Stan Johnson Company

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.

The last two years have been challenging to say the least. Conditions across the commercial real estate market have been shifting as investors battle everything from the uncertainty surrounding 1031 exchanges to a shortage of quality on-market supply. Effects of the COVID-19 pandemic continue to linger, influencing remote versus in-office working, supply chain issues, additional e-commerce growth and reliance, labor shortages, inflation and demand for logistics-related and essential retail investments. In this dynamic environment, one of the most frequent questions investors are asking themselves is, “how do I know if this is the right time to sell or hold?” While there’s no crystal ball to see what 2022 holds, there are a few factors impacting the market today that can help real estate investors make the right decision for their unique situation or long-term strategy. Enthusiasm of Selling in a Frothy Market The market is currently seeing very robust levels of investment and demand across multiple sectors, geographies and property asset classes. Pent up demand and lack of supply, paired with the threats of increased interest rates and capital gain taxes, have created an emotionally driven environment. Bidding wars, full price offers and record low cap rates are becoming the new normal, but this has opened the doors for many investors looking to divest of assets. Buyer confidence is on the rise as debt remains cheap, so those investors who have been waiting for the right time to sell may find that now is the perfect opportunity to capitalize on high demand and secure outstanding pricing. "Pent up demand and lack of supply, paired with the threats of increased interest rates and capital gain taxes, have created an emotionally driven environment." The Rise of Industrial and Essential Retail Single-tenant net lease industrial product is high on the wish list for investors right now, due in part to recent changes in retail demand and perception during the pandemic. Consumers were forced to change their habits, and we saw investors gravitate away from retail concepts deemed “non-essential.” In the wake of this shift, many retailers have revised their business models in an attempt to remain relevant and competitive in today’s environment – they’re now offering delivery, curbside pickup and online ordering. Furthermore, we’ve seen retailers rely more heavily on their logistics components. Warehouses, last-mile distribution facilities and fulfillment centers have never been more critical to a retailer’s operation, and this trend is creating significant opportunity for the investor community. Owners of outdated or functionally obsolete industrial space, for example, may be seeing increased demand, especially if their asset is well-located or has an abundance of land. Landlords who’ve resigned themselves to holding on to these assets due to lack of demand or unfavorable offers in the past may wish to take advantage of surging demand levels and trade out or up. "Warehouses, last-mile distribution facilities and fulfillment centers have never been more critical to a retailer’s operation." Rental Rates and Interest Rates While many investors may choose to sell in today’s high-demand market, that strategy won’t be right for every investor or asset. Rental rates are rising in many geographies and asset classes, and landlords might find they have the ability to increase their cash flow by re-tenanting or renegotiating leases. New vacancies caused by pandemic-related conditions give owners the opportunity to secure a new tenant at current market rates. Additionally, with interest rates still so low, owners who are committed to a longer-term hold strategy should consider refinancing. There will never be a one-sized-fits-all strategy for real estate investing, and owners should be careful to avoid knee-jerk reactions to shifting market conditions. Buyer demand is translating to outstanding opportunities for those investors positioned to sell, but rising rents and inexpensive debt creates a favorable environment for landlords looking to hold. Each investor’s situation should be carefully considered before deciding if now is the time to sell or hold, but opportunities are abundant for investors considering both options.

Summary of future growth plans for the top 100 retailers, as selected by brand recognition, expansion rate and frequency of investment sale transactions Average cap rate and sale price information for the most commonly traded retailers Credit rating summary with parent company information Average square footage ranges and store counts for each tenant