In 2021, childcare assets are a product type to watch for commercial real estate investment opportunities. These assets are ideal additions to a net lease portfolio that provide long-term benefits and witness current growth as the industry bounces back from the COVID-19 pandemic. Childcare assets commonly provide long-term leases, corporate tenants with valuable reputations, strong operators, and—perhaps most importantly—owners who are highly committed to their businesses. These owners are passionate about their programs as they genuinely want to see children receive a quality education and care at their facilities.
This product type also offers a variety of tiers that can provide investors with higher rates of return than more familiar net lease asset classes. The first tier is corporate schools, such as KinderCare and Bright Horizons, which due to their credit and unit counts typically have the lowest rates. The second tier level is schools with 100 to 200 locations nationally, and the last group is the one-off owner users who operate a single location. The investor is rewarded for the potential risks of backing a smaller operator but often can find comfort in the more direct communication with their tenant.
One unique component of childcare assets as a net lease investment is that tuition rates are the main indicator of business performance and are typically a monthly or year-long sales cycle. Compared to a restaurant or retail location with more and smaller variable sales, educational facilities depend on the number of students enrolled and the potential for additional recruitment. There’s a deeper connection with their customer and it’s very conducive to building trust with a learning environment where kids can grow and thrive. Established schools and staff find less variability with their sales while providing a likely strong investment for their landlord.
We’re currently seeing a high demand for these assets, as childcare has proven to be essential throughout the last year, and schools and daycares are finding creative ways to adapt to the safety and health needs of their students and faculty. We have been able to structure sale-leasebacks to operators looking to reduce debt, lower occupancy costs, and raise capital to expand their current operations or purchase additional schools. We are seeing significant consolidation within the space and believe there is a strong window of opportunity for investors to benefit from attractive yields before this diamond in the rough is discovered.
For more information regarding the early education market and sale leaseback transactions, please contact a SIG Advisor.
Net Lease Advisor, SIG