March 20, 2019 Comments Off on Digging into the Opportunity Zone Weeds Views: 2161 Connect Classroom

Digging into the Opportunity Zone Weeds

Even as fund managers, developers and investors continue to figure out ground rules of the Opportunity Zone program, a just-released report, prepared by Yardi Matrix, provides an in-depth study of properties either in existence, under construction, or planned across the 8,700 nationwide Opportunity Zones. “The Big Opportunity for Investors in Opportunity Zones” focuses on multifamily units, as well as self-storage and office space. Some numbers are listed in the chart, below.

Yardi Matrix’s Director of Research Paul Fiorilla also pointed out the following:

  • Ground-up development will likely be a major focus of opportunity fund capital. This is because the program requires “investors to significantly increase the basis of assets purchased.” This is easier done through ground-up builds, rather than wholesale improvements of in-place properties.
  • The multifamily sector has the highest potential for Opportunity Zone development. The number of planned and prospective units represent 24.2% of the total stock. In the office sector, planned and prospective projects represent 12.6% of the total space, while planned and prospective projects in the self-storage sector represent 6.7% of the total space.

Fiorilla pointed out that there is, at present, a lack of clarity when it comes to overall rent data within Opportunity Zones. There simply isn’t a clear pattern, partly because of the way in which the zones were drawn. The U.S. Department of the Treasury and IRS relied on average from the 2011-2015 American Community Survey; “some communities have experienced growth and/or gentrification in the intervening years, and might not qualify if more recent numbers were used,” Fiorilla wrote.

Additionally, in some cases, numbers are skewed by smaller sample sizes, while states were also given “a fair amount of leeway to set up the zones,” meaning different strategies were employed. Finally, the census tracts designated as Opportunity Zones have a range of neighborhoods and characteristics. Fiorilla used Long Island City in Queens, NY, as an example, noting that the region has struggled as industries left in previous decades. It had, however, gentrified in recent years, and was selected by Amazon for its East Coast headquarters before the company changed its mind.

Fiorilla concluded that, while Opportunity Zones could well be an attractive investment, especially as commercial real estate is at the tail end of a close to decade-long bull market, the risks are also significant. “Investing in low income areas or those starved of business investment is inherently more volatile than core, stabilized markets,” Fiorilla pointed out. His suggestion is that investments be carefully thought out, researched, and made in concert with local governments and businesses.

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For comments, questions or concerns, please contact Amy Sorter

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