Higher Cap Rates For Day Care Property

Net lease properties continue to be of interest to a growing number of investors, but many are seeking properties with higher cap rates and day-care properties are among …

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Net lease properties continue to be of interest to a growing number of investors, but many are seeking properties with higher cap rates and day-care properties are among the types of properties that could potentially offer more value. While payoffs would be greater if tenancy could be guaranteed, the larger risk comes from the types of covenants and restrictions that usually accompany day-care properties. Each site will face specific demands, particularly when it comes to location and the expected levels of enrollment over the long term. For more on this continue reading the following article from National Real Estate Investor.

Continued constraints on the supply of net lease real estate properties have spurred investors to explore a wider range of options. Day care properties are among the opportunities offering cap rates at more appealing levels, but that’s in part because they carry special considerations that can affect long-term risk.

Cap rates for day care locations have generally tracked with rates for net lease properties as a whole over recent years, according to Betty Friant, vice president at Calkain Companies in Reston, Va. But they’ve trended about 100 to 150 basis points higher, drawing investors willing to assume greater risk on well-positioned properties.

Calkain recently sold an AutoZone at a 5 percent cap rate, and Dollar General stores have approached 6.75 percent, “so the 8-plus caps in day care look very interesting,” Friant said.

The more desirable day care properties belong to larger nationwide chains rather than smaller franchises, but those are in the minority, according to Dean Zang, first vice president of investments at Marcus & Millichap in Bethesda, Md. Most locations belong to franchisees operating just a few units, which in part drives up cap rates in comparison to restaurants or gas stations with national operators.

As with other net lease sites, the perceived ability to replace a tenant often bears on an investor’s decision. To start with, a low or market rent per square foot is most desired, Friant said.

Location also factors into decisions, as standalone sites may seem more difficult to keep filled. A day care closer to retail may be better positioned to draw other retailers if retenanting is required, said Harry Dematatis, vice president at CBRE in Washington, D.C. But a property nearer to a residential area may appeal more to parents dropping off and picking up their kids on the way home, increasing the site’s suitability for day care.

Covenants and restrictions on day care properties can limit their uses, and some centers may also be built out in ways that make them less amenable to other kinds of tenants. “The best replacement for a day care is typically another day care operator, due to the TI one would incur to change a facility to more of an office or medical-office use,” Zang said.

Despite these challenges, “we rarely see day cares sit vacant,” Friant said. “In areas with strong demos, we feel confident that there will be a new tenant if a day care building becomes vacant.”

“Each site is specific,” Dematatis said. “That’s why when a buyer comes and takes a look at it, you really need to do your homework” and examine demographic trends and the performance of surrounding sites, he said.

In the metropolitan Washington, D.C., area, where Zang is based, many day care facilities have waiting lists, which he attributes to the area’s younger families and lower unemployment level. Marcus & Millichap recently closed a deal on a KinderCare in Germantown, Md., at a cap rate of 7.7 percent—low for a day care site.

Located on a 1.2-acre parcel near a grocery store, the location boasted strong fundamentals, a waiting list for enrollment and a corporate-credit tenant. KinderCare’s parent company, Knowledge Learning Corp., operates 1,980 day care centers around the country. The Germantown property sold for $3.4 million with six years remaining on the lease.

Calkain recently represented the seller of a Learning Experience day care property in Richmond, Va., which sold at an 8.8 percent cap rate for $3 million. The center was located in a business park, which some investors found unusual until Friant explained that, as a mother herself, she would enjoy having her own children nearer to her workplace.

This article was republished with permission from National Real Estate Investor.

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