A curious thing has happened in the Opportunity Zone space, now more than five years after the program was created. The investment tool has largely dropped off the radar of media, philanthropy, and legislators, but it’s become a darling of real estate investors. But with substantial market activity and federal expenditure, it’s important to discover what this program is delivering for communities.
Taking stock of Opportunity Zones is no easy task. Currently, investment reporting is handled through IRS forms 8996 and 8997. Unlike other federal programs, the data collected are too limited to adequately understand the program, and because data are collected via the tax form, there are legal constraints on sharing them publicly.
However, a few recent papers have developed some new insights from aggregated tax records. A paper from the US Treasury’s Office of Tax Analysis found that $48 billion in Opportunity Zone investments were made from tax years 2018–20, with 2021 and 2022 likely sizable as well. The Joint Committee on Taxation estimates that for fiscal years 2020–24, Opportunity Zones will cost the federal government $8.2 billion (and the largest piece of the incentive will start coming due only in 2028). These numbers show that Opportunity Zones is the largest ongoing federal community economic development program in the US.
Where have Opportunity Zone investments gone?
Nearly half of designated zones (48 percent) received some investment between 2018 and 2020, but as a paper emerging from the Joint Committee on Taxation identifies, this investment hasn’t been geographically widespread. Just 1 percent of zones received 42 percent of investment, and fully 78 percent of investments went to just 5 percent of zones. And, as the statute allows, $1 in $10 of investment actually happens outside of zones, including higher-income communities. Generally, Opportunity Zones benefit a “narrow subset of tracts in which economic conditions were already improving prior to implementation of the tax subsidy,” as per the Joint Committee on Taxation report.
When weighting tracts by the size of Opportunity Zone investment, the Office of Tax Analysis found that zones with investment had more residents with a bachelor’s degree (29 versus 15 percent), higher median home values ($242,000 versus $136,000), higher median incomes ($43,000 versus $36,000), lower unemployment (9 percent versus 12 percent), and lower poverty rates. Looking at race and ethnicity, zones receiving investment had a lower share of Black residents, a higher share of Latinx residents, and a nearly identical share of white residents than those that did not receive investment.
Additionally, Opportunity Zones have a considerable urban bias. As of 2020, 95 percent of investments were made in urban zones, more than the 86 percent of zones in urban areas. The states with the highest share of zones receiving investment include DC, Oregon, Colorado, Utah, and Arizona, while Kansas, New Mexico, Alabama, Iowa, and Illinois had the fewest share of zones receiving investment.
These findings add to another debate that’s been taking place since the program was first launched—whether zones were showing signs of gentrification before the program started. Our research found that a small share of zones, roughly 4 percent, experienced a sizable degree of socioeconomic change between 2000 and 2016. Using a different approach, the Economic Innovation Group found a similar result. Given the concentrations in Opportunity Zone investing, it’s possible that relatively few zones are gentrifying and also that much or most of the investment is going to these communities.
What types of projects are being financed?
Our qualitative analysis of early year Opportunity Zone investments found that the vast majority of capital flowed into real estate rather than operating businesses. Both the Joint Committee on Taxation and Office of Tax Analysis reports show that roughly two-thirds of investee businesses were in the real estate, construction, or lodging industries. But this finding likely underreports real estate investment, as occupants of investment properties could span a number of industries.
In general, Opportunity Zone projects provide market-rate rental housing, as well as commercial and industrial real estate. According to a leading Opportunity Zone accounting firm, less than 3 percent of equity raised went into operating businesses. One analysis of investment into Colorado found roughly three-fourths of projects were multifamily housing.
And who are investors in the program? The investors for Opportunity Zone projects are typically exceptionally high income with an average annual income of $4.9 million, which is in the 99th percentile.
What are the effects of Opportunity Zones on communities?
Initial impact studies of Opportunity Zones designations show mixed, limited, or no effects of the incentive on designated neighborhoods. Importantly, these are estimates of the impact of a census tract being designated as a zone, not of receiving investment, as data on the exact location of investments aren’t publicly available.
One paper found zone designation was not linked to increased job postings in aggregate, but postings did increase in certain urban neighborhoods. Another paper found designated tracts had no greater degree of new business formation, new business loans, commercial diversity, or consumer spending than nondesignated tracts, nor did designation lead to more venture capital investment. Conversely, another study found designation increased employment between 2017 and 2019 by 2 to 4 percentage points. When looking at residents rather than jobs in a neighborhood, another study found zone designation had no statistically significant effects (PDF) on employment, earnings, or poverty rates.
Analysis of real estate trends within zones also showed mixed or no effects. Although one study found that commercial property and vacant land prices increased, another showed that designation had no significant effect for commercial investment. One study found that residential real estate prices increased in zones, but there was no statistically significant effect on transaction volume. Another paper found that single-family home prices did not significantly increase in price within zones. A different study found zone designation had no effect on home or small business lending.
Opportunity Zones could benefit from reforms
Although two of the three financial incentives provided by the Opportunity Zones have lapsed, the largest remains, meaning the program will continue to see qualifying investment through its expiration in 2026. Legislation to extend, expand, and reform the program has been introduced in every Congress since Opportunity Zones were enacted, but none has passed. Given investor and real estate developer interest in the program, there will likely be more calls to extend the program beyond its current end date.
If the program is going to prove a cost-efficient and effective means for advancing communities, we recommend policymakers pursue several reforms, including supporting mission-driven funds, more narrowly restricting investments, restructuring benefit incentives, broadening who can invest, and requiring reporting separate from the tax form.