3 min read February 2024 — In an interview with Focus:, Tim Perry, managing partner of North American Properties – Atlanta, talked about the challenges and opportunities faced in 2023 due to sustained interest rate increases. Despite headwinds, the company focused on cost discipline and acquisition strategies, benefiting from the reimagining of properties in the mixed-use space. Looking ahead, the company plans to acquire solid assets, fortify them against competition, and drive revenue growth by creating mini-cities and valuable community assets.
In what ways have you grown over the past year?
2023 certainly had its share of headwinds as we dealt with the fallout of the first sustained interest rate increase environment in more than 20 years. At the same time this created opportunities for those who are aligned with capital to take advantage of a reset in real estate valuation. The playbook needed a bit of rewriting in light of upward pressure on cap rates and investment plans; however, the focus on cost and acquisition discipline are all things that are more important than ever because you can only influence income and yields – factors more easily cured by the past falling cap rate environment.
We are fortunate though to have purchased properties that had redevelopment business plans with near-term revenue increases to offset the rate pressure and maintain acceptable development spreads. It was also fortunate to be in the right product classes, specifically with retail and multifamily in a mixed-use environment, to capture the revenue. We only had to execute what we acquired and anticipate that momentum continuing further into 2024.
How are you finding innovative ways to acquire capital?
From the debt side there is still a lot of illiquidity with banks, so until they can reduce loan exposure through repayment, it is going to be a challenging year for big banks. Smaller banks are less encumbered with regulation and need the assets on their books, so borrowing from local banks at the right loan size and guarantee is still attractive. Life insurance companies and longer-term lenders still have capital to deploy in the debt space and the CMBS market continues to recover, which will help create some of the bank repayment that produces liquidity. We still look at our partners and work with life insurance companies and debt funds when they get the yields that they’re seeking in a senior position.
How are you positioning the company to capitalize on opportunities?
Construction costs for new development remain extremely high. When you can purchase well-located, community-loved assets that just need new capital for less than half of the replacement, it gives you a lot of room to improve them. There is nothing that can compete with having all the amenities a person could need in one place. We’re talking about the gym, laundromat, coffee, and dining which makes the product more durable and creates a halo effect within the three-mile radius, growing that local community and creating even more demand for the tenants. Each asset class cyclically helps the other, creating a self-fulfilling success.
Is there any regulation you are monitoring closely?
Communities are seeing the benefit of amenities located within downtown and are being more supportive of the uses required to make that happen with a new openness to their entitlement powers. We still need to figure out how we are going to provide workforce housing that is affordable to those communities. One of the largest risks to real estate right now is skyrocketing insurance costs, especially for wood-framed residential. Insurance costs have gone up 300% to 400% in recent years. If that continues and providers keep exiting states, then we are going to end up with insurance costs that make housing unattainable and rent out of reach for many people – especially when we are trying to provide a price point for the workforce. It doesn’t matter whether it is a flood, fire, tornado, theft, or vandalism. It is all dollars lost and that cost is getting spread out everywhere, not to mention the frivolous lawsuits going on at a property level crushing the insurability of the property. It is something we have to start getting control of at the legislative level.
What is your outlook for the next two or three years for North American Properties and the market?
We are looking at acquiring solid assets we can continue to fortify and insulate from competition that is beloved and embraced by the community where we can drive sales traffic. We want to bring density to them and create these mini-cities and great surrounding communities. Because of that, we can get an above-market revenue growth rate and that for us is how we can insulate ourselves best from macro-economic issues. We want to stick where we can to create the most value and generate the best return.
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