'Nobody's Looking Into It': Why Fortec Is Going All-In On Early Childhood Education Real Estate

Early childhood education proved itself an essential and resilient business during the pandemic — so much so that a leading developer in the space just launched a new fund that aims to spread the word about a sector some call niche, but that it calls essential and underserved.

Miami-based Fortec’s new fund aims to raise $100M with an eye toward acquiring and developing around $300M in early childhood education assets over the next two years. The company has a track record of more than $205M in deals in the asset class across 12 states over the last five years.

“This is an essential business for the community,” Fortec Chairman Pablo Barreiro said. “Not only recession-proof, it's about how important it is for the local parents to have these preschools in their community.”

It is also a growing market, worth $61.7B in the U.S. as of December, according to a market report from brokerage firm B+E. The asset class is expected to grow at a compound annual growth rate of more than 4.3% through the end of the decade. There were about 100,000 such centers across the U.S. last year.

At an average price tag of between $4M and $6M apiece, Barreiro anticipates the fund will obtain 50 to 60 properties during its run.

Fortec generally procures the centers either by overseeing construction of the buildings from the ground up and securing the entitlements for a preschool or signing on as a real estate partner to a national operator that has already acquired smaller service providers.

The assets Fortec has already acquired are typically 8K SF to 12K SF buildings with playgrounds ranging from 6K SF to 9K SF on about 1.5 acres. But sizes can vary depending on the state and each city’s density. Barreiro said these facilities will look very different in urban areas like Manhattan than they do in suburban Texas.

Rent rates also differ state to state, though Barreiro said service providers are generally signed to leases that last 10 to 20 years. 

Fortec’s most recent transaction was the $33M acquisition of 10 early childhood centers in 10 states. 

The firm has received enthusiastic responses when talking up the sector to investors and institutional lenders, with many amazed that there isn’t a bigger market for this type of investment.

Barreiro said his only guess on why this category is slept on is that it gets overshadowed by more traditional multifamily and retail investments.

“Nobody's looking into it,” he said. “And nobody, honestly, gives me a good explanation of why not. My only explanation would be [that it] falls through the cracks sometimes.”

Barreiro saw the resiliency of the sector during the pandemic when most states classified preschools as essential businesses.

“They're going to be open because parents also need to work, and sometimes they need to leave their kids in a place that they feel safe and they have a good learning experience,” he said.

Early childhood education helps students develop academically and socially, but it is also being identified as an economic growth strategy, the Michigan Journal of Economics reported in May. Children who have gone through early childhood education programs are more likely to go to college and can earn 25% to 40% more as working adults than peers who didn’t participate in similar programs. 

But unlike traditional office and multifamily investments, early childhood education centers come with a concern that is of paramount importance to their success.

“You need to be very clear about the safety of the building,” Barreiro said. “There are kids within this structure, so you have to be very mindful about what is going on.”

In addition to regular investors in education-related businesses, Fortec’s fund will offer portfolio diversification for those new to the sector.

“I want this fund to bring people that [it] will be their first time investing in education,” Barreiro said. “One of our ideas is to really make this fund about learning how good it is to invest in early education for the community and also for the returns.”

Barreiro expects the market to grow nearly 50% by 2034. Industry reports indicate that, unsurprisingly, growth is fastest in parts of the nation seeing population booms like Texas, which accounts for 45.5% of market share.

Fortec’s track record shows this investment has the opportunity to “return with a core-plus strategy” despite higher cap rates on these properties. 

“Even with the higher rates, we're still making nice returns,” he said.

The company also anticipates more interest from institutional partners as it scales the platform, and it has had discussions with multiple potential lead investors for the fund. 

Once the portfolio is assembled, Barreiro said the firm is open to different exit strategies. 

“We could sell one by one, sell as a portfolio, or if the investors want us to keep it, maybe we keep it,” Barreiro said. “Right now, what we're thinking is selling them, but that also depends on the future and how the market is going when we are exiting.”