Why Early Education Commercial Properties Are A Great Investment
Commercial real estate properties that house childcare, early education, or early learning businesses are an integral part of the Northern Virginia economy.
The Hidden Goldmine
Seam #1
This line of business is a perfect example of what economists call rational choice theory. Parents make the best decisions they can for their children’s care and early learning. This locks into the parents’ own aspirations of satisfying their career goals and continually improving their lifestyles while knowing their kids are in the best hands possible.
Seam #2
Those parental desires result in childcare and early education providers competing to achieve the highest possible levels of service, care, and learning with the goal of dominating their local markets. That results in them being able to charge higher fees, continually improve the services they offer, maximize their profits, and guarantee their business’s future.
Seam #3
The third seam in this goldmine is that investors buy properties that attract high-quality tenants who can afford higher rents, who will sign longer-term NNN leases, or who are owner-operators intent on delivering the highest possible results to the clients.
From Theory to Actuality
Let’s now look at how this plays out in Loudoun, Fairfax, and Prince William Counties.
A Stable and Growing Economy
For this economic theory to deliver the expected results we need to see a stable, and growing economy, a well-established market, and experienced CRE experts who can locate the right properties and negotiate the best terms.
Loudoun, Fairfax, and Prince William Counties have a strong economic history. Of all the Fortune 500 companies based in the Metro DC area, two-thirds of them are located in Northern Virginia. 38% of all the jobs in the state are in this area.
Real GDP was predicted to grow 4.5 percent in FY 2022 and then by another 3.7 percent in FY 2023. Personal income grew in 2022 and is expected to grow by a further 4.4% in 2023. More than 80% of households have dual incomes, and the average household income exceeds $130,000. Breaking that down, the latest US Census records show the median household income in the three counties is:
- Loudoun County: $156,821
- Fairfax County: $133.974
- Prince William: $113,831
A Highly Educated Population and a Strong Demand
Professionals aged 25+ are well educated. Going back to the US Census records, we see the percentages of individuals with a bachelor’s degree or higher:
- Loudoun County: 63%
- Fairfax County: 63.54%
- Prince William: 42.7%
Well-educated parents in well-paid occupations spend money on their children’s care and development.
A recent national report says the childcare market was valued at $33.5 Billion in 2021 and $60.4 billion in 2022. It is expected to expand by a compound annual growth rate of 4.15% each year until 2030 when it is forecast to stand at $83.6 billion.
When you consider these numbers include states with less well-educated parents earning much less than the Northern Virginia parents, and where there is traditionally low demand in the childcare market, it offers a strong implication for our market’s future. The average cost of childcare in 2022, in Virginia, was $14,063 per child.
Specific Reasons to Invest in Childcare and Early Learning
The principles for considering childcare and early education are well established. Now let’s look at some of the simple practicalities. It’s true that in any relatively prosperous area with well-established corporate employers, other B2C businesses will thrive. Clothing stores, upscale restaurants, and grocery stores, just to name three. But, those lines of business also have major competition from Amazon, for example. Major store chains are constantly looking to reduce operating costs, and if people feel any pressure on their purses, some expenditures will be curtailed.
What is unlikely to be reduced is paying the fees to care for and educate their children. Investors in the buildings used by these providers, therefore, can expect steady and stable tenancies. Lease terms tend to be longer, and lease renewals are also to be expected. Property owners who can look forward to, say, a 15-year NNN lease with annual rent increases, and positive lease-renewal terms can maximize their returns.
Childcare and early education in well-educated and higher-earning locations are, to a large extent, recession-resistant, unlike many retail and dining sectors.
The early childhood education sector is usually supported by private investors, not by public trading, which tends to deliver higher returns to investors, so, again, the sector tends to be more stable than some others, resulting in greater confidence.
Some Simple Stats to Prove the Point
10-Year Cap Rate
The following list shows the historical cap rates achieved in Northern Virginia’s childcare and early learning properties.
- 2013 – 2014 = 6.830%
- 2015 = 6.647%
- 2016 = 7.535%
- 2017 = 7.413%
- 2018 = 7.023%
- 2019 = 6.987%
- 2020 = 6.625%
- 2021 = 7.500%
- 2022 = 6.380%
The average cap rate for the whole period is 6.993%, the median is 6.987%, and the difference between the lowest and highest years is only 1.155%. Taking into account how COVID-19 impacted the economy as a whole, the cap rates for those years look positive.
Sales Volume and $/SF
Here are the sales volumes and average price per square foot paid each year.
- 2013 = $11,247,566 ($241/SF)
- 2014 = $3,110,000 ($220/SF)
- 2015 = $36,777,000 ($318/SF)
- 2016 = $14,040,100 ($409/SF)
- 2017 = $59,792,717 ($293/SF)
- 2018 = $30,786,184 ($365/SF)
- 2019 = $48,342,000 ($440/SF)
- 2020 = $70,413,656 ($235/SF)
- 2021 = $55,223,231 ($342/SF)
- 2022 = $60,755,000 ($296/SF)
- 2023 YTD = $10,435,355 ($610/SF)
The average price paid totals $343/SF
Choosing the Right Properties in the Right Locations
Investing in a stable market sector is an ideal addition to a net lease portfolio. Choosing the right properties and negotiating the best terms demands the services and support of a childcare and early learning specialist real estate brokerage with a superb track record. As well as focusing on the childcare and early learning sector, we have long-term clients who buy and sell other CRE property types. We publish frequent reports on Northern Virginia’s commercial real estate market.
So if you want us to keep you up to date on the market, please send us your details and we will be delighted to keep you informed of news and trends.
If you have a particular goal of buying or selling property in the Northern Virginia childcare and early learning market niche, then tell us your specific needs, so we can get back to you, discuss everything in depth, and get to work.
* Information and data collected via Costar.com and internal database systems of Serafin Real Estate.