This year has been a turbulent one for investors. But does economic turmoil and fear in the market create a unique opportunity for investors and fund sponsors?

Noah Weiss, managing director and COO at Atlas Real Estate Partners, joins the show to discuss why now may be a perfect time to strike on new deals in high quality Opportunity Zone locations.

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Episode Highlights

• Why the current macroeconomic environment may make now “a perfect time to strike” for Opportunity Zone investors.
• The impact of rising interest rates on the supply and affordability of homes.
• The positive demographic trends favoring the multifamily sector in growth markets in the southeast.
• The partners and capital base that Atlas Real Estate Partners operates with, and what drew them to the Opportunity Zone marketplace.
• What naturally attainable housing is, and why it’s crucial for more of this type of product to be developed.
• Some of the specific challenges of raising equity for a Qualified Opportunity Fund in 2022.
• How Atlas Real Estate Partners partnered with Covenant House to raise over $3 million in the past eight years for homeless youth, through their Real Estate Executive Sleepout program.

Featured On This Episode

• Atlas Real Estate Partners on OZ Pitch Day Fall 2022 (OpportunityDb)
• Fed raises interest rates half a point to highest level in 15 years (CNBC)
• Real Estate Executive Sleepout (Covenant House)

Today’s Guest: Noah Weiss, Atlas Real Estate Partners

• Noah Weiss on LinkedIn
• Atlas Real Estate Partners Opportunity Zone Fund 4
• Atlas Real Estate Partners
• Contact: [email protected]

About The Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

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Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m Jimmy Atkinson, and my guest today is Noah Weiss from Atlas Real Estate Partners. He joins me today from New York City. Noah, you were great on OZ Pitch Day a few weeks back. It’s great to have you on the podcast now. How are you doing? And thanks for coming on the show.

Noah: Fantastic. Thanks for asking.

Jimmy: Okay, Noah. So given our economic climate, we have rapidly rising interest rates, high inflation, the equities markets have been in turmoil since the beginning of the year, we’ve been in a bear market. Why is now a good time to launch an Opportunity Zone Fund?

Noah: So, that’s a great question Jimmy. So, we’re long-term holders, right? We are long-term investors. We’re going to be holding these assets for 10-plus years. And the simple fact is just because cap rates have changed, or interest rates have changed nobody knows anything more about interest rates or cap rates at the time of our exit or refi than they did six months ago or a year ago. And so nothing has really changed with our long-term outlook, especially with our thesis in the Southeast with a significantly growing population and job growth. And so nothing has changed about our thesis. You know, we are seeing a huge influx of potential deals that are in the market that are in fantastic locations. We think that right now it’s just the time to strike with regards to high-quality locations. We’re raising a boutique fund of only four to six assets. And so we need the best of the best locations. And so right now is the best time to actually get those locations, given there’s fear in the market and people are stepping back. And supply is crumbling in terms of new supply. And given that it’s much harder to get a deal off the ground today, we would much rather be one of those deals they get off the ground when nobody else is delivering into dearth of supply rather than delivering when everybody else is. And so, you know, given that there is fear in the market, given that we do have a very conservative leverage stack that isn’t as impacted by the current changes in interest rates and debt availability, we think now is the perfect time to strike.

Jimmy: Yeah, a lot of people are fearful right now. A lot of uncertainty in the markets, for sure, uncertain times that we’re in since the start of the year when the economy really started turning south when the markets really started turning south. You know, with that said, it’s interesting, I misspoke. I said why is it a good time to buy assets? You mentioned good time to buy land, and that’s important because, you know, Opportunity Zone deals, essentially have to be ground-up construction, the vast majority of the time unless you’re able to do substantial improvement on assets. But that can be tough to do with multifamily a lot of the time. Let’s talk about rising interest rates for a moment. There’s a lot of interesting things happening with our economy right now, but I wanna focus in on interest rates. The Fed has made several very steep and quick interest rate hikes over the last few months. I think we’re recording this right now in mid-November, I think they’ve done 4 hikes of 75 basis points already this year, if I’m not mistaken. And it’s all designed to control inflation, but does it possibly have the unintended effect of constricting housing supply, given rates are going up so much that leads to higher cost of debt? It’s harder to get new construction off the ground, harder to get this multifamily and buildings, and really all types of real estate. But I’m essentially focusing in on residential real estate. It’s harder to get those types of properties built, which could then lead to more undersupply leading to an increase in rent. And essentially it might end up causing housing costs to inflate even further. What are your thoughts on that? Do you agree with what I said there? Is there any truth in that?

Noah: I wholeheartedly agree. I mean, the only way to keep rents in check is to deliver on the supply side. The reason why rents were increased so fast so far across a wide swath of the country is that, there just wasn’t enough supply, right? You take three to five million units shortfall nationally, you have a pipeline of deals that are no longer happening. I think a lot of it has to do with the interest rate environment, both in terms of the level of interest rates themselves, as well as the disruption in the capital markets, in general. Things aren’t trading, loans aren’t happening for a lot of people, will be having to use very conservative debt. So, will still be able to access it. But a lot of people just can’t survive on 55%, 60% LTV loans. And so you have people like us who are gonna be going forward and moving forward in these markets. We have a 10-plus year hold, but you have a lot of merchant builders that they’re trying to underwrite the three to five-year exits that can’t… Who knows what cap rates are gonna be in three to five years from now, right? Why would you ever start a project right now versus a very few amount of opportunity zone investors who both, you know, have the capitalization to move forward in a time like this, and as well as leverage levels?

But if you think about all of that marginal supply that’s not happening, rents will increase significantly, right? You still have the same tailwinds you had before, you still have the same jobs that are being created in a lot of these southeastern markets, which is gonna put a lot of pressure on new population into the markets which means that rents are gonna increase at a much faster pace now with that lack of supply. So, yes, absolutely. With CPI, the way they measure it, and housing being the primary component, and then you have that being increasing at a faster rate than otherwise, it would’ve been inspected because of the supply constraints, you’re gonna have an inflationary impact on that as well. Not to mention the inflationary impact of all the other capacity that should have been delivered into the system, you know, across the rest of the supply chain, it’s not gonna happen. And so I think they’re taking a lot of… They’re obviously stuck between a rock and a hard place with trying to bring down short-term inflation. But I do think that there’s gonna be a lot of long-term consequences to the current policy if they don’t bring rates down in a reasonable manner.

Jimmy: Yeah, we’re definitely in a tough place, and it’ll be interesting to see how that unfolds over the coming months and years ahead. I did wanna shift gears now and focus in on your strategy at Atlas Real Estate Partners, specifically your Opportunities Zone strategy. You guys, your firm are delivering multifamily in the Southeast. What do you like about the Southeast geographically speaking? And then second part of my question, what do you like about the multifamily asset class?

Noah: Sure. And so the Southeast has been our focus from day one. We really have a thesis of low-income states with sunshine. And you know, see where the population goes. And we started investing there way back in the day. We just sold an asset for an 8 times multiple, because we held it for 10 years. And so, you know, we’ve always been long-term holders and have always had a long-term thesis on these markets. And so the Opportunity Zone program was a perfect fit for the way that we’ve managed deals in general. But in terms of the Southeast, not only do you have that population growth with low-income taxes and population growth because of the sunshine, etc., but now you have real companies moving there as well. And for instance, we have two deals in Atlanta. One’s about to start construction and another one is currently under control. And you’ve got, you know, companies like Microsoft that are bringing 15,000 employees, highly paid employees, you know, right down the street from our projects.

And so what that impact is and a company like that going to a market like that… Home Depot is currently the third largest employer. Microsoft is about gonna be tied with them. So, adding another Home Depot into a city like Atlanta, you can see how that’s gonna have an outsized ranked growth. And you see those types of moves being played out across a couple different markets in the Southeast. And so, you know, we think that this long-term, low-income taxes, great quality of life in additional corporate growth will then yield more additional corporate growth, which is why we love the Southeast. In terms of the multifamily, though, we’re becoming a nation of renters. I think we had talked on the lack of affordability in housing earlier in terms of, you know, rising rates and how that’s gonna impact rising rents. You know, with the current rents environment…so rates environment, the affordability of homes is going absolutely just plummeting.

And so you had over, call it 80 million people that couldn’t afford a medium home going into 2022 but the rates have now gone, you know, whatever, 7%, whatever it is today, that’s gone, that’s ballooned through the roof. And so that’s really caused a ton of long-term demand for rental housing. So, people are gonna be staying in rental housing for much longer, it’s gonna reduce turnover, it’s gonna have an outsized increase in rents because the gap between affordability of rental versus ownership has just never been higher, quite frankly. And so we think that long-term, you know, steady cash flows, steady returns with outsized cash flow increases, delivers a superior risk-adjusted return for our investors.

Jimmy: Yeah. And it’s no surprise that multifamily is the most popular asset class for Opportunity Zone deals to date so far. It seems like, and just anecdotally speaking, seems like the vast majority of funds that I interact with, and Atlas included in that, is doing, at least something with multifamily. And it is, you know, very much needed all across this country. A huge undersupply as we have already hit on. Let’s talk a little bit more about Atlas Real Estate Partners. Can you give me the backstory? Who are you guys? When were you founded? What’s your history basically?

Noah: Sure. We were founded in 2009 by Arvind Charry and Alex Foster. We’ve always been focused on kind of deal-by-deal execution, multifamily, Southeast. And we’ve done approximately 50-plus deals, primarily in the Southeast, primarily multifamily. And, you know, total capitalization of about $1.5 billion. We are a team, evenly located between New York and Miami. The Miami team, obviously, supports a lot of our development and value add strategy. Yeah, so that’s kind of what we do. We’ve historically grown a lot through the partnering with local developers and local partners. We have a huge expertise in that. But at the same time, we have a vertically integrated development team. And so, you know, we have a kind of unique purview, where we have capital vertical integration, but also the ability to partner with folks on the ground with a very kind of best-in-class team. And so we bring a lot of value to our investors as well as to our partners.

Jimmy: Good. Well, let me ask you about those partners in a moment here, but I wanna talk about what you guys are doing now with this relatively new Opportunity Zone Fund. You mentioned that, historically, you focused on raising and developing on a deal-by-deal basis, but now you have a, what you referred to on OZ Pitch Day the other day, as a direct-to-sponsor Opportunity Zone Fund. So, what’s the benefit of having a fund right now versus what you’ve historically done, which has been on a deal-by-deal basis?

Noah: Sure. And so, again, we’ve historically done a deal-by-deal raise, which means you have to be hyperfocused on making sure you have to check every box, you know, dot every i, cross every t, in terms of the fundraise. And so that’s in our DNA, it’s in our blood of doing that. And that’s exactly how we kind of approach the opportunity zone investment environment and the way we run the fund. But why have fund? There’s a lot of opportunities coming our way. The time to strike is now. And sometimes timing and the ability to get things done is everything. And just in terms of being able to get the best sites. So, we have a boutique fund, right? It’s only a $100 million, and we’re only gonna be doing, you know, four to six assets within the fund. And so we’re gonna be doing the best of the best deals, you know, within our targeting markets. But in order to get the best of the best deals, you have to be able to compete on timing, and speed, and all those things. And having that discretionary capital will allow us to do that.

Jimmy: And so your four to six deals within that fund, what’s the status of it right now? Do you have any deals identified in the pipeline or are you still doing due diligence on your pipeline? Where are you guys at right now?

Noah: Yeah, so we have three deals currently under contract or under control. You know, one deal in Charleston, South Carolina, one deal in Atlanta, and another deal between Savannah and Hilton Head.

Jimmy: Good. And then probably one to three more that you’ll identify?

Noah: Correct. And we have other deals in the pipeline that are either, you know, LOI negotiations, etc., but are not currently under contract.

Jimmy: Good. Well, let’s talk about your partners now. You mentioned them a few minutes ago. Who are some of the partners that you’re working with at Atlas, and what is the importance of forming those partnerships?

Noah: Sure. And so, you know, we’ve partnered with folks across a variety of different verticals, historically, value add, primarily geographically focused partners, as well as ground-up partners. So, we can kind of take our partners within a couple different buckets. But the reason why we do partner with folks is local execution is very, very important to us. And so we do have an in-house development team. But having local expertise and having the ability and have the eye of someone who knows what sells in the market, knows the local politicians, knows all those different people, gives us a huge competitive advantage in reducing the risks that a lot of people take when developing. And so having partners is actually a huge value add. And having the in-house mechanisms to actually manage those folks, you know, people who actually know what they’re doing in terms of development, basically provides the best of both worlds of having a super-regional focused, you know, investor like us, as well as, I should say, super-regional developer, such as us partnering with super-local developers provides a really great outcome for our investors.

Jimmy: And what about your capital base? Where are you sourcing your equity from primarily? Who are your investors, in other words?

Noah: So, we started this business in 2009. We’ve built up a huge, huge network of high-net-worth individuals and family offices that have historically funded us on a deal-by-deal basis. But as our deals have gotten larger and as our execution has just gotten, I guess way better, we’ve also attracted a lot of institutions as well, whether it be through other QOFs that invest in our deals or kind of larger institutions. You know, for instance, we’ve done deal with Angelo Gordon and some other kind of higher name firms.

Jimmy: Good. Well, what about opportunity zones now, because you guys have been doing deals since ’09, you guys predate opportunity zones. You’ve been around the block a few times, but opportunity zones came around a few years ago and now you’re launching your OZ Fund. What is it about the opportunity zone policy or incentive that drew your attention to it? What do you like about opportunity zones?

Noah: I think it’s just an alignment of interests, right? So, we’ve always been invested as a long-term thesis, and we immediately were drawn to the opportunity zone marketplace because it allowed us to do what we were doing on the value add side, but on the development side. And so what we did is we took that expertise in multifamily, that housing that we did hone for over, you know, 50 deals and put that into development. And so by being incentivized to hold over 10 years, allowed us to attract the right capital that actually was in line with how we thought real estate should be held. So, again, you know, we think that real estate is best-owned long-term, especially in a high-growth market. And when opportunity zones, that’s exactly lines up with what your interests are as an investor and as we think as responsible stewards of capital in terms of what makes the most wealth for our investors, which is, you know, holding it long term. And so there’s just kind of a perfect marriage. I would say another part of our thesis is, you know, I would say, this might be repetitive if anybody has seen my pitch, but our deals have kind of a pervasive theme in terms of what they do. You know, our markets have strong long-term demographic tailwinds. Our sites are soon-to-be core locations, and our design is timeless but authentic to the locations we build in, and our properties have a broad appeal across a wide range of ventures. And we were able to do that with kind of the value add strategy. But in terms of development, the opportunity zone actually allows us to deliver that, you know, currently with development. So, it’s been a great program that I think has aligned our interests well simply, but maybe not so simply, but…

Jimmy: Right, but you put it well. So, we talked about multifamily as the broad property type that Atlas is developing now. But most of it, or if not all of it, is affordably priced workforce housing or affordable housing, or you used a term with me before we hit the record button a few minutes ago, naturally attainable housing. What can you tell my listeners and me about this property type and why is it so crucial at this point in time that more of this type of product get delivered?

Noah: Sure. So, we’ve never been focused on kind of top-of-market pricing. We think that it kind of attracts too narrow of a renter base. What we like to do is target, we would say naturally rents attainable housing, or naturally attainable housing. What that allows us to do is kind of target chunk rents that are much less. And so in a period of time where the cost of everything else is going up, you know, having your rent as a significantly smaller portion of your income allows for two things, one, much broader demand for your unit. So, you know, theoretically, we lease up faster than somebody who’s got rents 20% higher than ours. Two, gives us room to raise rents. And so when you’re delivering a product that, you know, your chunk rents are a significantly lower portion of people’s incomes, you solve a lot of things.

And, you know, we have assets across our portfolio. This is exactly what we see where we’re either the low-cost provider or just the high-value provider, where people are not necessarily paying the top-of-market rents, but they’re getting a product that is very livable. You know, they love living there and reduces the turnover, and also kind of reduces their marketing costs. And so we really do believe in giving back to the community. And so, you know, delivering products that are rent attainable, we then both does that as well. And in working with local governments, you can see the excitement on their faces. And when they say you’re delivering that type of product or you’re actually helping us fulfill our goals, it’s great to see their reactions to that. But also, you know, just as a company, we like to give back to the community. And we have a couple of different corporate initiatives that we like to touch on, and a lot of it has to do with housing and security.

Jimmy: Well, let’s touch on those in a moment. But I wanna talk one more minute here about opportunity zones and fundraising. You know, given the challenges that we discussed at the start of the episode today, what are some of the specific challenges that you have faced so far in raising for a Qualified Opportunity Fund right now as we approach the end of 2022, given where we are?

Noah: Sure. I think that it would not be an exaggeration to say that there’s less capital gains today than there were six-plus months ago. And so, yes, so I would say that folks that are investing, some of them are still writing the same size checks as they used to. Those just happen to be very wealthy people. But some people just don’t have as many gains as they used to. And some people are pulling back in terms of the risk profile, maybe ground up isn’t as…it doesn’t fit their liquidity needs at the moment, as well as just the size of the gains might be lower. But given that we have the product that we do, we’re still getting a ton of traction in terms of, but it’s probably more investors with maybe slightly smaller checks, and having to go a little bit beyond our current investor base.

Jimmy: That makes sense. That’s understandable. I think the economy will continue to kind of ebb and flow in this investment vehicle or policy opportunity zones, whatever you wanna call it, will continue to evolve over the coming years. Well, you hinted a moment ago, Noah, about how you and your firm, Atlas, likes to give back to the community. And you guys are participating in an interesting way to give back to your community, a Real Estate Executive Sleep Out that you’re participating in very soon here. What can you tell us about that?

Noah: Sure. So eight years ago, we actually co-founded the Real Estate Executive Sleep Out in conjunction with the Covenant House. Covenant House provides housing and services to homeless youth across the country, I think actually internationally as well. What we do every year is we actually sleep on the streets, and raise money for Covenant House with a bunch of other real estate executives. We’ve raised over $3 million in the past eight years. This year, we’ve raised over $50,000, just Atlas. And with the rest of the people involved it is obviously significantly more than that. And so, yeah, so, everybody gives up their bed for a night. It’s gonna be 35 degrees in New York City on Thursday. And so I’m trying to stay healthy so I don’t get pneumonia, but it’s always a great experience, at least emotionally.

Jimmy: Well, that sounds very worthwhile. And good luck, and try to keep warm out there. It’s been a pleasure speaking with you today, Noah. Thanks for all your insights. And again, thanks for partnering with us on OZ Pitch Day a few weeks back. It was great having you there as well. Before I let you go today, if we have any listeners or viewers out there who are interested in learning more about you or Atlas Real Estate Partners, where can they go to learn more?

Noah: Sure. So, we have two websites. One is specifically for the OZ Fund, and it’s atlasrepoz.com, so atlasrepoz.com. And the other one is just atlasrep.com and then you can email us at [email protected].

Jimmy: Fantastic. For our listeners and viewers out there, of course, as always, I’ll have show notes available for today’s episode at opportunitydb.com/podcast. And there, I’ll make sure that we have links to all of the resources that Noah and I discussed on today’s show and I’ll be sure to link to that email address and the Atlas websites as well. And please be sure to subscribe to OpportunityDb on YouTube or your favorite podcast listening platform to always get the latest episodes. Noah, again, it’s been a pleasure. Thanks so much for joining me today.

Noah: Thank you. Thank you for having me.