Six Years On, Opportunity Zone Funds are Finding Secondary Markets
https://www.connectcre.com/stories/six-years-on-opportunity-zone-funds-are-finding-secondary-markets/
Connect CRE
National + Weekender | June 1, 2023
Since its introduction in 2017, the opportunity zone program has been lauded and criticized in turn. Cutting through some of the rhetoric, investors participating in the program have taken advantage of opportunity zone tax benefits. According to research by Novogradac, opportunity zone funds reported an equity investment of $9.68 billion in 2022, the largest single-year total charted by the company since the incentive became part of the tax code in late 2017.
Meanwhile, the Economic Innovation Group, the organization that provided the idea of funneling capital gains into underserved communities, indicated that opportunity zone program is having a significant and positive economic impact on the communities it was set up to serve.
But mention “opportunity zone program,” and what might come to mind are large, urban centers. But it’s important to remember that there are more than 8,700 federally designated opportunity zones on the opportunity zone map. And experts tell Connect CRE that opportunity zone funds are turning their attention toward secondary markets.
Said Excelsa Properties’ Director of Asset Management Curtis Holder: “These secondary markets have received increased attention from investors wanting to take advantage of tax benefits offered by the program, due to the recent high valuations and difficulty of placing capital into more conventional investments.”
Defining “Secondary”
What, exactly, are secondary markets? Googling the term generates different definitions, but the standard tends to be tied to population, investment activity and economic strength. Primary markets tend to include New York, Los Angeles, Chicago and San Francisco. These are densely populated cities, typically numbering more than 5 million people.
Meanwhile, secondary markets are those that aren’t as populated as their primary counterparts (averaging between 1 million and 5 million people). But they’re enjoying economic growth and, as a result, are attracting more people. Examples of these markets include Houston, Orlando, FL and Charlotte, NC.
What’s interesting is that some cities can be found on both primary and secondary market lists. Seattle, Atlanta, GA and Miami, FL can show up on both lists.
And . . . the Appeal
Valuations and capital placement are one attraction of these secondary opportunity zone markets. Another are the fundamentals. “Larger macro trends speak to the potential of these communities,” said Kunal Merchant, partner and COO of Revitate. “Notably, 68% of the largest urban counties in the United States experienced recent population losses to secondary markets.”
As a result, he added, intelligent fund managers and investors are following that migration and demand patterns, which are leading “directly to secondary and emerging markets.” These locations offer benefits including less deal competition and greater flexibility in structuring investor-friendly terms. Additionally, secondary markets can provide “lower and more manageable land and development costs,” Merchant explained.
Holder also noted that funds involved with secondary markets support a variety of real estate types, including housing and other renovations. “Many investors are attracted to the potential for high returns on their investments in these areas, as well as the opportunity to make a positive impact on underserved communities.”
Merchant agreed, noting that investors who are smart, disciplined and patient could experience positive upsides and returns. Additionally, targeting those secondary markets “reflects the spirit of the opportunity zone policy,” Merchant said. “This seeks to intentionally prioritize capital infusion into lower-income markets with significant need for additional jobs, housing and economic development.”