Industry Hopes for New Surge Once Government Shutdown Ends, Rules Are Released.
Sales of commercial properties in so-called Opportunity Zones rose 12.4 percent to $52.3 billion in 2018 from the year before, according to preliminary CoStar data, a sign analysts say may mean demand throughout this year. The numbers are likely to climb higher as details of deals become public and get added to the tally. Whether the total reaches the numbers anticipated by backers of the new tax incentives remains to be seen.
Opportunity Zone activity is being muted by a government shutdown that is entering its second month with little end in sight. The shutdown is delaying the release of final regulations from the Internal Revenue Service, prompting some investors to hold back from property purchases and new development. So far, opportunity zone transactions make up 8 percent of all property sales, a slight increase from the 7.8 percent recorded in 2017.
The data comes amid optimism in the real estate community that opportunity zone spending could jump in 2019.
"I expect that interest to exponentially increase in 2019 and 2020 as the federal government moves to clarify and solidify the rules and regulations surrounding various aspects of the opportunity zone program," said Lauren Campbell, investment sales and development at the real estate advisory firm Hybridge CRE in Tampa.
Opportunity zones are communities dubbed economically distressed where new investments can be eligible for preferential tax treatment. Investors can defer or exclude taxes on any prior gains if held for five years or more. In addition, if the investor holds the investment for at least 10 years, investors can exclude 100 percent of new gains.
As enacted, investments would have to be deployed by the end of 2019 to take full advantage of the tax estimates. Campbell expects that interest to come from larger firms, real estate investment trusts are already getting into the game, she says, but one of the most significant investor types will be so-called family offices that manage assets for wealthy individuals and their families.
"I expect this because they have significant capital gains to defer as well as the flexibility to pivot to a new investment type quickly. They also typically have a more flexible risk profile than other larger dollar investors, while only answering to themselves," Campbell said. Family offices have the means to purchase these properties and the patience to ride out the decade for a net capital gain of zero at year 10 and beyond, she added.
Giles Stevens, vice president, investment sales at SRS Real Estate Partners, an Atlanta real estate services firm specializing in retail, said the big firms and funds will be the major players in 2019. The smaller players, he said probably will not be able to or may not want to absorb the opportunity paperwork and hassle. "I predict there will be some monster winners with the Goldman Sachs-type funds, but not so sure for the bulk of $500,000 to $3 million in-town rehab/redevelop plays," Stevens said.
The smaller players could be more likely to pull the trigger on deals with adjacency to but not in opportunity zones. "They want to be adjacent to a larger catalyst redevelopment project," Stevens said. "I would guess that a very large percentage of opportunity zone investment will come in the form of rising tide lifts all ships type investments."
Wendy Crites, principal of DMS Development in Baltimore, agreed there would be much more investment in opportunity zones if the rules were not so convoluted and more developers understood the intricacies of investment in this type of venture.
"The majority of money that has been invested in opportunity zones to date is primarily based on projects that were already targeted to receive these monies," Crites said. "It is a process that is still being vetted out by many of us."
Brent Field, director of data science at Hodges Ward Elliott, a hotel brokerage and investment-banking firm in New York, said the industry is still reading the tea leaves when it comes to how opportunity zones will play out in 2019 and beyond.
"We are short on data, and what data we have is impacted by an adoption curve dynamic in which the earliest investors bring a different perspective than those who will invest later," Field said. "The only projection I feel comfortable making is that opportunity zone sales volume will be a larger but still relatively small part of all 2019 U.S. commercial real estate sales volume. I would be very surprised if opportunity zones account for even 12 percent of sale volume in 2019, although I would love to be proven wrong."
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