Signs Point to a Strong Recovery for the Early Education/Childcare Net Lease Sector

The early education/childcare sector has been a staple for net lease investors. The market has a varied mix of large and independent operators, and the need for these essential facilities is truly nationwide, providing ample supply for buyers. As we emerge from the pandemic, market dynamics are shifting, and investors are revisiting this asset class in earnest. We caught up with Milo Spector to discuss trends and changes across the sector and his predictions for 2022.

Lanie Beck: How is the early education/childcare sector recovering from the pandemic?

Milo Spector: The early education/childcare sector is seeing a pretty strong recovery from 2020. In most cases, these facilities are seeing pre-COVID enrollment levels, or very close to it. In terms of transaction volume, we saw things start picking back up toward the end of 2020, and market conditions have been very strong throughout 2021. We did not see cap rates increase after things started to normalize, though. In fact, we started seeing more aggressive cap rates due to the increased demand in the net lease sector as a whole. I think folks are starting to understand that, despite the pandemic, this is truly an essential service.

LB: How has the buyer pool diversified in recent years?

MS: Historically, the buyers in this space have been predominantly institutional. However, we have seen a gradual shift over the years to more high-net-worth investors and private family offices. I expect we will continue to see this trend as investors are desperately seeking yield and exploring property types they didn’t consider before. The yield on these types of properties is still relatively high compared to other assets in the net lease space.

LB: What are your predictions for supply, demand and pricing trends in 2022?

MS: I think we will see a lot more supply going into 2022 as the gas is being pressed on expansion again for a lot of these companies. In terms of demand, I believe we will continue to see demand increase as more and more net lease investors see the value in this sector. This should continue to push cap rates down the same way we’ve seen across other net lease property types, like quick service restaurants and discount stores.

LB: Where are the opportunities for investors in today’s market and beyond?

MS: In my opinion, the opportunities lie in the small to mid-size operators. In some cases, you might be able to get a more advantageous cap rate for these properties, and since there is a lot of consolidation in the space, an investor might end up with a stronger credit during ownership. I believe that if an investor is comfortable owning a property with a small to mid-sized operator, they might end up hitting the lottery if the smaller brand gets acquired by one of the larger ones.