Opportunity Zones have been discussed at length since their inception in Q1 2018. Interest is high, and 300+ investment funds had targets to raise ±$50 billion to invest in Opportunity Zones as of Q2 2019.
The impact of Opportunity Zone incentives is mixed and should be described in nuanced terms. Overall, investment volumes appear to be primarily influenced by cyclical factors. Total investment in Opportunity Zones since the creation of incentives (Q1 2018), transactions have accounted for 10.5% of overall U.S. volume.
The share of volume in these zones remains largely unchanged compared with the 18 months prior to the program (10.7%). Furthermore, annual volume growth in Opportunity Zones has been quite reflective of the broader market throughout the entire cycle, even during the past 18 months (6.7% vs 7.2%) when compared with the preceding 18 months.
While transaction volumes do not appear to have an impact on aggregate demand, demand has shifted around in some ways and there are meaningful localized impacts, including the rise in development site acquisitions since the start of the program.
Development Site Acquisitions Stand Out
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 Opportunity Zones was only 1.2% higher than the six months leading up to the program.
Development of raw land is one of the most straightforward ways to deploy capital and maintain compliance with program regulations, thus qualifying for tax benefits. As a result, transaction activity for opportunity zone development sites has increased sharply, indicating some impact in this segment of the market.
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.
Multifamily site investment accounted for 35.1% of all development site buying in Q1 2018 through Q2 2019. In the prior 18-month period, multifamily represented 24.2% of total development site investment.
In terms of the dollar value of construction starts, multifamily represented over one-half (53.2%) of the total commercial real estate value invested in Opportunity Zones over the last 18 months. Consequently, the estimated dollar value of completions is expected to rise through the end of 2019.
Site Investment by Location
New York City, Los Angeles and San Jose led in investment volumes of development sites since the start of the program. Secondary markets such as Salt Lake City, Denver and the Inland Empire had strong showings in terms of absolute gains as well as total volume.
It is also worth noting that these cities have attractively-located opportunity zones—even encompassing downtown areas in some cases.
The top five markets for percentage increases were Baltimore (896%), Birmingham (728%), Boston (572%), Philadelphia (479%) and Denver (413%).
Clearly, 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 Opportunity Zones and tax incentives will only help steer more capital into blighted communities.
By George Entis, Senior Research Analyst, CBRE