OZ Funds Fueling Multifamily Construction Rush
One asset class has emerged as the clear winner of opportunity zone investors' affection — and funds. Investors have been funneling their funds to multifamily, partly because apartments are a winning asset these days, but also because the advantages of OZs mesh well with apartment development, Urban Land reports.
When it comes to OZ investment, the problem with office development is that too often the asset class doesn't lend itself well to long-term holds.
“Offices reach their peak value the moment you lease them up. They actually lose value as you get closer to tenants’ lease expirations five or 10 years later,” Pinnacle Partners Managing Partner Leo Backer told UL.
Industrial development is on a tear these days, but it doesn't need a complex source of capital, and retail development has gone into what might be a permanent slump.
That leaves multifamily as the favored property type for OZ investors, according to a report earlier this year by Novogradac. The interest in multifamily for OZ investing comes as the investment vehicle, which allows capital gains taxes to be deferred until the end of the program in 2026 (though there is talk in Congress of extending it), has attracted a surge of interest.
Investment in opportunity zones grew in the last half of 2021, with qualified opportunity zone funds tracked by Novogradac taking in $6.9B, up 39% from the first half of the year. California is the top choice for OZ investors, along with Arizona and the Pacific Northwest, Georgia and other Sun Belt states.
Not only are OZs attracting a large volume of investment dollars, but the program also seems to be attracting investments that might not be made without OZ incentives, according to a report by financial administration specialist JTC Americas and OpportunityDb, a database of OZs.
Nearly 70% of existing and aspirational OZ investors see the program’s incentives as enough to consider investments they wouldn't otherwise make, the report says. Over half (54%) would be willing to accept a lower financial return for investing in what they considered a good social impact project, and over 30% would take a reduction of more than 25%, according to the report.