End of Quarter: 3Q 2024
Welcome to Greenleaf's Newsletter. This month, Greenleaf Partner David Codrea gives his insights on 3Q 2024 and current and future trends for the market. Let's dive in!
The third quarter marked a period of robust commercial leasing activity, coupled with favorable adjustments in government policy for residential delinquencies. We also capitalized on opportunities to acquire higher-yielding retail properties. Despite fluctuating real estate markets, our focus remains on deals with attractive acquisition costs and multiple angles for value appreciation.
Operational costs continue to rise across most categories, although material delivery delays have returned to normal. We remain committed to efficient in-house maintenance management, leveraging our experienced teams to achieve significant cost savings. By maintaining a strong internal maintenance capability, we’re able to avoid costly external solutions and ensure the timely completion of maintenance tasks. This continues to grow in importance each quarter and we see this trend continuing.
Commercial leasing activity continues to be strong in the small footprint sizes of 3-7k SQ FT. This is most evident in specific space verticals - with autism centers rapidly expanding into new spaces, as long as they have private bathrooms and ample parking ratios. Medical offerings such as imaging and care centers have been taking spaces in the 5-12k SQ FT range with 10-year lease agreements. Additionally, we are seeing strong demand for in-person fitness, with specialty uses for sports training. These are taking flex space layouts that provide 5-7k SQ FT of floor space.
Demand for smaller suites, both flex and office, remains the strongest segment of the market and our primary focus. While we’ve successfully negotiated larger leases ranging from 15,000 to 50,000 SQ FT, these transactions are time-consuming, requiring extensive negotiation, lease updates, and tenant build-out. The entire process, from initial interest to occupancy, can take up to a year.
Although larger tenants can positively impact a property’s performance, the extended lease-up timelines associated with these deals can hinder our overall occupancy goals. We'll continue to prioritize smaller suites to achieve faster lease-ups and maximize rental income.
We’re observing two primary drivers of tenant activity in the market. First, tenants are expanding into new locations. Second, existing tenants are upgrading to higher-quality spaces, even if it means paying higher rents. These upgrades are often incentivized by tenant improvement allowances and favorable lease terms. While we’ve seen limited new business leases, those that have occurred typically involve short-term tenancies and early termination. The majority of market growth is driven by existing businesses expanding their operations within the current market conditions.
The impacts of vacancy are being felt and we are seeing vacant/down space in both commercial and industrial continuing to deteriorate, pointing to increased distress. Just focus on the grass next time you are driving through a commercial area. Anytime routine things stop, like landscaping, the building begins to further degrade, and minor issues become big ones. Plumbing, ceilings, and eventually windows, doors, and hardware start breaking. These are the buying opportunities we are seeking in the market.
Residential indicators have mixed messaging. The residential segment is showing both positive and negative indicators across the metrics that we follow. We are focused on trends of population growth, housing demand, and occupancy trends around turnover, which is what we believe fuels success in residential markets. We don’t see the pros outweighing the cons right now to open up buying.
Positive Indicators
Negative Indicators
Our performance in our mobile home communities continues to demonstrate stable occupancy and consistent rent growth. And our apartment communities achieved a 7% revenue increase this quarter, significantly outperforming market trends.
Recent updates to eviction policies in Atlanta have positively impacted our ability to address long-term non-paying residents. Residents who fail to make rent payments are now required to deposit equal payments with the court to avoid accelerated eviction proceedings. Additionally, understaffed Sheriff departments have implemented measures to expedite eviction processes, including the utilization of off-duty deputies. These policy changes have contributed to a reduction in long-term residential delinquencies. Although these updates may have temporarily reduced occupancy in some properties, we view them as positive developments that will ultimately enable us to lease vacant units to qualified residents.
Good operators will separate from the pack. Two quick ways to save money on maintenance is to do it poorly or cover it up. The current cost increases in everything material-based are sticking and performing correct current and preventative maintenance is expensive. Additionally, skilled roles are required to install electrical or plumbing and the demand for services remains strong with all vendors we interact with.?
Retail assets pricing has dipped and is at a buying opportunity. As interest rates rise, retail capitalization rates are trending upward while transaction volume remains low. This combination of higher cap rates and reduced activity presents a limited-time window for acquiring attractive retail assets. Many properties are currently priced at cap rates not seen in five or more years. We’re actively capitalizing on these opportunities, acquiring Dollar General locations at cap rates as high as 8%. We anticipate that this favorable market condition will persist for another three to four months.
Foot traffic in our monitored retail locations, including Dollar General, Family Dollar, and Zaxby’s, remains consistent. While we observed a decline in foot traffic at some Applebee's locations, these numbers still exceed pre-pandemic levels. Overall, we believe that many retail assets represent excellent buying opportunities in the current market.