Real Estate's Role in Child Care
Real Estate's Role in Child Care
Analyzing early childhood education spaces as a real estate investment category
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Today's Thesis Driven is a guest letter by Mark Munro, Co-Founder of Beam Early Learning, a company building a network of high-quality preschools and child care centers.
In 2021, U.S. Treasury Secretary Janet Yellen characterized child care as a "textbook example of a broken market." Readers with young children have likely encountered this brokenness firsthand. Before the pandemic, half of Americans lived in a “child care desert” with one licensed spot available for every three children. COVID made it even more challenging for child care providers to balance affordable tuition with sustainable wages.
While most policymakers have focused on solutions to recruit and retain educators, another frontier may hold the key to unlocking the additional supply needed across the country: investing in real estate and reforming regulations around child care facilities.
Today’s letter explores:
The evolution of the early childhood education (ECE) sector;
The tailwinds driving real estate investment interest in the sector;
The economic and regulatory context of ECE real estate;
The unique real estate requirements of ECE operators;
Examples of REITs and real estate developers addressing the ECE real estate need;
Innovative approaches to expand access to child care.
The Evolution of the Early Childhood Education Sector
In 1968, Montgomery, Alabama real estate developer Perry Mendel observed a significant workforce shift. The percentage of mothers with young children entering the workforce had risen from 14% in 1950 to 40% by the late 1960s.
Without relatives available for child care, families needed a reliable solution. Mendel recognized an opportunity to apply the standardized models that had driven the success of motel and fast food chains to a new industry: child care. In 1969, he launched KinderCare, establishing one of the first national for-profit child care operators.
ECE has evolved from first to third wave providers
KinderCare and similar providers represented the first wave of early childhood education (ECE) providers in the United States. They offered a structured and reliable alternative to the informal care arrangements (relying on friends, family, or neighbors) that had previously delivered the service.
The late 1980s saw the emergence of a second wave of ECE providers, distinguished by an emphasis on quality early learning that tracked a growing body of research on the field. The line between "child care" and "preschool" blurred. Operators like Bright Horizons, founded in 1988, provided education-focused programs at a premium, with employers sharing the cost.
A third wave of ECE providers has more recently emerged, differentiating through pedagogical style. From Reggio Emilia to Mandarin immersion to nature-based preschool, these specialized providers mostly cater to high-income parents seeking every possible advantage for their kids. Innovative companies like Higher Ground Education have scaled to over 120 Montessori schools by employing creative strategies, such as using EB-5 Visas to attract foreign investors to fund new site development and strategically locating near military bases to tap into consistent demand.
The growing importance of center-based care and real estate
Real estate plays a crucial role in the ECE sector. It is the second-largest expense for most providers, surpassed only by labor costs. Center-based care dominates the ECE landscape, with approximately 100,000 licensed centers in the US. In contrast, home-based providers decreased from around 220,000 in 2005 to 123,000 in 2019, largely due to conflicts with regulators, landlords, and homeowners' associations. The pandemic accelerated this decline, raising costs and complicating cash flow management amid reduced attendance. The structural shift from home-based to center-based care has accelerated commercial real estate’s role in the field.
This heightened focus on real estate is not without merit. Where a center chooses to open its doors, and the design of its physical space, are perhaps the most important decisions an operator can make. Most families look for child care options within a one-mile radius in urban areas and a three-mile radius in the suburbs. Location and facility choices directly drive everything from enrollment capacities and operating margins to parent experience and brand perception.
Real Estate Investment Tailwinds
Demographic and economic trends support demand
Fueled by demographic and economic tailwinds, the demand for ECE and its underlying real estate will continue to grow. Women's workforce participation, especially among mothers with young children, has increased from 34% in 1975 to 66% in 2022, nearly matching men's participation rates. 61% of families are now dual income with young children, providing an additional demand tailwind for reliable, high-quality care.
Real median household income for families with children has risen 17% over the last ten years, and experts project a 12% increase in the next three years. Meanwhile, the average weekly cost of center-based care has grown 49% over the last five years, from $215 in 2019 to $321 in 2024. These increases are caused by factors including pandemic-related closures and rising staff costs. Families with young children now spend an average of 24% of their household income on child care, with 60% of families (up from 32% in 2017) allocating 20% or more of their annual income to this expense.
Governments are stepping in to address the rapid cost growth in the child care market. For instance, Michigan's Tri-Share program, which splits costs equally among the state, employer, and family, creates new opportunities for providers while helping parents enter or remain in the workforce. The program targets families making 185-300% of the federal poverty level, recognizing the need to support middle-income households.
Despite ECE’s high costs, parents want to give their children every possible advantage in this competitive world. The research supporting the benefits of early learning underscores its importance. From birth to age five, a child’s brain develops more than at any other time in its life. Starting at a quarter of an adult’s brain size, a baby’s brain doubles within the first year and reaches 90% by age 5. ECE also has lifetime benefits. Nobel Laureate James Heckman found that high-quality birth-to-five programs for children can deliver a 13% per year return on investment as measured by high school graduation rates, adult employment, and taxable income.
The Economic and Regulatory Drivers of ECE Real Estate
Zoning and workforce issues constrain ECE supply
ECE and its real estate market face significant supply-side challenges, including a scarcity of credentialed staff and appropriately zoned properties. Current child care centers can only accommodate 25% of US children under age 3. Even when operators want to expand, they struggle to find qualified staff or suitable sites. High workforce churn, ranging from 25-40% annually, exacerbates these issues. Staffing shortages can reduce revenue for centers if they cannot operate at full capacity, as highlighted in Bright Horizons’ Q4 2023 earnings call.
Local zoning restrictions and state child care regulations limit suitable properties for ECE operators. In addition to rules around outdoor space and child-to-staff ratios, many jurisdictions severely limit where centers can be located, often requiring conditional use permits or prohibiting them outright in certain zones. Some states mandate off-street parking and designated pick-up/drop-off areas, which can be challenging to accommodate. Tenafly, NJ, for example, only allows childcare centers in non-residential zones and requires a 35-foot setback from residential properties. These restrictions have a cascading effect on ECE providers:
No zoning approval means no occupancy permit
No occupancy permit means the Department of Social Services will not grant a child care provider license
No child care license means no ability to apply for eligible grants
Without a commercial use property, the provider is not eligible for commercial, SBA, or other forms of debt, critical to financing ECE facilities
These constraints, partially driven by the labor market and partially by the regulatory requirements, create an opportunity for developers and investors looking to crack the code.
Potential structures to address the supply of ECE real estate
For real estate owners, developers, and investors interested in addressing some of these shortages, there are several potential structures to consider:
Lease: Rent a licensed space to a new or existing child care provider. These leases can be quite stable / attractive as discussed in the section below.
Sale leaseback: Buy property for or from an ECE operator and lease it back to them. The child care provider benefits from the additional capital, and the investor receives an income stream from a long-term tenant.
Vertical integration: Some child care providers choose to acquire and develop their own properties, giving them greater control over their facilities and the ability to capture profit on the real estate as well as the operations.
OpCo-PropCo Model: Operators may separate the operating and real estate aspects of the business through an OpCo-PropCo model. In this case, the PropCo owns and leases the facilities to the OpCo, enabling the business to raise separate pools of capital and separate the operational and real estate risks.
Brownfield development: Developers interested in creating supply may consider converting former schools or retail spaces into licensed child care centers.
Build-to-suit development: Partnering with an independent operator or franchisor gives the tenant significant input in the design and lowers the developer’s risk by lining up a tenant in advance.
Greenfield development: The developer, rather than the tenant, guides the project’s design. They may take greater risk if they are leasing to an operator after completion.
ECE operators have unique requirements as tenants
ECE tenants typically have distinct needs. First, they seek long leases (10+ years) to ensure stability and return on initial investment. As centers can take up to 3 years to reach full enrollment, rent abatements and tenant improvement (TI) allowances are commonly negotiated. These TIs typically involve creating age-appropriate spaces, which are subject to strict oversight and state-specific regulations on student-to-classroom ratios and child-to-staff ratios.
In New York, for example, regulators require 2 sinks and no more than 8 infants per infant classroom. Infants and toddlers also require separate play areas of at least 35 sq ft per child. While these rules are intended as minimums to support optimal child development and learning, they add upfront costs for providers and developers.
Second, ECE tenants often have space requirements for outdoor play. In California, the state mandates 75 sq ft of outdoor space per child, a tall order in urban areas. This mandate either leads developers to create costly rooftop play spaces or pushes providers to seek a waiver from regulators. Balancing these requirements with the scarcity of affordable real estate poses a major challenge for ECE providers looking to purchase or lease space.
ECE has emerged as an attractive area of investment
Institutional investors are also waking up to ECE's stable cash flows and potential impact. Some larger REITs, like STORE Capital and Essential Properties, have invested in centers’ real estate as part of diversified portfolios. Harkness Management, an investor focused exclusively on education, acted as an early real estate partner to Higher Ground Education. Harkness CIO Matt Fuller sees more operators pursuing sale leasebacks to free up equity and liquidity, so long as leases remain affordable. He points to later-stage comps like Bright Horizons, which prefers an asset-light model. Others, like Mission Driven Finance's CARE REIT, aim to expand quality child care by investing in commercial and residential facilities for providers. In Las Vegas, they are investing in residential real estate to help existing home-based providers expand their capacity to serve children and families.
The fragmented nature of the ECE market presents both opportunities and challenges for firms looking to invest in or develop ECE real estate. With no single operator controlling more than 2% market share, the top 40 providers collectively hold just 7% of the market, while single-site "mom and pop" operators represent 53%. Larger players, such as Cadence Education, have focused on growth through acquisitions, purchasing fully enrolled centers for 3-5x EBITDA and aiming to create enterprise value through multiple expansion. For context, Bright Horizons, the only publicly traded ECE company, trades at around 25x due to its scale and recurring revenue from employers. This ongoing consolidation creates opportunities for investors interested in sale leasebacks, as many retiring owners outside of Tier One markets own their real estate.
Franchises like Primrose and Goddard create opportunities for investors interested in build-to-suit development. Effective franchises develop centers with capacity for 150-200 students, which can be twice the size of an independent provider's center and ten times larger than home-based child care. De novo sites cost $850k to $2M to build out due to bespoke requirements, such as commercial kitchens, and features like playground equipment, which can cost $150k. Tuition for these franchise centers varies by geography and age group, but can be as high as $35k annually in the premium tier. These operators tend to tightly manage payroll and operating expenses to maintain profitability.
Real estate investors can have confidence in the ECE industry's revenue dynamics, whether investing in franchises or acquisitions. ECE providers have strong visibility with sticky, recurring revenue streams, as child care is often the second-highest spend category for families outside of housing during the first five years of their child's life. Despite rising labor costs, the industry has been able to protect margins through waterfall pricing between age groups and annual tuition increases ranging from 3-8%.
Innovative Approaches to Expand Access to Child Care
Co-locating child care centers with workplaces and mixed-use developments has gained momentum as one solution to shift the status quo. Increasingly, policymakers at the federal and local levels are connecting their public investments to ECE amenities.
The CHIPS Act, passed in 2022 to spur domestic semiconductor manufacturing and innovation, requires companies applying for $150M+ grants to submit plans for on-site child care. Innovators like OnsiteKids are developing modular designs that make providing childcare a more scalable endeavor for employers. Carmi Medoff, OnsiteKids’ founder, is attempting to turn the traditional ECE build on its head: “Rather than modeling a 3-5 year ramp and an unaddressed waitlist after that, we’re starting with small centers and aiming to grow campus footprints as an employer’s needs evolve.” With OnsiteKids, employers can start with 2-3 classrooms and add modular units as their workforce demands it.
Greystar's Elco Yards mixed-use development in Redwood City, CA provides a compelling template for developers and city councils looking to support local families. Kristen Anderson, who spent her career at the intersection of urban development policy and ECE in the Bay Area, advocated for the inclusion of child care in this and other Redwood City projects. At the local level, child care has been a long-time priority for Redwood City, reflected in their General Plan and zoning regulations and in incentives such as density bonus and community benefit credit.
In collaboration with Build Up San Mateo County, Greystar tackled challenges to create a winning construct. This included $3-4M in tenant improvements, no rent or escalation, and a 10-15 year lease to attract an operator offering much-needed infant and toddler care and slots for low-income families. Without Greystar’s financial contributions, the city would have likely attracted an operator only interested in a premium offering for preschool aged children. The final product is a public center that will serve 70 children.
In Kalamazoo, Michigan, Hollander Development Corporation partnered with YWCA Kalamazoo to transform a former dairy plant into The Creamery, a vibrant mixed-use development featuring apartments, commercial space, and a 24-hour childcare facility. This 7,800-square-foot center caters to workers on second or third shifts, filling a critical gap in care. By braiding together tax-exempt bond financing from the Michigan State Housing Development Authority and social impact bonds from local community foundations, Hollander demonstrated the power of creative funding strategies to bring ambitious projects to life.
Of course, cities and counties can take much smaller steps to streamline their own approach to supporting childcare supply. Permit fee exemptions, like those offered by Olympia, Washington for qualifying early learning facilities, can significantly reduce upfront costs for providers. Parking requirements are another area ripe for reform; forward-thinking cities like Austin, Texas have eliminated onsite parking mandates for childcare centers, recognizing that these regulations often pose an unnecessary burden. Finally, having specialized child care coordinators who can guide applicants through the permitting process - an approach adopted by several departments in Los Angeles County - helps ensure that providers can navigate the bureaucratic hurdles efficiently. While these tactical changes may seem modest in isolation, together they can meaningfully improve the economics of opening new facilities and help communities expand access to quality care.
The ECE sector remains a resilient asset class that delivers promising financial returns and meaningful social impact, even if the effects of recent innovations will take time to materialize. Demographic trends drive long-term demand for quality child care, and policymakers increasingly recognize ECE's critical role in supporting families and communities. Quality child care profoundly impacts families, communities, and the economy, beyond just financial returns. Real estate leaders have an opportunity to support the industry’s growth while driving long-term portfolio value. Investors and operators should closely examine the ECE sector and consider how their expertise and resources can expand access to quality care for families nationwide.
—Mark Munro
Munro of Beam Early Learning welcomes your thoughts on this letter and is also interested in speaking with real estate partners who would be open to collaborating on Beam’s growth. He can be reached at mark@beamearlylearning.com.
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