Of all the risks associated with Opportunity Zone investing, perhaps the most pernicious is the influx of what I call “garbage projects” into the marketplace. These are essentially failing projects which just happen to be located in Opportunity Zones. These were projects that developers spent a lot of zoning/permitting/ architectural dollars, only to find that investors were not interested, because the projects didn’t ‘pencil out’.
Some of these projects have gone as far as the zoning and permitting process, but lack funding. That’s because opportunity zone designation or not, they are almost always built in the wrong areas and are virtually guaranteed to fail.
Institutional investors head for the hills when they are presented with these sorts of projects because they see a lot of risk and not a lot of potential for reward. That’s why developers are now targeting individual investors with “mad money” who are hungry for returns and tax advantages.
Some opportunity zone investors are likely to wind up with failing projects because they simply don’t do their homework. The little consideration they give to necessary demographic requirements for success is, at best, superficial.
For example, when looking at population growth, a very important predictor of success, many developers are content to say, “We have population growth in this area so it’s good.”
But that just isn’t true. We have population growth in most of the country because the birth rate is higher than the death rate. What is needed isn’t just a general declaration of growth, but a specific, measurable, and data-supported amount of growth.
Garbage project developers are equally careless when evaluating the other essential elements of Opportunity Zone success. They see incomes trending upward, but they don’t set benchmarks as to exactly how much income is needed to make their project feasible.
A trend upward has to be high enough that people in the area can afford to pay the higher rents of a Class A apartment building or a Class A office. Again, a specific amount of income is needed in order to form predictions about the chances of success.
There are other demographic markers which must be considered carefully and subjected to rigorous research involving the use of both qualitative and quantitative data. Unfortunately, those who are marketing garbage projects seem disinclined to do the work involved.
When I evaluate my own projects, I look at 5 key areas:
- Population growth – I have a REAL growth %age number in mind here.
- Job growth – More jobs, but what kinds of jobs and what do they pay? Is advancement possible?
- Income growth – Tied in with job growth. I know the exact income levels that my projects need in order to be sustainable.
- Home prices increases in the area – I am looking at both short term and long term home price growth in the area, because that tends to support new construction.
- Crime statistics – Is the crime rate in a downward trend? Again, I use data to arrive at specific metrics for each area.
I also consider whether or not there is going to be other construction in the area. We don’t want to be the only game in town; neither do we want to find ourselves adrift in a sea of too many projects. I have a specific project density in mind when I look at this aspect of the project.
In all of this, data is paramount in reducing the risk and increasing the rewards of Opportunity Zones. When dying projects are resuscitated or new projects are hurried to market without the application of scientific analysis, they are destined to fail.
If you are presented with an Opportunity Zone project, I will be happy to objectively evaluate the project and point out any potential problems I see. This isn’t with a view toward pitching you my projects, but because I truly want this attempt at urban improvement to succeed.
Contact my office if you have any questions or would like to schedule an appointment.
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