There are at least two types of real estate investors in Opportunity Zones, those that are drawn to a particular location for reasons that have little or nothing to do with the fact that the location is in an Opportunity Zone per se and those who are making strategic choices to invest in one Opportunity Zone versus another. The first investor may have ties to a particular community or simply believe that it is the best place to park her money. The strategic investor recognizes that long term gain is more likely to occur in locations that have both an attractive current pricing structure for rents and costs and the potential for growth.
The strategic real estate investor is likely to seek Opportunity Zones where the current rent levels are not currently burdensome and where even if rents were to increase, the market would be able to absorb new residential product without overdue strain or having to rely solely on in migration. The strategic investor is also likely to have an eye on the horizon, looking for the potential for longer term NOI growth. Opportunity Zones where gentrification is already occurring may not produce the greatest relative gain over the next ten years due to the already increased cost of entry and the potential that rents may reach their peak sooner rather than later. Instead, a well-chosen Opportunity Zone property with a more modest acquisition price, a more elastic rental market and a greater potential for NOI growth over time, is likely to produce a superior performing asset.
SP Group, a D.C. area real estate advisory firm is increasingly hearing from investors who are seeking to maximize their long-term gain by selecting Opportunity Zones with the greatest relative growth potential. “We have stratified all 8,762 Opportunity Zones”, explained Pratima Damani, SP Group’s CEO. “When clients ask, which is the best Opportunity Zone for me, given that I want A or B or C, we are in a good position to advise them based on our proprietary models and screening methods.”
SP Group’s top tier Opportunity Zones encompass the 70 census tracts with the optimal combination of rent elasticity and potential for revitalization among the 8,762 census tracts. These 70 Opportunity Zones are located in 69 cities in 25 states. More than half of the top tier Opportunity Zones are in the Midwest.
“One thing that investors sometimes forget when looking at Opportunity Zones and hunting for properties”, she said, “is that maximizing the benefit of the Opportunity Zone incentive requires that there be a gain from the business or property at the ten-year mark.”
“Our clients are focusing on those markets and properties that have the greatest potential for the greatest relative growth.”
SP Group’s method incorporates massive amounts of data and involves several proprietary indices to rank and rate the current pricing of properties and the potential for rent growth over time. “We have segmented the 8,762 Opportunity Zones into tiers representing an amalgam of market, social and macro-economic factors,” Damani explained. “Comparative analyses between census tracts and modeling outcomes to test the potential to achieve investor’s desired yield are all based on well established, dispassionate data”, she added.