There were 300+ investment funds with targets to raise $50 billion or more to invest in Opportunity Zones as of Q2 2019. Interest in this program was strong when it debuted, in short, but since then that eagerness has translated into a more realistic and nuanced approach to investment.

The impact of Opportunity Zone incentives is mixed and should be described in nuanced terms, according to a recent report by CBRE. Overall, it said, investment volumes appear to be primarily influenced by cyclical factors and the transactions in Opportunity Zones since the first quarter of 2018, have accounted for 10.5% of overall US volume.

This remains largely unchanged compared with the 18 months prior to the program (10.7%), CBRE notes. Furthermore, it continued, annual volume growth in Opportunity Zones has been quite reflective of the broader market throughout the entire cycle, even during the past 18 months (6.7% vs 7.2%) when compared with the preceding 18 months.

Development Sites Attract Investment

But while transaction volumes do not appear to have an impact on aggregate demand, “demand has shifted around in some ways and there are meaningful localized impacts, including the rise in development site acquisitions since the start of the program,” CBRE said.

Development site investment in the period from Q1 2018 through Q2 2019 totaled $87 billion and was 14.6% higher than the 18 months preceding the program, it said. In contrast, investment outside of Opportunity Zones was only 1.2% higher than the six months leading up to the program.

One possible reason is that development of raw land is one of the most straightforward ways to deploy capital and maintain compliance with program regulations, thus qualifying for tax benefits. “As a result, transaction activity for Opportunity Zone development sites has increased sharply, indicating some impact in this segment of the market,” CBRE said.

Multifamily Dominates

Multifamily site investment accounted for 35.1% of all development site buying in Q1 2018 through Q2 2019 while in the prior 18-month period, multifamily represented 24.2% of total development site investment, according to CBRE.

This comes as little surprise: Of all the investment in Opportunity Zones, multifamily projects have dominated. Investment in multifamily development sites in Opportunity Zones has jumped 66.2% over the last 18 months, according to CBRE, with the sector now accounting for 53.2% of the construction value.

In terms of the dollar value of construction starts, multifamily represented over one-half (53.2%) of the total commercial real estate value invested in Opportunity Zones over the last 18 months. “Consequently, the estimated dollar value of completions is expected to rise through the end of 2019,” CBRE concludes.