The housing industry is buzzing with excitement over the prospect of massive investments in Opportunity Zones. New Opportunity Funds are emerging almost daily. Some investors are waiting until additional guidance is issued concerning the finer points of investing in Opportunity Zones, others are already mobilized. They are sifting through market data to identify target areas where investible projects may be found. There are reports of speculation tied to Opportunity Zone investment that are beginning to move the price curve in some markets.*
Some observers have cautioned that the influx of capital into Opportunity Zones and the requirements for substantial improvement of properties may result in acceleration of gentrification. Others have suggested that Opportunity Zone investments will promote the retention of affordable housing. A recent article published by Enterprise Community Partners posited that the proposed rule that would exclude the value of land when determining a property’s tax basis would likely be conducive to preserving existing affordable housing, especially in high-cost areas.†
Given these two starkly different perspectives, we at SP Group took a step back and asked: How much existing affordable housing is there in Opportunity Zones? We analyzed the rent levels in Opportunity Zone (OZ) census tracts‡ to identify the degree to which the median gross rent currently exceeds the “burdensome” threshold, i.e., 30 percent of median household income. Through this analysis, we make initial observations regarding the degree to which rents could rise and the effects on the levels of affordability within the Opportunity Zones.§
We found that 3,192 OZ tracts (41 percent) are rent burdened (i.e., current median gross rents exceed 30 percent of the median household income).
We further stratified the 3,192 rent burdened tracts and found 1,175 tracts that have ratio of median rent to the burden level (30 percent of household income) of between 100 percent and 115 percent. Five hundred seventy-one tracts have a ratio of median rent to the burden level of between 115 percent and 125 percent, and 1,446 tracts have a ratio of median rent to the burden level of more than 125 percent. With such a large number of tracts with a median rent above the burden threshold, the starting point for gauging affordability is already problematic.
The map of the Atlanta area illustrates the significance of the affordability issue in the OZ census tracts.
The gross median rent levels in the tracts shaded the darkest red are already more than 125 percent of the level that would be considered burdensome. The medium red illustrates those OZ tracts where the gross median rent level is already 100 percent to 115 percent of the burdensome level. The lightest pink indicates the OZ tracts where the gross median rent is between 90 percent and 100 percent of the burdensome level. The census tracts shaded in grey are those where the gross median rent is below the burden level.
The Potential for Exacerbation of the Affordability Problem in Opportunity Zones
SP Group calculated how many additional census tracts would break through the affordability threshold if rents rise in various increments (assuming no significant changes in median household income). We found that if median gross rents rise by approximately 10 percent, an additional 945 OZ tracts would be rent burdened. Similarly, if median gross rents were to rise by approximately 30 percent, an additional 3,063 census tracts would exceed the threshold, resulting in more than 80 percent of the OZ tracts‡ to be rent burdened.
We anticipate that rents are not going to decrease when properties are “substantially improved” to meet the conditions necessary to be considered Opportunity Zone Properties. Upward pressure on rents will likely increase public pressure on local governments to address affordable housing issues.
* http://product.costar.com/home/news/shared/1605432901
‡ There are 8,762 designated OZ census tracts. Due to rental data limitations, our analysis is based on 7,776 OZ census tracts located in the 50 states and District of Columbia.
§ The source of our income and rent data was the U.S. Census, American Community Survey (ACS 2016, 5-year estimates).