Opportunity zones are the latest big thing to hit the commercial real estate market, but many questions remain, including details of how deals can be structured, the best strategy for investing and just how much property there is in the zones.
Transaction activity has so far been muted as industry players try to understand the ground rules and raise capital in vehicles that will meet the needs of investors and withstand structural scrutiny. However, one thing is certain: the opportunity is enormous.
A study of Yardi Matrix’s database found that within opportunity zones there are either in place or under construction 1.9 million multifamily units, 960 million square feet of office space and 180 million square feet of self-storage space. As a percentage of total space, properties in opportunity zones that are in place or under construction represent 13.1% of total multifamily units nationwide, 13.7% of total office space and 11.4% of total self-storage space.
The development pipeline in those zones – projects that either have (or are in the process of getting) government approvals to build but have not broken ground – encompasses 450,000 multifamily units, 120 million square feet of office space, and 12 million square feet of self-storage space. Ground-up development is likely to be a major focus of opportunity fund capital, since the law requires investors to significantly increase the basis of assets purchased. For properties in place, that would mean buildings in need of wholesale improvements, which limits the pool of potential assets that would qualify.
The potential is highest in the multifamily sector, where the number of planned and prospective units represent 24.2% of total stock within opportunity zones. In office, planned and prospective projects represent 12.6% of total space, while the percentage is only 6.7% in the self-storage segment.
While it would seem intuitive that average rents of properties in opportunity zones – defined as areas with below-average income and higher-then-average unemployment – would be less than the market average, the data shows no clear pattern.