This thought leadership piece is the second in a series to examine the potential impact of Opportunity Zones on communities and specialized real estate sectors.
The 2017 Tax Cuts and Jobs Act created a new national community investment program that seeks to connect private capital with under-invested communities. Some of the most under-invested areas are urban industrial redevelopment sites, and investors are starting to take notice.
Many Opportunity Zones are distressed urban areas outside of core population centers. These areas are ripe for industrial redevelopment because much of the existing product is obsolete for most modern industrial users including final-mile distribution centers.
OPPORTUNITY FOR THE FINAL-MILE
The final-mile is the last link in the global supply chain that connects consumers with the rest of the world. This final-mile carries an outsized cost and much emphasis has been placed on improving this aspect of order delivery. While demand for final-mile centers is surging to new highs, a lack of suitable inventory remains the greatest obstacle.
Final-mile industrial users compete for urban industrial buildings with breweries, fitness centers and other quasi-retail/office uses that have traditionally filled this void of under-utilized properties. Unlike traditional industrial counterparts, reusing older industrial buildings for non-industrial uses and final-mile face many significant hurdles. Lack of parking, incompatible zoning code, crime and environmental issues are some of the problems in redeveloping these under-utilized spaces.
As mentioned in our first installment of this Opportunity Zones blog series, the new Opportunity Zone legislation may change the calculus in deciding the viability of adaptive reuse projects. The Opportunity Zones provide a mechanism by which investors in industrial real estate can place capital in the most in demand commercial asset class while still maintaining core-plus/value-add return upside in higher-cost redevelopments.
MARKETS RIPE FOR OPPORTUNITY ZONE INVESTMENT
Although there are more than 8,700 designated census tracts in the Opportunity Zone program, some offer more potential for immediate positive impact for both investors and residents than others. The top markets for Opportunity Zone industrial investment will be located near large growing populations, major transportation hubs and have access to a robust labor pool. While many markets across the U.S. can check off a majority of these requirements, the five markets below offer the most potential for industrial investment:
South Los Angeles: The South Los Angeles area has a large amount of older industrial space, and these areas also have access to several freeways. Now that many areas of South Los Angeles fall into Opportunity Zones, entrepreneurs and builders have even greater incentives to develop more housing and local amenities in these emerging neighborhoods.
Nashville: Many of the most promising Nashville Opportunity Zones surround the Cumberland River near Downtown Nashville. Opportunity Zones on both sides of the Cumberland River are also promising. Nashville is experiencing some of the largest millennial population growth in the country, and these areas are ripe for industrial related redevelopment to service them.
Atlanta: In 2017, Atlanta was one of the fastest growing cities in the U.S., adding nearly 100,000 residents. Its growth is expected to continue with the development of both private and public real estate in the coming years. Atlanta is also the regional distribution hub of the Southeast, servicing the fastest growing regions in the country. All of this means the need for more urban industrial and a significant amount of potential in its Opportunity Zone locations.
Houston: There are many Texas Opportunity Zones that offer promise for increased investment, but Houston offers some of the largest and most immediate opportunities for impact. Large contiguous sections of central parts of the city extending north and south of the 610 freeway now fall into Opportunity Zones. Redevelopment in the city has been hampered by the effects of Hurricane Harvey, but the addition of Opportunity Zones could be a major catalyst.
- Oakland: Many parts of California offer enticing Opportunity Zone options, but the Oakland region provides a significant opportunity for industrial redevelopment. There is significant demand to service one of the most affluent millennial populations in the world and Opportunity Zones in many parts of the city, especially the Coliseum Industrial zone, provide a significant opportunity to do so.
OPENING URBAN MARKETS FOR INVESTMENT
The concept of Opportunity Zones remains new to many investors still trying to wrap their arms around their exact implications. What is clear is that many investors will continue to look at industrial real estate as a safe haven for placing capital. With Opportunity Zone rules making it easier to increase yields, it will be a new mechanism that opens up urban markets and alternative industrial product types to more investment.
Next topic in the series: A Macro View of Opportunity Zones
James Breeze is the National Director of Industrial Research for Colliers International, where he focuses on analyzing industrial property trends, compiling Colliers’ thought leadership and delivering timely market projections to provide clients with a leading edge in our industry.