Opportunity Zone Development Has Yet to take Off

Opportunity zones have rapidly become one of the most popular investment models in commercial real estate. While capital has flooded into the opportunity zone funds, development starts have been slower. That is largely because there has been a lack of clarity regarding opportunity zone regulation.

“There has been a slight delay in an increase in development in opportunity zone areas,” Richard Lara, president and CEO of RAAM Construction, tells GlobeSt.com. “That said, this is largely due to a lack of clarity regarding some of the regulations. Many investors and developers were awaiting final clarification on the regulations before making the full leap into the space.”

However, now that the final regulations have been released, there is clarity in the new model, and likely new projects will begin to break ground more frequently. “Now that the final regulations were released by Treasury at the very end of last year, we will likely see an influx of development in many opportunity zone areas across the U.S.,” says Lara. “The final regulations provided answers to a lot of pending questions for many investors and developers, which we believe will aid in providing more confidence when structuring opportunity zone deals this year.”

Opportunity zones are intended to help fuel economic investment in disenfranchised communities. While any asset class can work in the model, Lara says that affordable housing is one of the biggest opportunities. “Affordable housing is one asset class that we believe will benefit most from the opportunity zone legislation,” says Lara. “Opportunity Zones are focused on underserved markets, and as mentioned, affordable investors and developers often have experience working in and successfully operating in these markets. Therefore, they may be able to make more deals pencil as a result of the tax benefits compared to investors who focus on other product types.”

In addition, affordable housing has strong and growing demand in today’s market, making it an even better candidate for opportunity zones. ‘The sheer demand for affordable housing in underserved markets may be another reason this product may benefit most compared to other asset classes,” says Lara. “Market-rate housing, for example, may not fare as well in an emerging or underserved market that does not yet quite have full capital reinvestment or revitalization where an affordable housing asset may perform.”