Investments in a Qualified Opportunity Fund (QOF) ensure that capital gains from all types of sales can be reinvested into promising, up-and-coming areas in need of an influx of investment. But with nearly 8,700 census tracts designated Opportunity Zones (OZ) across the country, investors face a daunting task analyzing each zone’s unique characteristics and searching for the greatest upside to their capital investment.
In reviewing data and analysis regarding the 8,700 tracts, we spotted a few important patterns that investors should consider when evaluating OZ for future projects. Using data provided by the Economic Innovation Group, we identified three important takeaways that highlight just how promising these zones really are. According to the data, Opportunity Zones:
- Rural vs. Urban Metros – Approximately 78% of Opportunity Zones are split almost evenly between high-density areas close to urban centers and low-density communities common in rural areas. This is a boon for investors looking to invest in emerging regional hubs in rural communities.
- Overlap with Aging Housing Stock – On average, the housing stock located in Opportunity Zones is approximately 50 years old. The need for housing, especially affordable living, is expected to be a major influence on Opportunity Zone investments in these areas.
- Demonstrate Existing Support for Growth – Opportunity Zones are primarily located in economically distressed areas, but that doesn’t mean that investments translate to starting from scratch. Close to 75% of Opportunity Zone tracts are in areas that have already begun to exhibit signs of growth and lasting momentum.
Several economic factors are shared between Opportunity Zones. However, considering the sheer diversity of communities represented by the 8,700 designated tracts, a vast number of options exist for investors in terms of taking advantage of relevant tax incentives.
We’ve identified three types of Opportunity Zone communities with a high potential for economic growth. The following insights serve as a helpful lens for any potential investor analyzing the best ways to take advantage of what Opportunity Zones have to offer.
- Emerging Communities in Need of Concentrated Capital
While the local community has long been dedicated to driving economic development in Springfield, Oregon, a lack of funding has been a major factor limiting outside investment. Multiple Opportunity Zones are located within this community, and the potential gains represented by new tax incentives may be the final push needed to transform Springfield into a thriving regional hub.
“These Springfield neighborhoods have a clear vision and community commitment, but at times lack only the final layers of investment to turn vision into built projects,” said Courtney Griesel, economic development director for the city of Springfield, in an interview with The Register-Guard. “We’re encouraged by the opportunity this program might be connecting valued investment to an energized community.”
Investors should pay close attention to Opportunity Zones located in communities with a strong leadership and planning capabilities. Pouring capital into communities like Springfield, Oregon, that are already primed for growth is a solid approach to maximizing these investments.
2. Established Development Areas Offering Added Returns
Among the most exciting potential Opportunity Zone investments to consider are those where existing tax incentives are already driving development. A perfect example of this trend is in Allentown, Pennsylvania, where the local Neighborhood Improvement Zone (NIZ) overlaps with, or is adjacent to, census tracts designated as Opportunity Zones.
Local leaders have already begun to draw attention to the potential for Opportunity Investments to ramp up the progress that has already been made through the NIZ. Allentown Neighborhood Improvement Zone Development Authority (ANIZDA) Director Steve Bamford emphasized that “[the] Opportunity Zone is an extension of the city’s master plan.”
Likewise, ANIZDA Chair Sy Traub has already begun to pitch possible investors on the long-term advantages of investing in the area.
“This is a unique situation because…the city has been redeveloping over the past several years,” said Traub. “Within the next 10 years, what’s in Allentown will be more attractive to investors and worth a lot more.”
3. Booming Urban Cores Designated as Distressed Areas
Most census tracts designated as Opportunity Zones resemble what one may immediately imagine as an economically distressed community. However, there are several OZ’s where economic growth and development are aggressively underway and demand for housing and office space is already high.
A perfect example of this trend is underway in Charleston, South Carolina. Thanks to a population that is made up predominantly of undergraduates attending the College of Charleston, the community’s average household income is deflated. As a result, investing in this area where high-end development of bars, restaurants, and luxury hotels is already underway now qualifies for substantial long-term tax incentives.
It’s no coincidence that this economic activity is being driven by proximity to a major university. Investors should keep their eyes on other metros where a high population of students has led to Opportunity Zones with unique economic profiles.
More urban centers with long-term potential for OZ investments include the following:
- Pearl District, Portland, OR
- Arts District, Los Angeles, CA
- International District, Seattle, WA
- East Bank, Nashville, TN
Thanks to the promise of tax-free capital gains on the sale of OZ projects, these areas are especially attractive for investors. Those eying the greatest return for their OZ investment should consider communities like these that promise to be economically stable over the next decade.