2020 has been a unique year for the commercial real estate market to say the least. Every sector has been impacted in some way due to COVID-19. While some of these impacts have been positive, allowing certain brands or sectors to thrive, other sectors have faced never-before-seen challenges. During the many years that we have worked in the net lease investment sales space – years in which we’ve helped clients divest or acquire approximately $80 million in child care/early education assets – we’ve never experienced market dynamics like we’re seeing today. We have seen widespread closures across non-essential retail categories, as well as mandated safety precautions that alter ways in which essential companies do business. Here, we explore today’s trends across the child care/early education space, illustrate why this sector continues to be a driving force of the U.S. economy, and discuss what that means for the net lease investor.
"These facilities provide a critical and essential service to parents, making the industry very much the backbone of the U.S. economy."
Real estate investors have been paying close attention to how tenants react in today’s environment, especially in the net lease space, where long-term leases, strong tenants and essential services are particularly desirable characteristics. Included in this is the child care/early education industry, which has reacted very quickly to adapt to the ever-changing environment, and we continue to see activity across this sector during the year’s first three quarters:
Since cap rates indicate value – and whether a property is retaining its value or gaining or losing value – the compression of cap rates this year compared to the same three quarters in 2019 is a critical metric. Based on average rates, the sector has not only retained its value, but has even increased slightly in 2020.
Investors looking for higher yields and strong, internet-resistant tenants that will come out of this pandemic thriving need to look no further than the child care/early education sector. These facilities provide a critical and essential service to parents, making the industry very much the backbone of the U.S. economy. Without access to child care services, parents cannot effectively work. Without the ability to work, personal financial situations are jeopardized which has a domino effect on the larger economy.
To address concerns presented by COVID-19, the sector has been quick to adopt new practices to ensure the safety of teachers, caregivers, students, and their families. Additionally, as we learn more about how the illness spreads, new findings will inform future policy and practices. As an example, researchers at Yale University recently surveyed 57,000 child care providers across all 50 states, and they determined that child care programs remaining open during the pandemic did not contribute to the spread of COVID-19 among providers, and reopening these centers did not correlate to a higher risk of spreading COVID-19 from children to adults, assuming the providers took necessary and appropriate safety precautions. This study delivers reassuring news to parents, providers and ultimately investors and should lead to increased confidence across the industry while reinforcing the need to follow safety protocols.
"Investors looking for higher yields and strong, internet-resistant tenants…need to look no further than the child care/early education sector."
Adopting new safety practices helps ensure these child care/early education facilities remain open, and this is encouraging to investors. We personally feel very confident in the space and expect to see demand increase for child care/early education assets in the coming months and years.