End of Quarter: 4Q 2024
Welcome to our End of Quarter update! Let’s take a dive deep into the performance of Greenleaf’s portfolio and discuss key developments that have shaped the market.
The dominant theme in the fourth quarter was "waiting." Across both the buy-side and sell-side, market participants adopted a cautious stance—waiting for the outcomes of the election, navigating the holiday season, and anticipating year-end planning. This pervasive hesitancy shaped much of the transaction landscape. However, tenants on the leasing side were not waiting - new leases were very active and we leased 80k feet of commercial and 75k ft of flex space, along side increasing overall residential occupancy by 3% after seeing a drop from positive policy changes on the eviction fronts.
As we enter Q1, we believe this period of uncertainty will give way to increased clarity. With a clearer direction on policies influencing the macroeconomy and an anticipated perception of reduced regulatory pressures, we expect the waiting game to end. This should lead to greater confidence in the market and a revival of transaction activity…
While waiting for impacted transactions, operations never got that opportunity. Both residential and commercial leasing continued to see significant activity, with growth in occupancy in all asset classes and rental increases in respective categories for the year. Mobile Home rents up 9%, Apartments up 7%, Flex rates achieving gains of 5%, and general office space up about 3%. This is based on leases we signed compared to 2023.
From a market perspective, we continue to observe challenges that present compelling buying opportunities while simultaneously driving up the value of stable assets. These opportunities often arise from maturing debt that cannot be refinanced or operational cost increases that turn cash flows negative. Capitalizing on these situations requires the agility to move quickly and effectively reposition assets to uses that have high leasing demand. At the same time, these dynamics are driving increased demand—and consequently higher prices—for stable, cash-flowing deals, as investors prioritize dependable income streams.
Looking ahead to 2025, we have a robust sales strategy in place. We plan to bring several apartment assets to market, along with approximately 150,000 square feet of commercial space comprising a mix of medical, government, and flex-use properties. These sales are strategically timed to maximize value, focusing on assets we have stabilized physically and have the longest average lease terms.
Debt
In the fourth quarter, we further expanded into the private debt space, with multiple new offerings delivering returns of 8–13% on land development strategies. These investments are focused on shorter-term situations with current pay monthly distributions. Having closely monitored the private debt markets for years, we recognized 2024 as a pivotal time to enter, as the need for private debt solutions surged and terms like "debt funds" and "rescue capital" became industry buzzwords.
This shift in the market was driven by three primary factors: First, bank transactions have slowed down in general as they tighten lending. Second, when banks do issue term sheets there are inconsistencies between initial term sheets and final loan terms that get approved. These bank retrades create disruptions in closing timelines, making borrowers look for easier solutions. Lastly, the spread in borrowing rates widened significantly across lending facilities, with market rates for bank loans ranging from 7–9%, compared to much narrower bands of 2023. These dynamics opened the door for us to provide reliable, flexible funding solutions.
In the fourth quarter, we focused on three key areas of lending impacted by these market trends:
As we look toward 2025, we anticipate continued growth and opportunity in the private debt space. The combination of retraded bank terms, high borrowing costs, and the demand for dependable lending solutions positions us to fill critical gaps in the market. By consistently delivering on our commitments and providing certainty to sponsors, we aim to solidify our role as a trusted and reliable partner in this evolving environment.
Industrial
In the fourth quarter, we expanded our unique look at industrial assets, continuing to focus on the minor market segment of shallow bay flex assets. We grew this segment with the acquisition of The HUB in Milton, GA, a 170,000-square-foot single-story office complex that will be converted into flex space. This acquisition brings our total flex space portfolio to 770,000 square feet, with 213,000 square feet acquired in 2024 at a blended cost of under $75 per square foot.
Our strategy in this sector focuses on identifying optimal narrow, rectangular, single-story buildings that can be efficiently converted into flex space. We continue to see strong leasing demand for suites ranging from 3,000 to 10,000 square feet, evidenced by 75,000 square feet leased in Q4 alone. We are not looking to build these facilities from scratch as the land/build costs greatly exceed our repurposed.
Our competitive advantage lies in our ability to take on complex properties requiring significant repositioning and deliver successful turnarounds. This process—which involves navigating zoning approvals, executing capital expenditure plans, and driving leasing efforts—typically takes 18–20 months per asset. We remain committed to leveraging this expertise to unlock value and deliver strong results for our investors.
Commercial
Our commercial portfolio now spans 1.4 million square feet, divided into three key segments: Medical, Office, and Government. On the broader commercial leasing front, we signed 17 new leases in Q4, bringing our annual total to 76 leases covering 280,000 square feet, with an average lease size of 3,684 square feet. This robust leasing activity underscores the continued demand for well-positioned commercial assets.
The medical segment, comprising 300,000 square feet, remains a strong performer with 95% occupancy. Among our most robust tenants are lab-based businesses and autism spectrum centers, which align well with our space planning due to their unique parking requirements, driven by low therapist-to-patient ratios.
The value of medical assets has stabilized at significantly higher levels compared to 2–3 years ago, with market transactions now exceeding $150-200 per square foot. These elevated valuations have limited our acquisition activity, as we have not added new medical assets in the past 18 months.? However, we are able to lease medical space and look at adding medical users into some of our office and flex spaces. These higher-value leases will help those segments deliver higher investment returns. Looking ahead to 2025, we plan to realize gains on two medical properties that have undergone lease turnovers and now benefit from higher weighted average lease terms.
The office sector represents a compelling area of opportunity, driven by significant market pessimism and constrained lending activity, which are keeping prices suppressed. Despite these challenges, the fundamentals tell a different story: approximately 90% of Fortune 500 companies have resumed in-office operations, and the federal government is signaling a return to five-day workweeks for its workforce. When approached with a strategic lens, the office sector offers bright spots for those who can identify and capitalize on the right opportunities.
It’s also important to note that a substantial portion of current office vacancies are concentrated in outdated and underperforming assets that require extensive upgrades to meet modern standards–like older stock high-rise buildings. These properties are largely excluded from our investment focus. We concentrate on well-located and functional office spaces with clear paths to value creation. These assets are mostly less than three-story complexes, in good suburban locations, which are around town center developments. These town centers have seen significant economic and housing growth in the past 5 years as they have been a focus of development in the Southeast.
The Government segment experienced mixed results in Q4. Our occupancy was impacted by a 27,000-square-foot tenant move-out in Q3. To address this, we are reconfiguring the space into smaller, more desirable suites that lease more quickly, with a focus on attracting medical users. This fluid state of the building will enable us to move to the most in-demand market users. Despite this vacancy, pricing and cap rates in this segment have remained stable, showing resilience even in the face of higher interest rates. Deal pricing remains strong, and we have not seen any acquisition opportunities in this space in the 3rd or 4th quarters of 2024.
Residential
In the Residential market, our focus remains on operations rather than acquisitions across our portfolio of apartments and mobile homes. Significant changes in the tax and insurance markets are shaping operational performance. These were the most important issues in Q4, as this is the time taxes are paid and insurance policies are negotiated. We expect these factors to dominate the landscape in 2025 for all operators. As a result, we continue to be net sellers, with three additional sales planned for the coming year.
Mobile Homes
In 2024, our mobile home portfolio delivered exceptional performance, achieving 9% revenue growth despite broader market rental rate trends being negative. This success aligns with our long-standing strategy of financing homes for buyers, while targeting lot rent revenues, and simultaneously ensuring our service levels enable 70% + retention rates that we consistently hit on a monthly and quarterly basis. Operationally, we have maintained strong on-time payment rates, controlled costs, and steady occupancy levels that have not dipped below 95% for two consecutive years. These fundamentals have supported consistent annual distributions. While this asset class has experienced heavy syndication-driven buying over recent years, we do not see any acquisition opportunities at price points comparable to our existing holdings.
Apartments
Our apartment portfolio also showed positive developments, particularly with the implementation of improved eviction policies in Q3 in Georgia. These changes, requiring long-term nonpayment rents to be paid to the courts, have expedited the eviction process for cases extending beyond 12 months. This adjustment saw numerous evictions in Q3 and backlogs may be artificially inflating occupancy figures across syndicated apartment deals. We have reversed that occupancy decline in Q4, pushing occupancy back above 90%. Our leasing efforts generated 2.5% rental rate growth in Q4 2024, outpacing the broader market decline of -1.7%. However, this growth is down from 9.5% in Q4 2023 and over 10% in 2022. We are projecting that rent growth for our assets will outperform the market in 2025, with expectations of 2% growth, while market trends are showing flat to negative.
Despite these operational successes, external challenges persist. Tax and insurance costs remain key areas of concern. While we actively appeal tax assessments and engage municipalities, upward trends show no signs of slowing. Insurance costs are also rising dramatically, with an average annual increase of 32%. We are working to mitigate these increases by exploring site-specific precautions, insured pools, and competitive quotes, but the pressure on margins remains significant. Coupled with rising maintenance costs, these factors will continue to present challenges as we head into 2025.
Retail
Retail asset pricing remained stable toward the end of 2024, with limited opportunities materializing. The only segment opportunity we saw to capitalize on was the rise in Dollar General cap rates, where some property cap rates rose above 8% and enabled a few strategic buying opportunities. While higher interest rates initially pushed retail cap rates higher, the rate of increase has not kept pace with rising borrowing costs. As a result, the spread between cap rates and interest rates has narrowed significantly, with both cap rates and interest rates sitting in the 7% range approaching near-zero margin spread on the interest-rate-to-cap-rate spread.
Our strategy for identifying opportunities in this challenging environment focuses on capitalizing on market sentiment. Specifically, we target assets temporarily impacted by negative press, which can drive cap rates higher. By pursuing these acquisitions with little-to-no bank debt, we aim to mitigate financing risks and position these assets for long-term value creation.
What to Look for in 2025
We anticipate a significant shift in 2025, with transaction volumes accelerating across many market segments. This growth will be driven by two key trends: capitalizing on stable, high-performing properties, and addressing underperforming assets requiring turnaround strategies.
Our focus for the year will center on realizing gains and redeploying into repositioning assets across key market segments, particularly those requiring rapid leasing velocity and operational improvements to attract the right tenants. This includes flex-use, medical, and office properties that align with our expertise in value creation.
In the residential segment, we expect to continue divesting assets, leveraging sustained demand and strong syndication interest. Despite headwinds and underperforming properties in the broader market, investor appetite for residential assets remains robust, creating favorable conditions for strategic sales.
By maintaining a disciplined approach and targeting high-impact opportunities, we are well-positioned to navigate 2025’s dynamic market environment and drive strong results for our investors.
Thank you,
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