Jury Still Out On Opportunity Zones
The Treasury Department recently released Opportunity Zone guidance to make it easier for fund managers to raise capital and developers to begin construction, but it is too soon to see how well they work, analysts said.
The December 2017 tax reform law created an incentive for real estate investment in low-income areas designated as Opportunity Zones by allowing investors to defer to capital gains taxes and avoid paying taxes on gains if they hold the investment for 10 years or more.
Commercial real estate analytics firm Reonomy, New York, looked at asset supply, investment share and average sale prices in and outside of Opportunity Zones in the 50 largest metros except for New York City. It found that over the past 10 years, census tracts currently designated as Opportunity Zones have seen a declining proportion of commercial real estate investments.
For example, in 2009, just under 15 percent of all commercial transactions activity in the top 50 MSAs (except New York) took place in what are now designated Opportunity Zones, but in 2018, the share of investments in Opportunity Zone tracts fell to 10.5 percent. “The U.S. in its entirety shows a similar trend, though the top 50 MSAs saw a much steeper decline from 2017 to 2018,” Reonomy’s CRE in the Land of Opportunity (Zones) report said.
Reonomy noted this trend might be exactly why the Opportunity Zone program was created in the first place–to shift investment back into these areas. Or perhaps the Opportunity Zone legislation has not yet had its intended impact on commercial investment, the report said.
“If first-quarter 2019 is any indication of things to come, however, it could be that the program is beginning to have an impact in more prominent commercial real estate markets first–that is, risk-averse markets–or that the program will only have an impact in the more distressed areas of already risk-averse markets,” Reonomy said.
JLL Senior Vice President Jonathan Paine said while a few investors charged into Opportunity Zones, most waited for the Treasury Department’s more complete guidance released in mid-April before taking the plunge. “This clarifying guidance should remove many of the barriers that have kept large pools of capital on the sidelines,” he said.
MBA Education and members of Ballard Spahr’s Qualified Opportunity Zone team will discuss the QOZ program and how it could affect commercial real estate investment on Wednesday, June 19 from 2:00-3:30 p.m. ET. Click here for more information.
