Cap Rates Compress For Early Learning Assets

Cap rates have continued to compress for early education centers in the net lease space during this quarter, according to a new report from B+E Net Lease. On-market cap rates hit a record low in Q3 for such assets, with the average breaking 6% at a 5.99% cap.

“Historically, early learning assets have traded at higher cap rates in comparison to other net lease assets such as QSRs,” the firm’s analysts note. “This has shifted as the reputations and creditworthiness of the larger early learning tenants have steadily grown, alongside the expansion of their businesses and nationwide footprints. Investors favor the internet-resistant nature, long lease terms, quality underlying real estate, and strong/growing demand for these assets.”

On-market listings in Q4 feature more properties with 10 or more years of remaining lease term and a larger average offering price, B+E analysts say. The report cites 33 on-market properties with 15 or more years of remaining term, 59 with 10 to 14 years remaining, and 29 with 9 or fewer years remaining. The lowest on-market cap rate was 4.75% and the highest was 7.25%, translating to an average of 5.99%.

The report tracks 121 properties on market, at an average price of $5.3 million and average size just over 11,000 sf.

Single-tenant net lease investors have flocked to early learning assets as of late, with traditional private capital joined by such groups as publicly traded REITs, private funds, syndicators, and family offices.

“We anticipate that more institutions will enter the airspace and compete to buy these properties, especially newly formed, publicly traded REITs,” said Chad Lieber, Vice President of SRS – National Net Lease Group.

And larger players tend to dominate the space, led by The Learning Experience, KinderCare, Childtime, Guidepost Montessori, and Kiddie Academy leading the way.

“The high levels of development of new early learning assets show no signs of slowing as demand from customers in this segment is sky-high and growing,” the report says.