The subject of Opportunity Zones (OZs) can be controversial when trying to pick bona fide development winners and losers. The fact that the perennial hot real estate markets of New York City, Washington, D.C., and Los Angeles account for the largest totals of development site acquisitions in OZs make it easy to be suspicious of the entire program. New data from CBRE reveals some crunched numbers to help understand what’s really happening in the OZ world.
Since OZs sprung into existence in the first quarter of 2018—after being enacted as part of the Tax Cuts and Jobs Act of 2017—more than 300 investment funds have been created to help target $50 billion of investments. While that sounds like a lot, CBRE estimates that the total investment in OZs since their creation have accounted for 10.5% of overall U.S. volume. When comparing investment in the same zones 18 month before the incentive, the number is 10.7%—basically the same.
The numbers start to get a bit more interesting by drilling past acquisitions and down into investments into actual site development. According to CBRE, development site investment in the period from Q1 2018 through Q2 2019 totaled $87 billion and was 14.6% higher than the 18 months preceding the program. In contrast, investment outside of OZs was only 1.2% higher than the six months leading up to the program.
The analysis indicates that developing raw land is a strong magnet for OZ dollars, and the details get juicier when looking specifically at multifamily. CBRE’s recent brief on OZs states, “Investment in land sites for multifamily development experienced particularly significant gains since Q1 2018. Multifamily development site acquisitions jumped 66.2% from the 18 months leading up to the program while development sites for all other property types experienced either losses or only moderate gains over the same time period.”
Following the money into the markets reveals the usual volume-leading suspects of LA, D.C., and NYC, along with a few surprises from secondary markets. The Top 10 list for OZ site development by volume for individual markets includes Salt Lake City (6), the Inland Empire (8), and the San Francisco East Bay (10).
The same volume-centric list also shows some impressive year-over-year percentage gains for Boston (571.5%), Denver (412.9%), and San Jose (292.6%). Looking at sheer percentage gains lists Baltimore as No. 1 with an 896% jump and Birmingham, Ala., at No. 2 with 728% growth.
CBRE is predicting the dollar value of OZ completions to continue to rise through the end of the year. It also is hedging its bets regarding OZs' ability to float all boats on a rising tide.
The report notes, “The increased buying activity of development sites in these markets were driven by many transactions that would have taken place regardless of incentives. Favorable locations and other transaction characteristics were also drivers. Still, significant multifamily development is taking place in OZs, and tax incentives will only help steer more capital into blighted communities.”
