With the increased investor demand for service-based, internet-resistant retail, the single-tenant net-leased learning and daycare industry has emerged as a viable and sustainable alternative to common net-leased retail properties for private investors.
Since January 2017, Hanley Investment Group has completed the sale of over $20 million in single-tenant learning and daycare leased properties across the country. Shopping Center Business sat down with Southern California-based Hanley Investment Group Vice President Jeff Lefko to discuss his take on this growing sector.
SCB: Why are so many new daycare and learning centers opening across the country?
LEFKO: Revenue across the childcare industry is projected to reach $52.5 billion by 2021. Working mothers are a major driver of early childhood education programs. More than 58 percent of mothers with children under 1-year-old work outside of the home; 70 percent of mothers with children under 18 now work outside of the home. Furthermore, the average age of a first-time mother is at an all-time high, according to the U.S. Centers for Disease Control and Prevention. For the first time, women in their 30s are having more children than those in their 20s, which is good news for the childcare and learning sector. Older parents have a better ability to pay for childcare services when compared to the younger parents in the past.
There is also a significant amount of research that shows early education and various childcare services have a positive impact on a student’s success such as positive benchmark scores for math performance from the results of standardized tests taken in third, sixth and eighth grades. Long-term data from the National Student Clearinghouse has shown that there is a 40 to 50 percent increase in college graduation rates from students that were involved in early childhood programs.
Over 71 percent of families spend at least 10 percent or more of their household income on childcare. Learning and daycare centers become the most logical and affordable form of childcare for many families. Average weekly daycare and learning center rates in 2017 were $211 (based on one infant child). When compared to the cost of a nanny at $580 per week or an after-school sitter at $242 per week, learning and daycare centers become the best option for many families. However, most daycare and learning centers are at full capacity. Many parents are so intent on enrolling their kids in a daycare or learning center that they sign up the moment they are expecting a baby. It is very common that a daycare center has a two-year or more waitlist.
The learning and daycare center concept is attractive to entrepreneurs because the demand for childcare in the U.S. is relatively inelastic. Families will go to great lengths to pay for childcare which includes saving less money, making budget cuts elsewhere to cover the cost of daycare or even putting themselves in debt. In fact, 26 percent of families said they would take out a loan in order to pay for childcare. According to care.com, one in three families spend 20 percent or more of their household income on childcare. Over 71 percent of families spend at least 10 percent or more of their household income on childcare.
SCB: How is the increased supply impacting the cap rates for single-tenant net-leased daycare and learning centers?
LEFKO: In general, cap rates have compressed for daycare and learning centers across the country. According to the CoStar Group, the average cap rate for all net-leased daycare centers that sold in the U.S. (above $2 million) between September 2017 to August 2018 was 7 percent. In the previous 12 months, the average cap rate was 7.2 percent marking a cap rate compression of 20 basis points. The more significant metric is between the current market and the market five years ago. Cap rates for daycare and learning centers in the U.S. compressed over 100 basis points between 2013 and 2018. Values have increased more for daycare and learning centers than many other product types. Although cap rates are at a record low, there still exists a gap between cap rates for single-tenant daycare/learning centers and traditional net-leased investments like sit-down restaurants, quick-serve restaurants (QSRs), drug stores, etc. As an example, in August 2018, Hanley Investment Group sold one of the lowest cap rates in the U.S. for The Learning Experience. The sale price set a cap rate record, but the cap rate was still nearly 100 basis points above comparable net-leased investments with 15-year leases like sit-down restaurants, QSRs and drug stores.
SCB: Why do investors like net-leased daycare and learning centers?
LEFKO: Net-leased daycare and learning centers offer a wide variety of benefits that surpass many other single-tenant investments including being service-based and internet resistant plus they typically have long-term, 15- and 20-year, absolute triple-net (or nearly) leases with fixed increases in affluent markets. With the growth of daycare and learning centers, most of the properties that are for sale are brand-new construction. Many of these properties are being built in traditional retail locations such as pad sites to grocery-anchored shopping centers. In the past, these types of buildings were not highly regarded because they were considered a ‘special use’ building that would have issues in the future if the tenant went out of business. Now, savvy developers are mandating that the properties are developed in a way that the building can easily be converted to a different retail or office use should the tenant vacate the building. Another benefit to these sites is that most states require a substantial amount of space for an outside playground such as 50 square feet of playground for every student, so the sites end up being at least one to two acres. The long-term value of the land is usually more than other net-leased assets that are situated on smaller lots.
Additionally, investors like to purchase assets where they can predict the tenant’s future operating success. Many of the net-leased daycare and/or learning centers that are being sold are located in markets that have a two-year-plus waitlist for other competing daycare centers. This tremendous demand usually allows the subject daycare and/or learning center to pre-enroll a significant amount of the total capacity before they are even open for business.
SCB: Do you expect that the demand for net-leased daycare and learning centers will continue?
LEFKO: Yes, we expect that the demand for net-leased daycare and learning centers will continue but the supply will significantly increase. According to CoStar Group, as of September 17, 2018, there were 48 single-tenant daycare and learning centers listed for sale, which is an increase of 18 percent from the previous year. The increase in the number of properties currently listed for sale is partly due to developers taking part in build-to-suit programs for major tenants such as The Learning Experience, Kiddie Academy, and others that are in massive expansion mode. Many of the daycare and learning center tenants are paying top dollar for prime sites that some other traditional retailers couldn’t afford.
In addition to developers, many operators are realizing large profits by taking part in sale-leaseback programs. In the past, the real estate for daycare and learning centers were sold in combination with the business. The EBITDA multiple (which measures value) for the business and the real estate was nowhere near as high maybe five to 10 years ago as the multiple for just the real estate in today’s market. In 2019, there will be an increase in the number of sale-leasebacks as tenants discover the untapped value of their real estate.