Eleven neighborhoods in seven states and the District of Columbia present the greatest ROI potential for residential developers interested in the federal reinvestment tax breaks offered by the growing Opportunity Zone Program, according to a new report. Investors in qualified opportunity funds (QOFs) might want to pay attention to this report, released on Sept. 3 by ATTOM Data Solutions and Seattle-based proptech company CityBldr.
The two firms applied artificial intelligence techniques to property sales and population demographics in the 8,800 opportunity zones (OZs) created since the Tax Cuts and Jobs Act was passed in 2017.
The firms then ranked the OZ-designated census tracts in order of the potential ROI they would yield to investors in multifamily apartments, rowhomes, or townhomes. CityBldr and ATTOM Data Solutions included only census tracts with sufficient home sale prices to show a year-over-year and two-year median home sales price change, the report says.
From coast to coast, here're the top 11
The 11 neighborhoods, in alphabetical order, are:
- Anacostia in Washington, D.C.
- Buckman/Kerns in Portland, Oregon
- Central District in eastern Seattle
- City Heights in central San Diego
- Hilltop in central Tacoma, Washington
- Mid-City in central Los Angeles
- North End/New Center in northern Detroit
- Parramore in west-central Orlando
- South Shore in Chicago
- Spartan Keyes in eastern San Jose, California
- West Colfax in western Denver
All 11 areas have poverty levels higher than the national rate of 13.1%. The highest is 49.4% in the City Heights area of San Diego; the lowest is 16.3% in the Mid-City section of Los Angeles.
However, the median home price in eight of the 11 areas is higher than the national median, according to ATTOM Data Solutions. The range is broad: a low of $40,501 in North End/New Center in Detroit to a high of $885,000 in Spartan Keyes in San Jose.
And the prices have risen sharply in some of those areas, but not all. They're up 91% in the South Shore in Chicago. Hilltop in Tacoma, meanwhile, fell 32% year over year.
"This data tells us that housing developers should consider investing in these neighborhoods because they have an immense amount of potential, plus tax benefits aimed at realizing that potential," said Bryan Copley, co-founder and CEO of CityBldr.
OZs were created to spur private investment, and it's happening
An August report by the White House Council on Economic Advisers estimates that by the end of 2019, $75 billion in private capital had been invested in QOFs, the investment vehicle created to pool funds to develop and redevelop residential, industrial, and commercial properties in urban, small town, tribal, and rural areas across the country.
"OZs cut taxes to increase economic activity by spurring private sector investment, job creation, and self-sufficiency. They also give greater scope for market forces to guide entrepreneurs and investors because they have no cap on participation and require no government approval," the report says.
The bottom line
Each opportunity zone has its own unique neighborhoods, demographics, existing housing stock, and potential. The ATTOM Data Solutions/CityBldr study is a useful overview for beginning an exploration of their potential for investment, whether through a QOF, some other joint venture, or directly.