investors are seeking higher cap rates, which they are discovering in the Early Education sector. The current size of the early education U.S. Market is $60.8 billion. The market is expected to grow by 3.7 percent in 2022, making the sector an attractive investment opportunity.

Industry Growth

With a high expected growth rate, the childcare industry is becoming more necessary due to the country’s changing social and economic conditions. Currently, affordable childcare is a concern for parents. As the search for non-relative Childcare grows, so does the desire to own these childcare centers.

Along with the social changes, corporations have started to acquire many smaller operators due to the effects of COVID. The smaller companies had a harder time bouncing back from the lasting instances of children being unable to attend daycare during isolation periods. This leads to continued steady growth for major corporate players. The growth of major corporate players is offset by the extreme fragmentation of the market. There is a low level of market share concentration that presents itself as no single enterprise owning more than 5 percent of the total market share. Market concentration is expected to remain low moving forward in 2022.

Industry Outlook

As we look at the market today, the challenges at hand are important to note. One of the challenges that the Childcare industry faces is staffing. State-by-state, companies are seeing a drop in the number of workers applying for jobs. With that also comes the struggle of finding the best fit for the position amongst those who apply. The challenges in staffing have affected enrollment rates. Many centers are currently operating at 70 percent enrollment, but if employment levels weren’t a threat, those centers would be operating at 100 percent.

“We are responding to the staffing challenges by taking the information that we have as advisors in the space, and reeling it back to the operators. Childcare is still extremely regional, and mom-and-pops don’t always have access to the research and tools that operators within a large franchise system do. We educate smaller operators on the strategies that large franchisees are implementing to get their enrollment and employment levels up,” states Adam Bridges, SIG Early Education Advisor.

The broader market is adapting to rising interest rates and higher costs of debt financing. “We are seeing quotes on sale leaseback deals climbing by 100 basis points, which is largely affecting investors,” says Adam. However, even though the selling market isn’t as aggressive as it was a few months ago, the rising interest rates have not impacted the volume of deals being sold in the Childcare space.

While there are uncertainties in the broader CRE market, the outlook for early education shines bright. Cap rates remain high in the space, giving investors a competitive advantage in 2022. For example, the arbitrage between cap rates in the early education sector versus the QSR sector. Currently, investors can purchase a Taco Bell at a 4.0 percent cap. Meanwhile, Childcare investors can get the same credit and lease terms, but at a 7.0 percent cap. While lending terms aren’t as favorable as they were six to eight months ago, investing in early education is still a solid bet in the remainder of 2022.

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