The Opportunity Zone program — created by the federal government through the Tax Cuts and Jobs Act to attract investment and development of property to stimulate economic growth in lower-income areas — is still a relatively new one. There is a learning curve to the most recent set of rules and regulations that shape Opportunity Zones that were released only a few months ago. Will multifamily development in Opportunity Zones gain more traction? And for now, what kinds of challenges are brokers seeing, and what do they expect the future to bring in terms of investment and development?

Chris Roach, associate vice president with Colliers | Phoenix has been on the front lines of the Phoenix Opportunity Zone scene and has noticed the challenges that the multifamily sector, specifically, has experienced so far. “Out of the 100 or so funds that were designated as Opportunity Zone funds, we noticed that a very small number of the deals were multifamily,” says Chris. “Most deals were focused on office and industrial product. You could actually count on one hand who has invested in multifamily Opportunity Zone projects so far.”

But why is this the case, when the tax incentives and other financial benefits of Opportunity Zones look so appealing? The short answer is, most of these funds have been slow to get organized and there were a handful of “what ifs” and unknowns about Opportunity Zones as a whole. “Once you raise the money to develop a property in an Opportunity Zone, you have a short window to place that capital,” says Chris. “Thus, it is crucial for developers and sponsors to fully understand the tax code and dynamics of Opportunity Zones first, in order to minimize any risks before raising investor capital.“

Not All About Raising Capital

Oftentimes, Opportunity Zone challenges don’t lie in raising the actual capital, as many of the investors and developers entering the arena are able to raise more than enough funds. So, where do the challenges come from?

First, a project has to make financial and locational sense for development before all the Opportunity Zone perks are factored in. As construction costs continue to rise and with no end in sight to the labor shortage, achieving the optimal rents for projects to make financial sense has been difficult. And surprisingly, the value of a property doesn’t automatically increase just because it’s an Opportunity Zone project. Ultimately, location is just as important as the project’s financials, which is challenging because many Opportunity Zones are located in financially depressed areas.

Benefits: What About Multifamily?

While a proposed development has to make financial sense on its own before Opportunity Zone perks are factored in, there are certainly benefits that have been realized as a result of multifamily property developed in these areas. In Mobile, AL, a 266-unit midrise apartment complex was constructed in an area that happened to also be an Opportunity Zone. “As the project neared completion, a number of potential purchasers came to the table before the property was even occupied because it was in an Opportunity Zone,” says Ron Cameron, vice president with Colliers | Atlanta. While the Opportunity Zone status certainly attracted buyers to the completed project, Ron also notes the importance of sound financials during the development process. “The investment in a project has to extend far beyond the cost of purchase.”

Ron also notes a difference between office and multifamily product in Opportunity Zones. “Tenants in an office building in an Opportunity Zone also realize those tax benefits for their employees. That same benefit doesn’t trickle down to occupants of multifamily properties in Opportunity Zones, as they won’t be able to take advantage of the same tax write-off benefits that employers can for their employees. Additionally, the majority of multifamily owners are not in for the required 10-year holding period”

What Will We See in the Future?

A decade from now, what will Opportunity Zones likely look like for those that develop, invest and occupy there? For one, Opportunity Zones will continue to help create a competitive advantage for properties that participate in the program. “Regardless of product type, if you’re in a competitive situation and you’re a purchaser with a fund with multiple property options in front of you, you’re going to go with the Opportunity Zone development,” says Ron.

However, it’s important to note that the government of each state has a hand in shaping what the future of Opportunity Zones will look like in the years to come. Each state is tasked with deciding which areas of their state need that economic jolt, creating beneficial tax incentives for economically run-down or stagnant areas through Opportunity Zones. While this means that outcomes of Opportunity Zones will likely vary from state to state, the future is optimistic. “I have been impressed by how many of our clients have built an Opportunity Zone business plan and are now starting to execute deals across the country,” says Brad Cooke, executive vice president with Colliers | Phoenix. “The overarching theme so far is that they have oversubscribed the fund and cannot find enough qualified sites to place the capital.” As states continue to iron out locations of Opportunity Zones, investors and developers will have to stay tuned for finding a wider array of these qualified sites to place capital in.